It’s been a while since Debating Europe focused specifically on the Eurozone crisis, and events have been moving quickly. We recently put up a post on banking and financial reforms (and will be publishing a follow-up to that shortly) but now is perhaps the time to turn more generally to the “permanent crisis” that has become the “new normal” for Europe. How many more late-night meetings and last-minute deals before we have a solution?
Yesterday, after yet another grueling 14-hour meeting, Eurozone finance ministers and private lenders agreed on a second round of emergency loans for cash-strapped Greece. A new “fiscal compact” is expected to be signed by the majority of member-states in March (though, due to last year’s UK veto, this will be a treaty signed outside the official EU framework). The new treaty is aimed at strengthening the rules for fiscal oversight in the Eurozone, but critics argue that further measures will be needed to ensure long-term growth.
Last year, reader Paul sent in the following comment:
The solution to the eurozone is, at this moment, the only thing that is important. This needs to be sorted out and any distraction has to be blocked.
Recently, we spoke to Lorenzo Codogno, Director General of Economic and Financial Analysis and Planning for Italy’s Ministry of Economy and Finance. We asked him if, since Paul left his comment in December of last year, a solution had finally been found.
My impression is that, yes, we have a solution. It’s not necessarily a permanent solution, but at least it addresses the issues raised by financial markets over the last couple of years. The ECB has been particularly effective, and the liquidity crisis that many banks have been facing is basically over. There’s still a solvency issue for many banks, but the issue is not immediately seen as particularly damaging. So, effectively, for the banking side, some of the problems have been resolved.
On the sovereign side, there is good news in some countries. I cannot emphasise enough that we in Italy have seen a positive change, which came on top of the policies of the previous government; but also in Spain and Portugal, the correct policy response is there. I’m not a particular fan of the so-called fiscal compact, but a number of solutions have been developed over the last few months, in terms of directives, the six-pack, and so on. We have a framework going forwards.
You say the fiscal compact is not a permanent solution, and many of our readers would agree with you. We’ve had comments sent in (for example, from Protesilaos, Stanislav and Christos) arguing that only a true “fiscal union” - with integrated fiscal policies and possibly a common Eurozone finance minister – will ultimately be able to overcome the crisis. Others, such as Marcel, argue that a fiscal union would be unacceptable to voters and thus a “catastrophe” for democracy. Who would you agree with? Do we need to move towards full fiscal union to finally achieve a solution?
I would agree with that. I fully understand that, particularly in some countries, there are certain sensitivities. Some steps would be perceived as far too much by voters, risking a political-social backlash in certain countries, which is something we need to avoid. However, some politicians would probably be better off being the driver of change rather than relying on what the voters say, whilst in other countries the voters are definitely not prepared to move immediately towards fiscal integration.
Some countries want to have commitments – and proof – that other countries are doing what they must to reduce their debt. Hopefully, once this process is set, and we see tangible results in terms of debt-to-GDP in some countries, and we have an established trend of good news, I think more countries could be more relaxed and much more proactive and accept much stronger integration in Europe than what is currently feasible. I would definitely argue in favour of that, and I’m sure we are heading towards that solution eventually. The problems we are facing will remain until we are at the point where there is only one country in Europe, and until then there will be still be risks around.
What do YOU think? Has a permanent solution to the Eurozone crisis been found? Will the “fiscal compact” be enough to satisfy markets that discipline has been achieved? Or do further steps need to be taken towards fiscal union and “one country in Europe”? Let us know your thoughts and comments on the fiscal compact and possible solutions to the crisis in the form below, and we’ll take them to policy-makers and experts for their reaction.
Lorenzo Codogno is Director General of Economic and Financial Analysis and Planning for Italy’s Ministry of Economy and Finance