by Bojana Simeunovic
Euro Zone is the economic and monetary union that includes Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, Netherlands, Portugal, Slovakia, Slovenia, and Spain (ECB the, 2012). The currency is European, but treasuries are national and economies are only partially integrated. (“Is anyone is Charge”, 2011, 24-26). All members have a veto on key decisions, which must then be ratified by respective parliaments. Triggered by the global financial crisis, the problems within the Eurozone slowly started to emerge. Today, the area has been spanned with a financial crisis that threatens to break the monetary unity and cause the failure of the single currency, imposing damage to capital markets and economic regional integration, as well as political cooperation among the EU members. Countries are wondering whether to help others or save themselves.
Although majority of the newspaper headlines and current debates revolve around finding a solution to Greece’s debt crisis, we must not be lulled into believing that it is the Greek debt that is the root of the European problem. The crisis has been only partly about the sustainability of the sovereign debts of Greece, Ireland, Portugal, Italy and Spain. Moreover, it has always been a political crisis, an institutional crisis “about the failure of the euro zone to develop the necessary mechanisms to ensure financial discipline among its member states and to come to the aid of countries when they ran into financial trouble” (Nixon, 2011). If Greece were a special case, the solution would be to isolate it from the rest in order to prevent contagion effect; but many argue that this is not the case. As reported by The Wall Street Journal, “the euro zone was destroyed at Deauville in October 2010 with the insistence that bond holders would be required to take losses as the price of future bailouts, and it was buried at Cannes with the announcement that Greece was free to choose to leave the euro” (Nixon, 2011). In order to understand how contagion effect works, and why many argue the option of ring-fencing Greece would lead to the failure of the entire project, we must look back at the shortcomings that were apparent already at the launching of the single currency.
On the one side, the ECB has been established as a supranational institution, the euro as a single currency, and the single monetary policy operating according to a clearly defined mandate. However, other instruments of macroeconomic policy, such as fiscal policy and wage policies, have remained under national direction (Issing, 2008). It was clear at the very beginning: the lack of the ECB’s political counterpart emerged as a main shortcoming of the EMU. Various politicians, who have proposed the so-called European Economic Government, have addressed this issue; but as soon as their national interest is at stake, they tend to ignore it entirely. There is no unified European Fiscal Policy; none of the finance ministers has a right to a decision that is not in harmony with his/her respective country’s national interests. “Not only is this impeded by the need to agree on the position with the national government and obtain the approval of parliament, but—depending on the situation—there may be strong political incentives to renege on a commitment previously entered into in the framework of coordination (Issing, 2008).”
While monetary policy is coordinated on a supranational level in order to secure the price stability, fiscal policy remains national responsibility, aimed at determining how macroeconomic resources are allocated across the public and private sectors, and implementing policies of income distribution (Issuing, 2008). Moreover, stabilization remains thus a national responsibility, subject to the rules of the Stability and Growth Pact, “aimed at ensuring that national policies are compatible with the requirements of EMU.” The ECB therefore has a strictly limited role because its responsibility in the fiscal policy regulation is only as a guardian of macroeconomic stability.
Knowing how the model works, one cannot help but ask: Does one size of the single monetary policy fit all? It is clear that a euro-level policy could easily contradict the national interest, and it is no wonder that this type of a question persists in debates. Upon the creation of the euro—and later with each state’s accession—statistics showed that similarities had outweighed the differences and that uniform policy could function; but what happens when the country falsifies its data and the statistics are fraud?
Greece certainly did so, and there are speculations that other euro countries were not quite ready to join the EMU. Moreover, even those who fitted the data at the entrance were not able to keep up with the criteria, e.g. Germany. Nevertheless, financial penalties were not imposed upon a single country that failed to meet the criteria (as it was agreed under the Stability and Growth Pact). Therefore, to claim that Greece is a special case, and responsible for the crisis, is not only wrong but also hypocritical.
Today, many point at the stalemate in which the Eurozone countries are still stuck: Should they allow countries to default and break the currency union, or should they try to save the euro by creating an unpopular fiscal union backed with Eurobonds. As Greece remains the center of the debate, I will now focus on the possible scenarios and actions already taken by the leading countries to tackle the issue of financial crisis through finding solution to the Greece’s problem.
Some analysts believe the solution of Greece defaulting, leaving the Eurozone and re-introducing the drachma would be ruinous for both parties. As outlined in the July issue of the Economist, the new drachma would make Greece’s debt ‘even more onerous’ with inflation kicking in and import prices rising immediately. Greece would have to print money to finance its deficit, and as exports make up only a small portion of the country’s GDP, the benefits of a devalued currency would be unsatisfactory. The country would still need external finance, but who would lend to it? (“If Greece Goes”, 2011, 13).
The ECB, the European Commission and the majority of national ministers had stood against any restructuring of the Greece’s debt, orderly or otherwise, for the fear of the contagion effect. Euro-federalists in particular have been proposing a move towards the United States of Europe, stressing an eventual introduction of European Finance Ministry to coordinate fiscal policies (“Charlemagne: Default Options”, 2011, 38). For now, this does not seem likely, for Europe is not a federalist state and uniformity of national and supranational interest seems unattainable.
The Economist has been favoring an orderly restructuring of Greece’s burden, defaulting its debt to 80% of GDP. As it is argued, this would hardly impose any threat to the markets, which have long expected a default. This measure cannot be divorced from more fiscal control from the Brussels; but there seems to be a serious problem with this approach: the Greeks.
