It is symptomatic of the Eurozone’s (EZ) crisis that most of Europe’s newspapers described the results of last week’s summit as a ‘Club-Med’ victory and a German defeat, as though Monti v Merkel were simply an extension of football’s Euro-2012. In reality, as Charles Wyplosz argues, nobody has truly won; the EZ has once again kicked the can down the road. While limited progress has been made on recapitalising Spain (and possibly Irish and Italian) banks directly from the ESM as well as setting in motion a €130bn growth fund, far more fundamental change is needed if the euro if it is to survive this interminable crisis in one piece.
New thinking in Germany?
Elsewhere you’ll find lots of interesting, well-informed experts outlining alternative futures for the EZ, ranging from its total collapse to measures needed to ensure its gradual realignment and survival. The opposition to Merkel is beginning to stir, not just in the Club-Med countries but in Germany itself. Notable are pieces for the Freidrich Ebert Stiftung; inter alia, by Preofessor Maria João Rodriguez and by Björn Hacker as well as by Silke Tober for the Hans Boeckler Stiftung. In a previous piece I called attention to Joshka Fisher’s excellent contribution.
All agree that, ideally, fiscal union must be completed and that some form of jointly backed Eurobond finance must be adopted, probably one based on the Breugel Institute’s ‘blue bond’ proposal. It is argued that within the framework of the Stability Pact, more emphasis must be given to stimulating growth (a ‘growth protocol’) and raising productivity at the periphery—although Tober has strong reservations about the Pact. Completing fiscal union will also require improved budgetary co-ordination and a larger EZ budget to be financed from the proceeds of the FTT. All writers see Merkel’s obsession with austerity as a key problem, and by implication the need to install a centre-left government at next year’s general election.
While one must welcome the new debate taking place on the centre-left in Germany, my concern below is to point to some deeper problems which remain unaddressed or unresolved, namely:
- stabilising sovereign bond prices using the ECB;
- escaping recession through growth;
- rebalancing the EZ economy;
- radically changing EZ politics.
Stabilising bond prices
As pointed out by Paul De Grauwe, the ESM cannot realistically stabilise sovereign bond prices because it is simply too small; its resources of €500bn cannot cover the nearly €3tr in outstanding Spanish and Italian bonds. A proper fix for this problem would be for the ECB to cap sovereign bond yields at (say) 300 basis points above those on German bunds by buying as many sovereign bonds as required. Such a move is not only feasible (the ECB’s firepower is potentially unlimited because it can print euros) but it would stop further contagion in its tracks. Moreover, because such a move by ECB would put a stop to speculation, it would be cheaper in the long run than greatly increasing the capitalisation of the ESM at the expense of member-states.
The second problem is that of reflation and growth. At present, Club-Med GDP is shrinking and unemployment is rising dramatically. The so-called growth fund of €130bn agreed to at the summit on 28 June contains hardly any new money and is equivalent to only 1% of EZ GDP. US experience suggests that a 2-3% stimulus is required to generate sustained growth and reduce unemployment to tolerable levels—or indeed to head off a global recession. Despite his much-publicised push for growth at the recent summit, François Hollande has little to boast about.
Thirdly, none of the ‘scenarios’ outlined addresses the underlying problem of EZ trade imbalances; ie, the fact that Germany’s trade surplus with the EZ is reflected in the Club-Med deficits. Indeed, it is fundamentally for this reason that the Stability Pact is incoherent. Solving this problem requires, in the short term, that Germany boost its own consumer demand at the expense of exports. In the longer term, Club-Med countries must channel foreign savings into productive investment. Assuming that productivity can grow at about the same average rate throughout the EZ, rebalancing means that wages at the centre (Germany) would have to grow faster-than-average while peripheral wages would need to grow more slowly; ie, a pan-EZ wages policy is required. Furthermore, such a task would be considerably easier if the EZ were willing to accept a level of inflation of 4-5% per annum rather than 0-2%. For one thing, it is far easier to restrain real wages than money wages; for another, moderate inflation would erode debt/GDP ratios more quickly.
Towards a social Europe?
Finally, there is a key political question: what sort of Europe is to be built? At present, austerity is killing ‘social Europe’; ie, a Europe of decent jobs, pensions and social services. The citizens of the EZ are growing increasingly sceptical and bitter about the euro-project, a project which held such promise little more than a decade ago.
The call for closer integration is increasingly hollow unless accompanied by tangible benefits. Closer integration must lead to full employment, just as future EZ taxes (such as an FTT) must be used to help fund an EZ wide pension system, EZ unemployment benefit and so on. Such transfer payments are the key to redistribution between rich and poor states. The attempt to launch a common currency without a country has failed. In truth, either we move quickly towards building a legitimate and democratic United States of Europe, or we shall lose the euro.
This column is part of the Eurozone Scenarios Project of the Friedrich-Ebert-Stiftung and Social Europe Journal. The long version of the scenarios paper can be downloaded here. A Statistical Annex is also available.