Alexander
Mirtchev, Contributor
The broadening
cracks in the European economic framework now appear to be undermining the
whole European structure, as if a ‘contagion’ is spreading from the Southern European
economies outwards.
As the most
serious challenge to Europe since the end of WWII, the actual policy decisions
that result will likely be too little and too late to make a difference.
The risk to the
future of European currency is further aggravated by the fact that too many
different strategies continue to be under serious consideration. This
lack of consensus and decisiveness does not sit well for the future of the euro
zone.
In considering
historical examples that might serve as a guiding light out of the current
quandary, it might seem ironic that perhaps the best example is found in the
original European project itself. At the end of WWII, Europe was
devastated economically, politically and socially. From the seemingly impossible
emerged the political will and determination to overcome extreme forms of
nationalism and create a federation of Europe.
While the roots
of the European project were political in nature, its goals were
economic. Indeed, the first move was to revitalize the whole of the
European economy at the time, starting with the coal and steel community.
That was More than 60 years ago. While the EU has modernized and expanded
in ways that its founders may not have envisioned, the architecture that
underpins the Union has not adapted to the realities of a globalized
twenty-first century.
Institutional
Makeover
According to
Christian Noyer, France’s central bank governor and a governing council member
of the European Central Bank, “We are now looking at a true financial
crisis–that is a broad-based disruption in financial markets.” While the
halls of Brussels are full of talk of treaty changes that would create more
power over euro zone countries’ budgets, these changes would likely require a
lengthy political reckoning in all member states. Markets will not give
the EU this luxury of time. An appearance of democratic legitimacy is
important, thus the treaty convention process could begin while a short-term
immediate plan is put in place.
However, there
is one member country, whose position is key for how the crisis developed and
where it is going–Germany. In order for China and others to consider
investing in new IMF measures it must first see that the euro zone’s own
members, namely Germany, cannot do more. This has not happened.
Germany must in
effect be willing to put all of the distressed euro zone economies on its balance
sheet and pay to keep them afloat. The German position is that any such
option would be contingent on first addressing the issue of a true fiscal
union, where fiscal discipline is enforced in a manner that does not undermine
the efforts to save the Euro.
A New Framework for the
Future
The roots of the
economic problems of the euro zone lie ultimately in the structural imbalances
at the heart of the EU. While the severe macro-economic disparities are
at the center of the crisis, Europe’s structural imbalances are also on
political, economic, and social terms. European economies have been
overwhelmed by increasingly unrealistic expectations about the role of
governments. In this regard, leaders could choose to address the fact
that the current socio-economic model is unsustainable. As Cato Institute
economist Jagadeesh Gokhale finds, the average European country would need to
set aside 8 percent of its economic output each year in order to fully finance
future pension obligations. This is, quite simply, a practical
impossibility.
Even prior to
the current crisis, Europe’s unfunded pension liabilities averaged about 285
percent of GDP. Richard Disney of the University of Knottingham
calculates that if social policies are kept unchanged, tax hikes of as much as
5 to 15 percentage points will be necessary over the next couple of decades
merely to avoid the rate of indebtedness increasing any further. One
alternative is for increased government intervention in the market, coupled
with increased tax revenues and spending cuts, further straining already weak
government budgets. It is impossible for Europe to tax its way back to
growth. From where, then, would growth come?
“Creative
Destruction”
A different way
forward would be to implement the changes that would allow an increase in
European productivity. Europe’s ‘productivity gap’ has been the subject
of much debate during the past 20 years. Greece is not the only country
with productivity and competitiveness challenges. Europe’s overall per
capita GDP is 24 percent lower than that of the United States, a gap that
amounts to a total of $4.5 trillion in annual income.
To address this
gap, the European business community has long called for a genuine framework
that promotes innovation, productivity and entrepreneurialism. And,
according to the Organization for Economic Cooperation and Development, an
important mechanism that drives innovation and productivity gains is “creative
destruction.” This is the process by which new firms and technologies
revolutionize the economic structure from within and those that don’t innovate
are forced out.
Instead of
incentivizing the private sector so, governments without realistic sources of
income and growth have been determined to spend their way out of recession.
Realizing that this option is no longer viable, EU leaders could
implement measures, such as a revamping of its painfully rigid labor market, to
ignite entrepreneurship, innovation, productivity, and growth.
In effect, we
are all Europeans now, as the euro zone crisis threatens global economic
security and threatens to evolve into a renewed global economic crisis.
Witnessing its slowest growth since 2009, China recognizes that a healthy
Europe is important for its own well being. China’s move to cut its
reserve requirements for the first time in three years shows that it has not
completely turned its back on the rest of the world.
This is even
more true for the United States. The interconnectedness of the
Transatlantic market means that when a European bank is pinched, a bank in the
U.S. flinches. The U.S. has its own economic problems that are compounded
by a lack of political will from all corners. For Europe, and the rest of
the world, the changes required will be painful. Ultimately, this means
rebuilding Europe from the bottom up and laying the foundation for a new era of
European growth.
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