Eurozone in Crisis Part IV
The crisis, and in some cases the tightening plans directly, has already had major political consequences . The heads of state in Ireland, Portugal, Slovenia, Greece and Italy have in turn resigned from their positions, while the Spanish government had to go after an election defeat. Italy is currently governed by a government made up of experts – so-called technocrats – and not by politicians. There is also a technocrat in Greece as prime minister, at least until the election in April 2012. The motivation is quite obvious: The technocrats must implement tough economic reforms that politicians do not fully want to be associated with.
8: The way out of crisis
It is difficult to predict what the European Monetary Union will look like in the future. The uncertainties are still large and numerous. The euro was a step towards even closer economic and political integration in Europe. The project is associated with a lot of political prestige. A possible dissolution of the monetary union will be a big step in the “wrong” direction. In itself, it is an argument that European politicians will ultimately do what it takes to save the currency. But it will require them to pull in the same direction.
This can be a significant challenge in a Europe / eurozone where countries have divergent interests. German politicians will have difficulty convincing their constituents, who have had high savings for a number of years, to help “loose” southern European “debt sinners”. But in a way, the German surplus economy is as unbalanced as the southern European ones. The “savings” in Germany even up in Southern Europe as cheap loans. The question of who is to blame for the crisis can create great tensions in the further cooperation.
The mood in the financial markets has improved so far in 2012. Among other things, government interest rates for some of the most vulnerable euro area countries have fallen (but not for Greece). Many believe the improvement is due to measures that the ECB has implemented. In two rounds, the central bank has offered European banks cheap loans with long maturities. A significant part of these loans has probably been used to buy government securities from countries such as Italy and Spain (greater demand typically leads to falling interest rates).
Even though it looks brighter than at the turn of the year, we cannot rule out a so-called disorderly collapse of the entire monetary union. There can be one horror scenario
- that (large) Italy is unable to finance large loans that fall due,
- that the other EU countries do not agree to help,
- that the crisis then spreads to other countries.
In such a situation, we will most likely also experience a new serious banking crisis, with major consequences for activity in the rest of the economy. Unemployment is likely to rise even more. Fortunately, it is possible to avoid the worst crisis. One way forward, which eurozone leaders have already taken steps towards, is even closer economic integration . Eurolandas already have a common monetary policy, in the future they may also have a more closely integrated fiscal policy. At a summit in January 2012, the heads of state in the EU countries (excluding the United Kingdom and the Czech Republic) agreed to establish a new financial pact. Stricter budget discipline and control are key words here.
Another element is the establishment of a stabilization fund . The pact is intended to apply to euro countries, but other EU countries can also join. The pact will apply when at least 12 euro countries have finally approved it – some countries after a referendum.
But even if the euro were to survive, it is not impossible for one or more countries to withdraw. Ultimately, a quarter of individual countries must weigh the benefits of membership against the disadvantages. On 20 February, it was announced that Greece would be granted a new crisis loan of EUR 130 billion, thus committing to the EU, the European Central Bank and the Monetary Fund (called the Troika) to follow a particularly strict austerity plan.
9: Tough years in sight – no matter what
Whatever the outcome, eurozone countries and their populations have tough years ahead. According to ESTATELEARNING, economic growth is likely to be weak, and more countries will have to implement extensive and painful economic reforms. Lost competitiveness in the south must be regained to get the economies back on track. Without the possibility of weakening its own currency, southern European countries can in principle only achieve this by having lower wage and cost growth than their trading partners.
This can happen in two ways: Either countries like Germany can stimulate their own economies, so that wage growth there picks up clearly (note: it is the relative cost level that matters); or southern European countries can themselves ensure that they have a particularly low, or negative, wage growth. With hyperinflation in Germany in the 1920s deeply rooted in the German mentality, the first scenario does not seem very likely. Southern Europe is thus quickly left with the last alternative, which will definitely be a long and tough route to better competitiveness.