The EuroCrisis – A Cultural Crisis – Part 1
Before going on to provide my own view about
the challenges and my insights on the EuroCrisis, I would like to present a
generic overview of the general situation. It is always important to take into
consideration different ways to approach a subject, before making it your own.
Was the
Eurozone a bad idea? – by Lissette Padilla at TestTube News
“The Euro debt crisis finally came to a head
when Greece defaulted on its first loan payment. After months of European
leaders scrambling to control this threat, critics have been if the Euro is
more trouble than it’s worth. So, we wanted to know, was the Eurozone a bad
idea? The Eurozone was established in 1999. Today it consists of 19 member
states who have all have adopted a singular currency: The Euro. Monetary policy
concerning the Euro is decided by the European Central Bank located in
Frankfurt, Germany. Their biggest role is preventing inflation by attempting to
keep prices stable amongst member countries. It would seem like a good idea to
combine powerful economies to feed off and strengthen each other… However, what
happens when a weak country enters the mix? Or when a strong country becomes
weak? There are strict guidelines for being considered a strong enough economy
to join. These are primarily base on a country’s long term stability forecast.
But Greece was able to enter the Eurozone without all the necessary
qualifications by severely understating their massive deficit. On top of that,
the 2007 sent a lot of formerly powerful economies into a downwards spiral,
forcing the ECB to bail them out, lest the Eurozone fails too. The ability of
failing economies to bring down strong economies is one of the biggest
criticism of the Eurozone. Often, when a country has trouble paying its debts,
it simply prints more money. While this devalues the currency to some degree,
its preferable to outright defaulting. However, individual countries don’t own
the Euro, so they can’t devalue everyone else’s money to solve their own
problems. Instead, the ECB provides emergency loans, but in exchange for
economic reforms to make sure the country can keep up with everyone else. You
may have heard of these reforms as “austerity measures”. Austerity measures mostly include massive
government spending cuts, curtailing social programs, and raising taxed. Now
while this works in theory, it can also lead to severe consequences. In
Greece’s case the EU’s austerity measures put a massive strain on the economy,
and removed the government’s ability to invest in the public sector. This meant
higher rates of unemployment, which led to fewer people paying taxes, leaving
less money for the government to pay back their ballooning loans. Today’s
Greece’s total inability to survive within the Eurozone has unprecedented consequences
for both the country and the European Union. There are a number of subtle and
complicated reasons for the Euro’s current instability. However, the biggest
problem simply comes from the inherent differences in attempting to lump
together economies with different growth, exports, relationships, and most
importantly, monetary politics. So, all things considered, was the Eurozone a
bad idea? While the EuroZone may be beneficial to many countries, its ability
to weather economic downturn may just be its ultimate failure”.
Joseph
Stiglitz on The Future of Europe:
“In the decades since WW2, and even before,
Europe built an economic and social system that delivered growth, was
reasonably well shared, and in the years before the crisis that we are now confronting,
it resulted in countries with the highest indicators in the world. GDP is not a
good measure of well-being, there are other factors that are more important not
just income but education, health, and the top performing countries. If we go
back even further, Europe was the source of Enlightment. A set of ideas and
values that have been transformative. Ideals that have marked our standard of
living that have marked the last 200 years. For thousands of years until the
1800s, standards of living have remained almost constant, barely perceptible
increases. The standard citizens today have a much higher standard of living
than people did 500 years ago.* Europe is going through a difficult period,
there is recession, the average unemployment rate is around 12%, the youth
unemployment rate is 25%, and several countries are in depression. The
magnitude of the economic downturn is greater than in the great depression.
With the exception of Germany, almost all the other countries (in the
Eurozone), have a GDP adjusted by inflation lower than it was 6 years ago…
Europe made one little mistake: the Euro. Having it’s own currency allows
countries to adjust monetary policy and exchange rate. Countries have been
borrowing in foreign debt. The Euro created the potential of sovereign debt
crisis, like it has happened in emerging markets. The diagnosis also was wrong.
