How Forward with the Eurozone?

The present EU discussions on the dangers of terrorism, on the refugee crisis and the weakening of the global economy plus raw material price plunges seem to have pushed considerations how to salvage the Eurozone (EZ) on the backburner. However, the stagnation of the Eurozone (let us remember that EZ GDP has still not surpassed the level of 2007, before the start of the crisis), the massive increase in unemployment, especially in Southern EZ countries, the ever-widening disparities and asymmetries in the Eurozone (contrary to the EU Treaty objective of coherence and convergence), the increasing inequalities, and the resulting loss of confidence in the body politic in general and the politicians of the centrist parties in most EZ countries – all these have not gone away, they keep festering and are beginning to endanger to further viability of EU’s flagship project, the common currency. The grave situation of large populations in Greece, the extremely high unemployment rate, especially among youths, in Spain, the further increasing external surplus of Germany (already 8% of GDP), the inability of Italy to shed stagnation, the impoverisation of single parents, of pensioners in many countries have disappeared from TV screens, but still exist.

All this threatens to imperil social cohesion in the EU and the EZ, and thus erode public support and political stability The most recent polls showing that the Italian population, previously one of the strongest EU and EZ supporters, is increasingly sceptical about its benefits, are highly worrying and should ring alarm bells. Prime Minister Renzi’s recent criticism of EZ economic policy may have domestic reasons, but hits an important point: the Eurozone’s economic policies are anathema to social cohesion, their insistence on budget consolidation as the prime policy direction – ensuring or regaining „confidence“ (mind you, confidence of the financial markets, not confidence of the populations) – their incomplete attempt towards Banking Union, their lack of a joint Fiscal Institution, reinforcing and complementing the Single Monetary Policy, their lack of a fiscal capacity evening out different cyclical developments in the Member States – all these have reversed social convergence since the formation of the Monetary Union. Existing instruments towards convergence, the Cohesion and Convergence Funds, are inadequate and do not tackle social concerns directly. While they comprise a significant part of the (too small) EU budget, they are unable to bridge the massive gap between the social protection (and investment) standards of the rich and the poor EU countries. And: social policy activities are only a complement to support the social benefits conveyed by a growing economy!

The design of EMU has been inadequate from the start: to collectivize monetary policy, but leaving fiscal policy to (supervised) member states has proven to work at best during „good times“, but proved completely inappropriate during crisis times. The major policy focus on budget consolidation, leaving out private sector behavior, disregarding accumulating asymmetries in current accounts, the ill-fated attempts at a „growth strategy“, i.e. the Lisbon Strategy and the 2020 Strategy, with their emphasis on supply side measures, disregarding the role of effective demand, all this has led to the present predicament: while the Eurozone is stagnating and Southern members faced with long-term misery, accentuated by unfulfillable „rescue“ attempts, the country where the present crisis originated, the USA, has grown in the meantime by more than 10% above ist pre-crisis level. In any enterprise, in any sober social undertaking, such contrast would lead to navel-gazing with the objective to find out, what went wrong. Not so in the EU, not so in the Eurozone. There, prevailing powers seem tob e convinced of t he potential efficacy of their misguided policy direction, and come tot he diagnosis that everything would be ok, if only member states had followed these prescriptions tot he last letter. Ophtalmologists call this „tunnel vision“. This is just not good enough for the future fate of more than 300 million citizens.

Tinkering at the seams (more bank supervision, more Banking Union, even Capital Market Union, more budget surveillance) will not do. If we want the Monetary Union to survive and disperse ist potential benefits to its members, a complete re-design of the institutions and the policy direction is necessary. Greece’s unsuccessful finance minister Varoufakis made an inadequate attempt to alert his colleagues to that task, maybe Italy’s Renzi could, with the help of some of the new governments in the South and, hopefully, strong support further in the North, give rise to this re-thinking.



Filed under Crisis Response, European Union, Financial Market Regulation, Fiscal Policy

2 responses to “How Forward with the Eurozone?

  1. I agree with many of the things you are saying, but the high level policy failures does not really get to the heart of the changes taking place across the political landscape of Europe, especially among the extremists parties, and the separatists who want to be part of those decision making opportunities. These policy decisions have important repercussions across Europe, and the fact the US is not more involved in helping the EU is bad for Europe and the Atlantic Community. We need need to be mindful about how domestic pressures in Paris, Berlin, Madrid, and London is causing stagnation.

    Lastly, I think we need to give credit to the EU for the fact they are in transition towards a more democratic superstate, something that has not existed ever. We are witnessing the growing pains of a political institution slowly becoming a country, but stuck half way. Again, we should be looking more at the domestic (regional and local) politics for answers to these issues.

    Just published this today. This might help.

    • Keith, I agree with you that the EU and EZ Dilemma goes beyond the economic sphere, which was the Focus of my blog. When I read your Website, I really wonder what you mean when you say that the US should help Europe with Democracy courses and direct Investment. What is it the US can offer Europe in this aspect? I am convinced that Europe should be able to handle ist Problems itself, that it Needs a new economic model and that it has to deal with ist sub-sovereign, i.e. regional political Problems itself.Of course, help would be welcome in ending the Middle-East wars and uprisings, the source of the refugee Problem apart from Africa.

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