Europe’s crisis treadmill
Publish Date: May 14, 2014
  • mail
  • img

By Barry Eichengreen

This month marks the fourth anniversary of the May 2010 financial rescue of Greece. Previously, the idea that a eurozone member would seek emergency assistance from the International Monetary Fund, along with the European Commission and the European Central Bank, was unthinkable. The rescue thus marked Europe’s descent into full-blown crisis.

Four years later, European officials are assuring everyone that the crisis is over. The IMF has raised its forecast for eurozone growth this year to 1.2%. Even Greece is forecast to grow by a modest but not insignificant 0.6%.

Bond markets, too, are indicating that the crisis is over. Yields on Irish government bonds have fallen below 3%. Last month, Portugal was able to issue ten-year bonds at 3.57%. Even Greece has been able to sell five-year bonds at rates below 5%.

Clearly, the supposed experts who predicted the imminent disintegration of the eurozone have been proved wrong. But it is equally likely that those now declaring that the crisis is over will be proved wrong as well.

If we have learned one thing from the last four years, it is that the European Union lacks the capacity to act decisively. With 28 member countries, decision-making processes are tedious and time-consuming. Common interests are difficult to define, making burden-sharing agreements difficult to reach. Action is regarded as more urgent in some quarters than in others.

Moreover, the patient is far from cured. Ireland, Portugal, Spain, and Greece have made considerable progress in lowering their unit labor costs to 1999 levels relative to Germany. The problem is that 1999 levels are not enough, because producers now have China and other emerging markets with which to contend. Italy and France, meanwhile, have made considerably less progress on improving their international competitiveness.

Nor is it clear where the crisis countries will find the demand that they need. With domestic spending subdued, they have been relying on exports. But now that growth in emerging markets has slowed, their export markets are weakening. Spanish exports, on a positive trend until recently, have stopped rising. And Spain may be the proverbial canary in a coalmine.

The ECB, for its part, continues to do too little to support demand. It has been behind the curve since 2011. If it finally turns to quantitative easing in June, it will take only baby steps down this path, because ECB President Mario Draghi and his team remain reluctant to embrace the kind of radical measures that would shock their political masters.

On the budgetary front, the new French and Italian prime ministers, Manuel Valls and Matteo Renzi, respectively, have proposed cutting taxes for low-paid workers and their employers. This is a positive step toward addressing the plight of those who have suffered the most from the unemployment crisis. But Valls and Renzi also plan to cut spending to prevent their budget deficits from rising, which means that their initiatives will not boost demand.

Meanwhile, Europe’s banking crisis is unresolved. Loans to finance fixed investment continue to fall. Remarkably, the European Banking Authority’s latest stress test for the eurozone’s banks does not contemplate the possibility of deflation in its adverse scenario. The implication is clear: The banks’ capital shortfall will be understated, and the amount of new capital they will be required to raise will be inadequate. If the goal is to restore confidence and get the banking system firing on all cylinders, this is not how to go about it.

And everyone knows that Europe’s much vaunted banking union is deeply flawed. It creates a single supervisor, but only for the largest banks. It harmonizes deposit-insurance coverage but does not provide a common deposit-insurance fund. The resolution mechanism for bad banks is incomprehensible and unworkable. The associated resolution fund will possess only €55 billion ($76.6 billion) of its own capital, whereas European bank liabilities are on the order of €1 trillion.

Finally, there is that pesky matter of public debt, which is still 90% of eurozone GDP. European officials propose to work this down to their target of 60% over a couple of decades. You read that right. Check back to see how they’ve done in 2034.

All of this has the makings of a dismal prognosis. But it is how Europe progresses. Its banking union may be flawed, but at least it exists, and over time those flaws can be fixed. The stress tests may be flawed, but at least they are better than Europe’s two previous attempts. ECB action this summer may underwhelm, but at least the eurozone’s monetary-policy officials will do something.

The eurozone will not collapse this year, but its troubles are far from over. Europe will not draw a line under its crisis. Decisiveness is not the EU way.

The writer is Professor of Economics and Political Science at the University of California, Berkeley

Copyright: Project Syndicate, 2014

The statements, comments, or opinions expressed through the use of New Vision Online are those of their respective authors, who are solely responsible for them, and do not necessarily represent the views held by the staff and management of New Vision Online.

New Vision Online reserves the right to moderate, publish or delete a post without warning or consultation with the author.Find out why we moderate comments. For any questions please contact digital@newvision.co.ug

  • mail
  • img
blog comments powered by Disqus
Also In This Section
Makerere should negotiate with Parents, Guardians to reduce fees strikes
This week has been horrendous. There has been student unrest at Makerere and Kyambogo Universities respectively. For Makerere, it marks another vehemently ugly tale that has come to keep haunting the University each time important steps are made in her advancement as a premier institution in the co...
Empower the girl child
Uganda will on 11th Oct join the world to commemorate the third ever International day of the girl child. The national celebration premised on the global theme “The power of the adolescent girl, Vision 2030,” is based on one of the Sustainable Development Goals (SDGs) that were launched on 25th Sep...
NGOs in Development
As Ugandans pay homage to the thousands of people who sacrificed their lives so that the citizenry can always celebrate the end of colonialism, it’s becomes significant to thank the government too, for its steady leadership under the guidance of President Museveni that has provided an enabling grou...
Access to information vital for fight against graft
Uganda recently joined the rest of the African Union and Member states in marking September 28th as the International Right to Information Day....
Latigo: I am not on Amama’s campaign team!
Last Monday, many people spoke to me in tongues. I did not know that they had read the Red Pepper newspaper allegation that I was to head the presidential campaign of Amama Mbabazi (JPAM) in Northern Uganda....
The rise of corruption is the fall of economic development
Corruption has been around us from time immemorial, it has since then established itself world over. According to me corruption is a summarized meaning of broad day robbery, misappropriation of public funds, being self centered about a national matter, failure to deliver services as expected and th...
Should Makerere University fees policy be reviewed?
Can't Say
follow us
subscribe to our news letter