The austerity path is a suicide path, no country has recovered from a downturn
through austerity. Divergence started between what are know as the PIIGS countries,
and the core countries. The problems that we see now in the EuroZone where
evident even before the crisis: capital went into Spain creating a Real State
bubble and there were no policies to restrain this influx of money. When the
Euro was created, there was excessive belief in market rationality, meaning
that the market were self-adjusting**. The crisis that broke in Greece in June
2010 was a good opportunity to show solidarity, to come to the help of Greece,
to make the reforms that has to be made to get the Euro to work, but that was
not what happened. There were some write downs in debt, austerity measures were
set in place, and the result is that GDP x capita in Greece is 25% below what
it was. And despite of wages being down, there are not more exports. So what is
needed? 1. More fiscal union: ideas like Eurobonds. Borrowing all together, the
countries can lower the interest rates. As it is today, the PIIGS countries
have difficulties paying due to high interest rates 2. A banking union: in
crisis the flows from the weakest to the strongest countries. A common deposit
system should be set in place. 3. Replace the austerity with growth and
industrial policies. The weak growth is not enough to create new jobs to allow
new work force into the market***. There is also a need for structural
transformation: in the 19th century 70% of our workers worked in
agriculture. High productivity lead to people having to move out of
agriculture, and jobs that they found in the middle of the 20th
century were largely in manufacturing. Today, manufacturing productivity is
growing so much again that global employment in manufacturing is going down.
Because of globalization, advances countries, the US and most of the European
countries, are going to get a smaller share of that dimishing global
employment. Many of these should move to the service sector, but the
governments must do their part to facilitate this transformation”.
Paul Krugman on the EuroCrisis, 2014:
“Europe is actually seriously scary. China is
also seriously scary but it is harder to track, but it gets less press. And we
are not an island, I think that international interdependence can be overstated
but you would not expect the US to be completely immune to this developments
and we are not that solid of a base here. So here we are 6 years after Lehman
fell still very fragile. In Europe, the problem has shifted from problems in
the debtors’ countries and a very strong Germany, but now the problem is that
after years of being worried about the wrong thing, and too worried about debt
and about inflation now they suddenly look around and they see that discovered
that they have turned into Japan without the social cohesion. That inflation is
practically zero, there is essentially a deflationary trap already, Germany is
slowing down sharply because it depends upon exports, and who is it going to
export to? And the scary thing is they don’t have tools. Monetary tools they is
so much they can do, and fiscal tools, nothing can happen without the germans
are not ready to change their tune. By the time everybody wakes up to the
gravity of the situation Europe may be deeply stuck in a kind of permanent
depression, with God knows what political consequences. Anti-immigrants groups
are extreme nationalist groups. These groups are flourishing because that is
what year after year of economic failure does”.
Nouriel Roubini on the EuroCrisis, already in
2012:
“There are many potential vulnerabilities in
the Global Economy, the key one is coming from the problems of the EuroZone: the
periphery of countries like Greece, Italy, Portugal, Spain that are in trouble,
many of them have a situation of public debt that is not sustainable and might
go through debt restructuring. Some might not even survive the EuroZone and
might eventually have to exit and if enough of them were to exit that would
mean a break-up of the Eurozone. If that were to materialize that would be a
shock since it would have systemic effects on global financial markets and the
global economy. Europe is re-entering a recession, but also in the UK there is
a double dip recession; the recovery in Japan is fragile. The economic data in
the US has been better than expected, but I expect that recovery in the US will
remain weak because of fiscal and financial instability and now even emerging
markets are slowing down with Chinese economic growth beign slower than people
expected, and Indian growth having disappointed (recently).
In Europe, while fiscal austerity is necessary
to avoid a fiscal crisis, in the short run, raising taxes, reducing transfer
payment and government spending will impact demand and make the recession even
worse. Studies have shown that fiscal austerity makes the economic situation
worse in the short run, and if many nations worldwide apply it simultaneously
then we risk a global recession. The problem of the Eurozone is that there is
no strategy to restore growth. To restore growth, in addition to austerity the
European Central Bank has to have more aggressive monetary easing, cut policy
rates to zero. Also, the ECB should be a lender of last resort not just for the
bank but also for the sovereign. To restore external balance, the Euro has to
fall 30% compared to the USD and the competitiveness of the periphery. If the
periphery is going to do austerity, then core Europe should do fiscal stimulus
to restore growth both in the core and the periphery of the Eurozone. If that
doesn’t happen, whatever you do in terms of structure reform and fiscal
austerity eventually is going to become unsustainable”.
*I disagree
with this, I consider that people in developed countries have a higher standard
of living today than the top did 200 years ago.
** This is
because the Eurozone and the Euro were created during the New Liberalism period
1980 – 2008, where reaganomics and free markets were pushed as global policy by
the US.
*** Younger
people, people with diverse background and foreigners.
Sources:
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