Posts Tagged ‘fiscal union’
Europe is in disarray.
Appearance-wise and disregarding petty differences, the EU-27 are marching on the spot on foreign policy, defence, Schengen and the single market with the exception, notable but again not yet really convincing, of progress on financial regulation and supervision.
A layer deeper though, one encounters seemingly impassable hurdles of sovereign debt, vulnerable and domino-like arrangement of banks, and a poorly-designed Eurozone, the combined effect of which risk to disintegrate the Euro (for which the crisis was originally brought on by investors with genuine worries about the solvency of several euro-zone countries), on whose foundations the united European economic system was built. It is clear that economic integration has exhausted its potential, which is more limited than anyone had imagined at the beginning, for ensuring structural convergence of industry between Member States and ameliorating weak growth performances.
Presently, Europe appears to be heading towards a decade of stagnation with the triple threat of nationalism, populism and protectionism which is being dragged behind unemployment (9.9% and among young workers, more than twice that much). Industrial activity is already shrinking in Greece, Ireland, Italy, Portugal, and Spain. The time is coming when a new path towards integration, political this time, will reveal itself as indispensable. But no consensus exists for a new treaty. Ad-hoc formulas will therefore have to emerge as short term Band-Aids, exploiting the existing potentialities of the Lisbon treaty to be followed by long-term formulas, based on a complete revisit and revamp of European economic, social and political values and vision driven by a need for sustainability and prosperity.
Europe also finds itself faced with the colossal challenge of having to mobilize public opinion. But because of the lack of a real consciousness of European citizenship, public opinion is at best passive and at worst euro-sceptic. To mobilize it will demand the unveiling of a “European plan” and the rallying of a majority buoyed by the perception of a commonality of destiny on the economy and defence, two inseparable pillars.
European politicians, led by Angela Merkel, have gone to absurd lengths to avoid admitting two truths: that Greece is bust; and that north Europeans (Germans in particular) will end up footing a good part of the bill. The current rescue package reduces Greece’s debt, but not by enough to give it a genuine chance of recovery. As a result, Greece, and maybe other European countries, will need another bail-out rather sooner than later. To face this (upcoming) problem in a united manner, Europe might get “tighter together” by spawning a fiscal union, hitherto unprecedented, while trying to run away/re-distribute immediate problems.
There is also a part of blame to be laid on dysfunctional politics. In Europe national politicians, answerable to their own electorates are struggling to confront continent-wide problems – thus a crucial misalignment between expectations (by national electorates) and commitments (towards European policies) yielding, on average, ”value-less” results.
European leaders do however know what they need to do. They have been slow in doing for two reasons:
- magnitude of the commitment necessary to save the union is uncertain, and they don’t want to pay a penny more than is necessary, and;
- distribution of commitment costs is uncertain and not guaranteed, and no individual entity wants to pay a penny more than is necessary.
So what are those possible solutions to the ailing EU economy that EU leaders so far fail to carry out? Some might be:
- Peripheral debts to be addressed through austerity.
- Like in case of Ireland, to drop all unsustainable debts, not to continuously slowly the economic recovery.
- The Euro to compete with the national currencies, putting pressure on the ECB, which will ensure that the Euro is a low-inflation currency.
- A form of Eurozone bond, which would largely replace the national eurobonds issued by the individual countries.
- To bolster European emergency funding, which fight failing European banking contagion.
- Financial/fiscal integration to take place, including fiscal transfers to support peripheral economies while they get their budgets in order.
- European Central Bank to stop raising interest rates and being illusioned about inflation.
Just as in Japan two decades ago, politicians have failed to make the structural labor- and product-market reforms essential to spurring growth. Lack of strong leaders was the underlying problem of Japanese economy, which has not recovered yet. The turn has now come for European leadership to show what it is capable of, but there seems to be no leadership.