Transcript Europe in Crisis - Cultural, Economic and Political Dimensions

Europe in Crisis
–
Cultural, Economic and
Political Dimensions
Dr Henning Meyer
Senior Visiting Fellow
November 2011
Overview
 The
cultural dimension (identity +
mobility) and the misconstruction of the
Eurozone
 The sovereign debt crisis and the
politics of Eurozone rescue efforts
 The political backlash
 Conclusion
Cultural Dimension
 The
Euro has been a political
integration project
 It was also an attempt to engineer
European identity and citizenship by
creating a monetary symbol
 Money has historically been a driver of
identity and statehood creation
Cultural Dimension II
 To
a degree it was identity giving as it
brought the EU into the daily lives of
citizens
“Thanks to the Euro, our pockets will soon hold solid evidence of a
European identity. We need to build on this, and make the Euro more than
a currency and Europe more than a territory… In the next six months, we
will talk a lot about political union, and rightly so. Political union is
inseparable from economic union. Stronger growth and European
integration are related issues. In both areas we will take concrete steps
forward.”
French Finance Minister Laurent Fabius, The Financial Times, 2000
Cultural Dimension III
 Engineered
integration vs. crisis leaps
forward  Failure of Constitution as
major setback  Change of dynamics
 What are the lasting effects now that it
has been portrayed as a monetary
prison?
 It did not seem to have a huge impact
on other important dimensions such as
labour mobility for instance
Labour Mobility
Labour Mobility II
 Is
a key challenge for the Union
 Fear of loss of social network is key
factor (Eurofound 2005)
 Language barriers are also still a major
problem
 Enlargement as mobility driver experience of 2004 enlargement in UK
Other Cultural Aspects
 Educational
programmes such as
ERASMUS and LEONARDO seem
successful
 Still problems with European citizenship
and identity
 Euro has been an economic success but
has not had a very deep cultural
dimension
The Eurozone’s Design Flaws
 Supranationalised
monetary policy but
national fiscal policy
 Levels of competitiveness went out of line
(costs and prices)  only internal
devaluation
 No automatic stabilisers that would soften
the blows of asymmetric economic shocks
(social security and medicare in US)
The Eurozone’s Design Flaws II
 Stability
and Growth Pact insufficient
fiscal straightjacket
 Averages of 1990 rather than real
economic rationale
 No emergency or crisis mechanism (EMF)
 No mechanisms for macroeconomic
coordination to avoid drift (wages, prices,
capital, …)
Banking to Sovereign Debt
Crisis
 Proof
of insufficient nature of SGP (crisis
factors)  Spanish debt levels pre crisis
were 43% of GDP (66% in Germany)
 No general picture across the PIIGS
 Huge increase of public debt in Ireland as
result of taking over of bank liabilities
 Economically speaking crisis still
manageable
Banking to Sovereign Debt Crisis II
Financial Times, 10th May 2011
Banking to Sovereign Debt Crisis III
Financial Times, 22nd June 2011
A Solvency not Liquidity Crisis
 Different
circumstances across PIIGS with
known longer-term problems in Greece
and Italy and different circumstances in
Ireland and Spain
 Bond yields rose as risk of non-repayment
increased
 The crisis was however treated as one of
liquidity, not solvency
EU/IMF Bailout Politics
 Joint
credit lines by IMF and new
European Financial Stability Facility
 Policy conditionality of massive austerity
 Austerity was also implemented in other
European countries (UK)  expansionary
fiscal contraction delusion
 Export-led strategies that do not work 
lack of economic growth
EU/IMF Bailout Politics II
 Without
economic growth there is no
chance to change the debt trend 
downward debt spiral
In addition to a bigger political vision, there is a need for clearer economic
thinking. The tendency to ignore the importance of economic growth in
generating public revenue should be a major item for scrutiny. The strong
connection between growth and public revenue has been observed in
many countries, from China and India to the US and Brazil.
