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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. 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

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  1. Europe in Crisis – Cultural, Economic and Political Dimensions Dr Henning Meyer Senior Visiting Fellow November 2011

  2. 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

  3. 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

  4. 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

  5. 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

  6. Labour Mobility

  7. 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

  8. 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

  9. 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)

  10. 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, …)

  11. 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

  12. Banking to Sovereign Debt Crisis II Financial Times, 10th May 2011

  13. Banking to Sovereign Debt Crisis III Financial Times, 22nd June 2011

  14. 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

  15. 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

  16. 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

  17. 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

  18. 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

  19. GDP Development in GIS Source: Google/World Bank

  20. Growth Projections Source: Daily Mail/OECD

  21. 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

  22. 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

  23. 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

  24. 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)

  25. 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

  26. 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

  27. 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

  28. 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

  29. 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

  30. 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)

  31. 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%)

  32. 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

  33. Political Backlash III • Fascists are part of the Greek ‘technocratic’ government • Accelerating crisis of democracy • Mismatch between national and European democracy (Greek referendum case)

  34. 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

  35. Conclusion II • There is a real danger that integration might stall or even reverse • The next weeks and months are either make or break

  36. Discussion Thank you very much for your attention!

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