Following on from yesterday’s post on the fiscal compact, we have another post today looking at the EU’s current crisis resolution strategy: i.e. further bail-outs in the form of emergency loans combined with austerity measures and a stricter rule-book for government spending. In our last interview, Frank Engel MEP was highly critical of this approach, though his proposed solution (steps towards a full fiscal union) might be seen as several steps too far by most political leaders.
Earlier this week, we spoke to Estonia’s Minister of Finance, Jürgen Ligi, and put some of your comments and questions to him. On 1st January 2011, his country became the latest EU member-state to join the troubled single currency, so how would he react to the debate?
Firstly, Christos sent in a comment criticising the current approach of bail-outs and austerity packages. He argues that we won’t find a solution to the crisis “with bail-outs to the weakest links of the eurozone! They will never be able to repay their debts! This is not the solution, not a permanent one anyway… unless we make permanent structural reforms we are going to go in circles…“
For Greece, I would clearly suggest they seek permanent solutions at home. All countries should remember that the primary responsibility for solving the crisis lies not with the EU but with national governments and voters. I don’t think anyone in Greece should think that these loans cannot be paid back; they will be made to pay them back. How painful this process will be is up to the Greek people. We are giving them these loans to make the situation easier.
Greece is not experiencing anything like the pain Estonia experienced in the 1990s; our social guarantees are much lower, our decrease in GDP in the 1990s was much deeper, but we reacted very quickly and Greece should think in the same way. After the cuts we made, we were the fastest growing economy in Europe. In the 1990s, we lost almost half our GDP, but we can say we made most of the reforms that Greece needs to make now. It is a shame if anyone in Greece thinks they have suffered enough, done enough, and can’t do more. Still the standard of living in Greece in 2010 is much higher than it was in Estonia in the 1990s. Our level was 65% of the European average in the 1990s, and Greece’s was 90% in 2010.
What about the various suggestions for debt-mutualisation as a solution? We had the following comment, for example, sent in from Michael: “If Europe has common problems then Europe has to have common solutions. [Eurobonds are] one of them and many others should follow.“
The long-term solution is not to spend more than you earn. A common eurobond is just dealing with symptoms and actually a government shouldn’t spend more than it earns, especially in aging societies. We should save, not borrow, and in the long-run it is the wrong attitude. Of course, I am not totally against this idea, because the EFSF and ESM are a step towards that, but it can’t be a permanent thing.
Germany is very much at the centre of the Eurozone crisis (and, indeed, at the centre of most of the proposed solutions). We also spoke recently to Thomas Silberhorn, a Member of the German Bundestag for the Christian Social Union of Bavaria (the sister party of Chancellor Angela Merkel’s centre-right Christian Democratic Union). We put Michael’s comment about eurobonds to Mr Silberhorn to hear what he thought.
No, I wouldn’t agree. What we had originally agreed on at the birth of the eurozone was the principle of “no bail-outs.” Only under the auspices of the financial crisis did we allow the eurozone members to grant financial aid to over-indebted countries – but with strict conditions attached.
The solution to this crisis will in no way be a joint approach like eurobonds, because that would merely encourage financial markets to treat all European countries the same. In fact, this has been one of the causes of the crisis. One effect of the common currency zone was that the markets no longer had in mind the different economic situations in different countries. Therefore, we saw a convergence of interest rates for the member-states. Eurobonds would just go back to this initial mistake. To avoid market forces and replace them with an artificial economic framework would not solve the problem.
We also had the following video comment sent in from Christos, who was worried that the “core” of wealthy Eurozone states were not being asked to compromise as much of their national sovereignty as the weaker “peripheral” states.
How would Mr Silberhorn respond?
My experience in the last months was that member-states like France and, of course, the UK are much more reluctant [in terms of] restrictions of sovereignty than Germany. However, I would concede restrictions of budgetary sovereignty only in those cases where the stability and growth pact is broken or in which financial aid is granted to a member-country. Restrictions in sovereignty of member-states should aim to reestablish the regulation set by the Maastricht treaty.
We also had a comment sent in from Craig that is highly critical of the current approach. He argues that “The policy of half-hearted ECB/Council bailouts has thus far led to recession and concurrently lower revenue/worse debt-to-GDP ratios.” Is the sort of negative spiral Craig is describing not a risk?
It is a risk. Nevertheless, austerity is one of the preconditions for financial aid and for a way out of the crisis. Austerity will not be sufficient on its own; it must come with a recovery program and, from my personal point of view, we have to limit financial aid and, should the conditions not be met by receiving countries, we should prepare for state insolvency (with an option to suspend countries from eurozone regulations). Countries, for example Greece, have just become too expensive. The country itself has to become cheaper. This is demonstrated by the consumption rate in 2011; Greece had a consumption rate of 110%, which means the Greek people consumed more than was generated in the Greek economy. This imbalance can only be tackled by austerity, in combination with a recovery program.
Finally, we had a comment sent in last year from MB who argues that “Greece should be allowed to default, unless Germany, etc. are prepared to take on the debt themselves and form a full political and economic union with the rest of the zone.“
I’m in favour of such an option, because continuing financial aid for too long could lead us to a point where the eurozone as a whole could come into danger… The problem is that a country like Greece needs a devaluation in any case. All of the measures implemented so far aim at a devaluation within the eurozone. The problem of such a devaluation is that Greece can only become cheaper by a massive reduction of social benefits, whereas the living costs stay at the European level. So the relation between private income and living costs will increase, and this is a reason for social tensions.
If you enabled Greece to devalue outside the eurozone, then the advantage would be that private incomes and the living cost would remain in balance and, at the same time, the exports would become more competitive and cheaper whilst imports became more expensive. This would enable the Greek economy to produce and deliver more goods.
What do YOU think? Is austerity the only way out of the financial crisis for Greece and other struggling economies? Or does the eurozone need to show greater solidarity and pool its sovereignty to come up with a common solution? Alternatively, perhaps we should prepare for sovereign insolvency and the default of one or more eurozone members? Let us know your thoughts and comments in the form below, and we’ll take them to policy-makers and experts for their reactions.