Amartya Sen, The Guardian, 22 June 2011
EU/IMF Bailout Politics III
 Massive
protests in Greece and other
countries with massive unemployment
and new poverty
 Youth unemployment of 46.2 % in Spain
and 38.5% in Greece
 Economic policy conditionality does not
work
EU/IMF Bailout Politics IV
 No
economic growth, too high interest
rates on IMF/EU loans, still rising national
debt
 No buy in from population – either messy
exit from the Eurozone or lost decade(s)
with mass unemployment and deflation 
can also lead into an even bigger crisis of
democracy
GDP Development in GIS
Source: Google/World
Bank
Growth Projections
Source: Daily Mail/OECD
What are the Problems?
 The
problem is primarily political and not
economic
 Politics has made the problem much
worse
 Initially no political honesty due to fear of
domestic electorate
 Need to acknowledge and stop the
banking socialism  long run
What are the Problems? II
 Breakup
of the Eurozone is the most
expensive option
 Would lead to bank runs and certain full
default on sovereign debt
 The problem is not just economic but will
determine Europe’s future
What can be done?
 Absolutely
urgent (matter of weeks)
reforms needed in five key areas:
 ECB must become some sort of LOLR
 Eurozone debt sustainability and growth
 Domestic reform in crisis countries
 Reforming Eurozone governance
 A return to serious financial sector reform
ECB as LOLR
 EFSF
was wrongly designed (solvent
countries helping insolvent countries)
 Accelerating decline after crisis spread
again reinforcing the spread
 Leveraging is not working and was a
dangerous construction
 Even leveraged not enough firepower to
stem crisis (Italy, Spain)
ECB as LOLR II
 Only
ECB can now put a stop to the
immediate crisis (stage 1)
 Debt monetisation not ideal (moral
hazard) but currently only solution
 Legal problems additional to political
problems
Eurozone Debt Sustainability
 Need
to change the debt trend with
cheaper loans, a restructuring of existing
debt and an investment programme to
generate growth
 Creates a chance for public buy-in as it
offers a more prosperous future
 Question of the participation of private
sector and contagion
Domestic Reform
 Aims
must be more economic coherence
across the Eurozone
 Higher wages in Germany
 Structural reforms (public sector,
competitiveness, …) in countries such as
Greece
 Once debt is stabilised EU help should
focus on social and economic change
Reforming Eurozone
 Add
governance and surveillance
mechanisms to SGP
 Implement sustainable debt mechanism
such as Eurobonds (different varieties)
 Discuss questions of transfer mechanisms
and the establishment of a European
treasury and European taxes
Financial Reform
 The
question of private sector
involvement in losses questions progress
of financial reform
 Making sure financial institutions can
cover their losses
 Mitigate negative short-term
consequences of higher capital ratios
Financial Reform II
 Revisit
the role of rating agencies and
their role in the sovereign debt crisis
 Fundamental reform of the financial sector
by separating retail and investment
banking
 Outlaw certain financial products (naked
CDS, …)
 Europe-wide taxation (Tobin tax)
Political Backlash
 Potentially
lasting damage already there
 Worrying trend of rise of right-wing
nationalistic parties all over Europe
(Marine LePen in France more popular
than Sarkozy in March 2011 poll)
 Already political backlashes  True Finns
went up from 4.05% to 19.1% in this years
elections (biggest party has 20.4%)
Political Backlash II
 End
of the Euro and of European
integration seriously discussed even
amongst pro-Europeans (Sir Stephen
Wall in London)
 The lack of political leadership creates a
toxic mix in European and national politics
 Long term trends and political consensus
might be shifting
Political Backlash III
 Fascists
are part of the Greek
‘technocratic’ government
 Accelerating crisis of democracy
 Mismatch between national and European
democracy (Greek referendum case)
Conclusion
 The
whole project of European integration
is at a watershed
 Urgent political leadership is needed – so
far always too little too late
 Already political backlashes
 There has already been a lot of damage
with a whole generation of young
southern Europeans disillusioned
Conclusion II
 There
is a real danger that integration
might stall or even reverse
 The next weeks and months are either
make or break
Discussion
Thank you very much for your attention!