Yesterday’s package was hailed as a panacea to Europe’s problems by politicians and markets alike. This is a puzzling and short sighted reaction because the package conspicuously fails to address the problems that lie at the heart of the euro. One could justify this by saying that the plan is primarily intended to placate restive markets as it is close to impossible to implement cross-cutting structural reforms which are likely to cause unrest when the biting eyes of the market are on your back. However there is little evidence that European policy-makers have adopted such a long-term view; the likelihood is that this is yet another fudging attempt to suppress the symptoms of the crisis whilst ignoring the roots of it. The problems with the euro are specific to the foundations of the eurozone but are also embedded in the contorted fabric of European integration.
The first of these problems concerns the structural differences between members of the ill-fated eurozone. These cleavages are so vast now that Jamie Dannhauser of Lombard Street Research says it is not clear to see how you could fix them. For a start there is the ubiquitous competitiveness problem. Mediterranean countries, especially Greece, went on a spending spree upon joining the euro which was fuelled by the low interest rates. They thus accumulated a healthy dollop of public debt and placidly let wages balloon which led to a sharp drop in competitiveness compared to their ascetic neighbour Germany. Yet it is easy to infer from this that southern Europe reaped all the (temporary) benefits of the euro whilst the disciplined north observed fiscal responsibility only to be presented with a hefty bill when the floor caved in. On the contrary, Germany has been able to foster its export-driven economy largely thanks to the weaker and thus more competitive exchange rate afforded it by sharing a currency with the reckless southerners. This is compounded by the reality that if Germany decided to leave the euro its economy would be hit hard by the ensuing appreciation of its new currency as exports would become less competitive.
The second problem is one of political accountability, or the lack thereof. As the BBC says, there is no one who can credibly claim to speak for Europe as a whole. The integration process so far has been run from the top by national governments, with the tacit consent of the people. Decisions have been taken by eurocrats haggling behind closed doors and then presenting them to voters as matters of competing national interests. National leaders have been adept at taking the credit when integration has generated benefits and quick at using it as a scapegoat for their own failings. Thus Italian politicians play the Brussels card when announcing another round of austerity measures, as if they were being imposed on the country on the whim of a distant eurocrat whilst the past decade of political prevarication and stagnation fades into insignificance. How convenient. Furthermore, the decision-making process in Brussels is painfully slow and ill-suited for financial crises; one cannot hope to assuage the markets’ jitters when 17 national leaders have to agree on a solution and then present it for ratification in 17 different parliaments. The obvious solution to the lack of political efficiency is for the EU’s executive arm, the Commission, to take the lead as its equivalent would do on the national level. However, this merely brings us to the next wall, namely a lack of democratic accountability. If Jose Manuel Barroso were to take a much more prominent role in solving Europe’s problems, he would encounter the wrath of all those within the public who consider the idea of a political appointee dictating policy anathema. Again, the obvious solution to this conundrum is to make him an elected leader, but this raises the spectre of a European superstate which is an equally abhorrent idea for many.
The third, and perhaps most intractable problem, is that of growth. Italy has been growing sluggishly for over 10 years and since the 2008 crisis growth in the rest of the eurozone has ratcheted along at a similar pace. Manufacturing output in the eurozone fell at its fastest pace in two years in September whilst Germany’s economy grew by just 0.1% in the second quarter of this year. More importantly, if the heavily indebted countries like Greece fail to foster growth they stand close to no chance of extracting themselves from the current quagmire. As Stephanie Flanders has said on the BBC, “we might get a ‘deal’ to save the Euro on Wednesday, but it does not look as though we will get a deal consistent with reasonable economic growth”. European leaders have instead focused zealously on austerity to cut deficits and debt which is showing few tangible results save for a conspicuous lack of growth. As tax receipts dwindle due to plunging profits and unemployment rises, governments are forced to borrow more to repay previous debts and thus find themselves back at square one. Moreover, Alen Mattich argues that the growth problems afflicting the eurozone’s periphery are so politically, culturally and legally entrenched that the solution does not lie in buying a few months’ respite from the fickle markets. He says that even with a 60% haircut on Greek debt, Greece would have to endure a semi permanent situation of austerity and recession, something which would be unpalatable to the population. Daniel Ben-Ami argues that fiscal deficits are merely symptoms of an underlying economic weakness rather than its cause, namely a low growth economy. It thus follows that fervently tackling deficits will not solve the eurozone’s economic problems but simply postpone the next economic crisis, which is exactly what has happened hitherto.
Another oft-ignored issue is the interconnectedness of the eurozone economies. It is apparent that Germany is convinced that Greece can slash its debt and return to growth without a currency depreciation (out of the question for obvious reasons). For this to happen Greece’s domestic prices and wages must fall sharply (which is already happening thanks to a hefty dollop of austerity) so as to become more competitive and its net exports must increase with respect to domestic consumption (the icky bit). This entails an increase in external demand, a luxury that Greece unfortunately does not have. Germany’s finance minister Wolfgang Schauble seems to think there is no symmetry between debtors and creditors so all this is perfectly feasible without Germany’s current account surplus having to fall. Whilst the rest of the eurozone was busy indebting itself by buying Germany’s exports (almost half of which go to the eurozone, incidentally), Germans were saving and running up a huge trade surplus at the expense of their neighbours.
The Economist points out that in a single currency zone habitual surplus countries tend to be matched by habitual deficit ones. In the eurozone sharp differences in labour productivity and fiscal policy flexibility led to the creation of a two-tier monetary union with a core of net exporters and a periphery with constant trade deficits; both layers fed off each other in a relationship that was mutually beneficial. It would be crass to argue that Germany is responsible for the current mess in which the periphery finds itself, but it would be equally obtuse to depict the Germans as the virtuous victims bailing out the venal spendthrift countries.
It is a political and economic conundrum that no leader would ever want to have to face. Mattich is discerning in describing the euro as a “political enterprise that keeps stumbling over economic fundamentals”; policy-makers naively believed at the inception of the single currency that they could achieve monetary union without investing the necessary political capital, however the flawed economics have now caught up with them. Ultimately, the eurozone’s woes stem from a common illness that has afflicted much of the developed world, namely a lethargic growth that has been countered primarily by high state spending. To depict the scenario facing European policy-makers as a two-sided coin with disintegration of the euro on one side and the creation of a European superstate on the other is to ignore the problem of sluggish growth. More political integration will not automatically engender growth, but rather a string of further all-nighters for our tired politicians.
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