Could the eurozone crisis be good for Europe? Last year, we looked at whether the eurozone crisis was good for the environment (as the economy falls to pieces, so the argument goes, it might be an opportunity to switch to an alternative economic paradigm). However, could the crisis actually be good… for the economy? We spoke to Finland’s Minister for Europe and Foreign Trade, Alexander Stubb, and asked him about the importance of market pressure on economic reform.
Firstly, one of our commenters, Samo, raised concerns about the recent souring of UK-EU relations. He believes we should “definitely keep the UK inside the EU, but not for any price.” Would Minister Stubb agree?
I fully agree. I think the UK needs to be an integral part of the European Union. The fact that the UK used its veto at the recent summit is only an extension of the policy the UK has been following since the Maastricht treaty. For a country like Finland, it’s important to have the UK remain a member.
What about the argument from another of our commenters, Patrick, who suggests the UK are – by remaining inside the EU but blocking further integration – obstructing the efforts of those members that do want closer integration? Patrick argues that “those nations that do want such a ‘complete’ union, should unite and set the constitution and rules of membership… Those that do not want to join that complete union should leave altogether. It is as simple as all that.” Does Patrick have a point? Is it as simple as all that?
Unfortunately, I disagree with him on all counts. The EU is not a black and white organisation; it has shades of grey. I’m a sad case – and an institutional nerd – in that I wrote my PhD on European integration. Integration can take place at different speeds. A core, be it on monetary union or defence cooperation, will have a centrifugal effect and pull the rest of the gang along with it. We cannot split Europe, we need to stay together.
Moving away from the debate on the UK’s troubled relationship with the EU, we’ve also had a number of comments sent in on the subject of the Eurozone crisis. Paul has set out a solution that he argues would end the crisis and ensure it won’t be repeated. This would include launching a common eurobond mechanism, investing heavily in economic growth and setting up either an “integrated euro financial system or enforceable monitoring and controls on all [euro-member budgets]”. How would you respond to Paul’s suggestion?
Eurobonds would not be a solution to the current crisis. It’s something we need to reflect upon in the future, but only once strict and enforceable rules are in place to ensure budgetary discipline. Eurobonds should not be an incentive for bad public financial policy. First you must have strong rules in place.
In fact, we had a similar response when we spoke to Ivan Mikloš, the Finance Minister of Slovakia. Minister Mikloš also argued that we first need rules in place before a serious discussion on eurobonds can begin. Protesilaos, one of our commenters, replied then that “in trying to maintain [a] ‘politically’ realistic approach, European elites end up [unwillingly materializing] the desires of speculators. So far, every single decision they have made has been in line with what the markets asked for.” Isn’t there a risk that policy-makers will never be able to “capture the initiative” from markets if they don’t take bold measures now?
I disagree. I believe we need market pressure; we need both political pressure and market pressure to achieve tough and necessary economic reforms. In that sense, I think the markets need to have a say; Greece is not making structural changes to its economy because of political pressure, but because it is under threat from the markets.
But market-prescribed solutions can be painful medicine. One of our commenters, Christos, says he does “not see any real solutions coming from our leaders, especially long term solutions. They are putting more and more people on the unemployment lists in some states without creating any new positions to absorb the newly unemployed. They plan to cap the numbers of those who work in the public sector, but they are choosing the wrong time to do it. Where will all those people go now that there are no jobs around?” Is it right to focus on austerity, or do we risk falling into a negative spiral?
You need both austerity and growth, but what we’re seeing is that if you live above your means for x amount of years, at the end you have to pay for it.
Some of our readers might dispute that, though. Whilst it’s true, for example, that some member-states ran significant deficits, other countries (such as Ireland and Spain) had quite limited levels of public debt. One of our commenters, Stanislav, argues that “the eurozone could have worked even without a fiscal union if it were accompanied by a weaker euro that would have not been indexed on par with the former German mark…”
There’s more than one reason for the sovereign debt crisis we find ourselves in. There are many reasons, and the reason he’s mentioned is one of them. It’s clear we would all benefit from a weaker euro. The rule of thumb is that, if the euro weakens by 1%, there is a 10% increase in GDP. That’s only a rule of thumb, but a weaker euro would definitely benefit the economy.
What do YOU think? Should we institute eurobonds and growth-focused solutions immediately to avoid a negative economic spiral? Or do we need market pressure to push through necessary structural reforms? Let us know your thoughts in the form below, and we’ll take your comments to policy-makers and experts for their reactions.