Jun 23 2011
The so-called Eurocrisis: separating myth from reality
To read the British media or to listen to many British politicians, you would think that the euro as such was in crisis and about to fall apart. This is sometimes accompanied by a smug smile about how wise we supposedly were not to have implemented Labour’s policy to join the euro. A little more factual analysis would be welcome.
For a start, the euro as a whole is not in deep crisis. It has strengthened in value on international monetary markets (while the pound has plummeted), it has throughout its existence maintained a low and stable inflation rate, the balance of payments of the Eurozone is in broad equilibrium and the euro is beginning to gain the advantage of being held across the world as an alternative reserve currency to the dollar. Economic growth has returned to the Eurozone as a whole (and especially in countries like Germany and France of comparable economic magnitudes to Britain, where growth is still stagnating).
Yes, some Eurozone countries have hit problems of excessive debt – just as have a number of countries outside of the Eurozone (such as Iceland, Hungary, Romania, Japan and potentially the USA). Various countries have received loans and this includes three Eurozone countries (do the press ever mention any others?). These three countries amount to a total of 6% of the Eurozone economy.
The loans are not actually “bailouts”. They are not grants or gifts. Nor has there been any assumption of liability for their debts. So it is wrong to say that taxpayers from other countries are having to fork out: the loans even attract interest so, unless there is a default, the lending countries will gain financially.
In fact, we would do well to stand back and look at the wider picture. After all, Europe was hit three years ago by the biggest economic tsunami since the Great Depression. Yet we avoided most of the mistakes that we made in the 1930s:
• We avoided protectionism — in no small part thanks to the single European market.
• We largely avoided competitive currency devaluations — in no small part thanks to the euro (just imagine for one moment what would have happened if we had still had the French franc, the Spanish peseta, the Italian lira, the German mark, the Belgian franc and so on: there would have been in turmoil on the international currency markets in addition to the turmoil we already had).
• We agreed on a fiscal stimulus at the depth of the recession (with an exit strategy) which helped turn the corner – in no small part thanks to Gordon Brown, lest we forget.
As a result, we have avoided the total meltdown that was a real possibility at one point and – except in a few countries, returned within two years to economic growth.
Nonetheless, three problems have arisen.
First, some countries have excessive levels of public debt. They had been profligate in the good times, meaning that they no longer had a margin of manoeuvre for the bad times. Greece is the most blatant case, compounded by fiscal fraud committed by the previous Conservative government there, and now in a very difficult situation.
Second, some smaller countries with large banking sectors suffered immensely when those banking sectors collapsed. Ireland (inside the euro) and Iceland (outside the euro) were the most blatant cases.
Third, some governments are taking deficits as an excuse for an all out assault on the welfare state, dismantling spending programmes with glee. I will leave it to the reader to guess which are the most blatant cases.
None of those three problems are a direct result of the EU policies or euro zone membership. They are a result of national policies and decisions. Nonetheless, they have underlined how interdependent we all are, in the Eurozone, of course, but also beyond, because of the single European market. A default by Greek or Irish banks would have major economic consequences in other EU countries, whether inside the euro or not. Britain, with its large financial sector, is particularly vulnerable and its maintenance of a separate currency is no protection.
That is why the countries of Europe have decided that it is worth coordinating and conferring more than before on their national macroeconomic policies. Strengthened macroeconomic coordination is a necessity. We now know that a housing bubble in Ireland or a banking problem in Germany can very rapidly become everybody’s problem. We have also learned that it is no good to focus just on deficits, but we need to look also at overall debt levels and other macroeconomic imbalances, such as asset bubbles and trade balances.
Indeed, looking at countries’ long-term competitiveness situations, led Germany to propose a “Competitiveness Pact”, on top of the extra co-ordination already agreed . It was, in its initial form, biased towards retrenchment and reductions in wages that made it unacceptable to a large majority of other Member States. It was replaced by a “Euro-plus Pact” put forward by the President of the European Council, Herman Van Rompuy. This was accepted by all but four EU Member States: UK, Hungary, the Czech Republic and Sweden — all currently governed by Conservative parties. All Member States currently governed by socialists signed up for this new version.
This was not because it is a socialist program – that would scarcely be realistic when there is currently an overwhelming majority of centre-right governments. But it is now focused on issues which all governments have to address: how in the long run to make our pension systems sustainable with ageing populations, how to arrange our tax systems in a way that does not mean that countries undermines their neighbours, how to combine fairness and flexibility in the labour market?
There remains much room for political debate on this. The left-right divide in the European Parliament has been accentuated – quite rightly as these are choices between policies, not choices between countries. But there is certainly a greater recognition that the key to the future, as we exit the immediate crisis, is how to improve the medium and long term performance of the European economy. This involves tackling structural problems. We must therefore focus relentlessly on the Europe 2020 strategy with its targets to improve education outputs, investment levels in R&D, poverty reduction, and climate change mitigation. The focus on immediate problems has detracted from the Europe 2020 strategy and we must rectify that balance.
And as to deficits, these are coming down. With immense problems in Greece, Portugal, and Ireland (where there is little choice) and the UK (where there is), but more gradually in most Member States.
The argument is about how this should be done – which is a matter for national decision not for the European institutions. It is up to each country to decide whether to cut expenditure or raise taxes. If cutting expenditure, what to cut, and if raising taxes, what to tax. Those are political battles to be fought at national level.
But in the long run, deficits must be reduced. From a socialist perspective, there is no point in accumulating public debt so that ultimately a higher and higher proportion of public spending goes on servicing the debt (paying a class of rentiers) instead of on public services or public investment. Of course, we must reserve the right to have deliberate counter cyclical deficits at times of economic downturn. But one of the lessons of the crisis is that this will be all the more effective if we have not already built up large debt levels. Keynes always intended “Keynesian” policies to be symmetrical, with deficits in the bad times balanced by surpluses in the good times. Britain didn’t do badly in this respect, thanks to Gordon Brown’s marriage to “prudence” (with Britain’s overall debt levels lower than Germany’s), but as we come out of the crisis we must learn that lesson across the whole of Europe.
The greatest lesson of all, however, is that whether we like it or not, we are all interdependent. Britain’s maintenance of a separate currency does not make it immune. Our trading patterns, our participation in the single European market, the cross-ownership of our banks with those in other EU countries (and the loans and liabilities they have), our involvement in the EU decision-making procedures and our simple geographic location, all mean that any pretence that it has nothing to do with us is futile.