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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

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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
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
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
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
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 ii
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
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
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
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
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
Banking to Sovereign Debt Crisis II

Financial Times, 10th May 2011

banking to sovereign debt crisis iii
Banking to Sovereign Debt Crisis III

Financial Times, 22nd June 2011

a solvency not liquidity crisis
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
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
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
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
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
GDP Development in GIS

Source: Google/World Bank

growth projections
Growth Projections

Source: Daily Mail/OECD

what are the problems
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
Discussion

Thank you very much for your attention!

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