In any decision-making process, the citizens must support their government in order for any kind of reforms to take roots. Apparently, this does not count or Greece. For a long period now, the Greeks have been protesting against the austerity measures, both violently and peacefully. With an increased fiscal control from the Brussels, a very serious social upheaval could be inevitable as such step would impose a direct threat to Greece’s sovereignty. The Germans at least tried it.
At the end of January, the German government proposed that a European commissioner be appointed to hold power over the Greek national budget and taxation. “Since the European Central Bank already controls the Greek currency, the euro, this would effectively transfer control of the Greek government to the European Union, since whoever controls a country’s government expenditures, tax rates and monetary policy effectively controls that country” (Friedman, 2012). The Commission rejected the proposal, yet the basis of German’s argumentation is not illogical: nobody trusts Greeks anymore, which is reasonable. However, Greece is not an individual or a corporation; it is a nation-state “a uniquely legitimate community whose members share a range of interests and values” and their popular will is the main determinant of the state’s actions (Friedman, 2012). How is it then possible that the Germans, of all the states, proposed something like this?
As George Friedman argues, about 40% of German GDP comes from exports, mainly from the European Union. Therefore, they have a vested interest in facilitating consumption and demand for their exports across Europe. Using the EMU, Germany has enabled other Eurozone states to access credit “at rates their economies did not merit in their own right,” facilitating irresponsible lending practices across Europe. The Germans blame the Greeks for deceiving their creditors and the union, but the truth is that they “willingly turned a blind eye (Friedman, 2012).” Friedman concludes by suggesting that defaulting turns out as a least painful solution to Greece, since in most cases “borrowing becomes more attractive after default, as it clears the way to new post-default debt.” Greece has already defaulted on its debt in the past, he claims and succeeded in attracting international lending.
On February 22, the solution seemed to be at the corner. Jose Manuel Barroso, president of the European Commission, said for the Wall Street Journal “the accord closes the door on a scenario of an uncontrolled default, with all its grave economic and social implications.” The deal included a €130 billion rescue which would cut country’s debt by €107 billion. However, many see no solution in this. As it stays closed to financial markets, Greece could remain dependent on the Eurozone life-support for years to come.
According to a survey conducted by Emnid, a German pooling firm, 60% of Germans oppose the latest Greek rescue (Karnitschnig, 2012, 4). German political elites tend to fall under this group of skeptics as well. Angela Merkel’s effort to pass the deal through the German parliament failed this week, when one of the senior members said Greece should leave the currency union. As The Wall Street Journal reports, Interior Minister Hans-Peter Friedrich also said “the chances that Greece can renew itself and become more competitive are surely greater outside the union than within it.” However, rather than kicking it out, Greece should be given incentives which it could be unable to refuse, he continued. Interior Minister is one of the first Germans to say that Greece’s exit could be divorced from the failure of the entire zone, because “banks and other investors in Greek debt have had time to write down holdings, removing the danger of a sudden shock” (Karnitschnig, 2012, 4).
Euro remains a currency without a state. Assuming that contagion effect could be avoided, I argue that Greece should leave the Eurozone. However, the crisis is European, not Greek; it is as financial as it is political. Therefore, isolating Greece is only a first step towards a constructive solution. In order to survive, Europe needs a united fiscal policy. There are two scenarios: either the introduction of the single currency would finally start fostering political integration, or Europe would decide to stick with a known Keynesian remark, “If I owe you a pound, I have a problem; but if you owe me a million, the problem is yours.”
It is clear that the future of the euro will be decided largely in Germany, as “it has the deepest pockets, and its post-war renaissance is intimately bound up with the European integration” (Is Anyone in Charge”, 2011, 24-26). However, the German dilemma of preserving the system vs. imposing discipline takes too long to unravel. The German public is lulled into believing that Greeks are responsible and demand justification for any future bailout. Merkel, consciously creating this image for the domestic audience, leaves a somewhat different impression internationally. She is aware that it is in Germany’s best interest to uphold the free-trade zone in Europe in order to secure the demand for its exports. Furthermore, a reemergence of German nationalism and pre-war sentiments must be avoided at all costs. The deeper into the crisis, the more mutually exclusive these interests get. Maybe, George Friedman has its right when he argues that this is not a Greek or an Italian crisis anymore, yet “a crisis of the role Germany will play in Europe in the future.” The euro will survive in the short run; for the long run, it is hard to speculate.
References
“Charlemagne: Default Options”. (2011, June 25). The Economist.
Fidler, Stephen. (2012, February 22). “Greek Deal Brings Relief, Concern”. The Wall Street Journal.
Friedman, George. (2012, January 31). “Germany’s Role in Europe and the European Debt Crisis”. Retrieved from http://www.stratfor.com/weekly/germanys-role-europe-and-european-debt-crisis.
“If Greece Goes…” (2011, June 25). The Economist.
Issing, Otmar. (2008). The Birth of the Euro. Cambridge: Cambridge University Press, 200-236.
Karnitschnig, Matthew. (2012, February 27). “German Minister Urges Greek Exit From the Euro”. The Wall Street Journal.
“Map of Euro Area 1999-2011”. (2012). The ECB. Retrieved from http://www.ecb.int/euro/intro/html/map.en.html.
Nixon, Simon. (2011, November 22). “Debt Crisis Is a Symptom of Wider Failings”. The Wall Street Journal.
“Rearranging the Deckchairs”. (2011, August 6). The Economist.
Photos retrieved from:
http://www.zeit.de/wirtschaft/2011-09/euro-schuldenkrise-merkel
http://www.naharnet.com/stories/en/33634
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