FRANKFURT – Europe’s struggle with economic stagnation is raising questions about whether its prized project — the shared euro currency — can bounce back or even just survive.
Fundamental gaps left at the euro’s creation in 1999 are haunting its policymakers. The euro’s missing pieces have come into sharper focus as the European Central Bank prepares to decide Thursday whether more monetary stimulus is needed to ward off crippling deflation and as Greece faces a Sunday election that could conceivably lead to its leaving the 19-nation eurozone.
Richer countries’ reluctance to share taxpayer money with poorer ones is still blocking change. Fixing the euro will be a matter of years — and that’s only if the political will can be mustered.
The alternative to change, according to economists and some officials, is that voters may turn their backs on an idea that promised prosperity but didn’t deliver.
No less a figure than Mario Draghi, head of the ECB, said in a recent article it’s clear “that our monetary union is still incomplete.” And at a Brussels conference Monday, Pierre Moscovici, the EU’s commissioner for economic and financial affairs, said the current state — no growth, high unemployment — was “unsustainable.”
“If nothing changes in five years, the European project will be rejected,” Moscovici said.
Or, as Draghi argued, countries “have to be better off inside than they would be outside.”
Economists often note the euro’s lack of a central budget. One central bank — the Frankfurt-based ECB — must devise one monetary policy for 19 countries, each of which has its own budget and a different way of running its economy. When one member is hit with a disaster, there’s no central automatic spending to soften the blow.
A shared budget “is the most important missing component and also explains why the eurozone is so fragile,” said Paul De Grauwe, a professor at the London School of Economics and author of “The Economics of Monetary Union.” ”And a fiscal union you can only have within a political union, because you need some supranational institution that is capable of directly taxing and spending.”
In contrast, the U.S. has a large federal budget that means rich states constantly send money to poorer ones without most people giving it one thought. When Florida’s real estate boom collapsed, the state government didn’t have to take over the busted banks. The Federal Deposit Insurance Corporation did. Meanwhile, federal money kept coming to Florida residents to pay their Social Security pensions, their unemployment insurance and their Medicare old-age health insurance.
Not so in Greece, Portugal and Ireland. When those governments faced bills running into the billions — for jobless workers, collapsed banks, pensions and health costs — they were bailed out by other European Union nations. But they had to agree to painful budget cuts and tax increases that sank their economies even deeper into recession.
That pressure to cut back is one factor keeping European growth slow and unemployment high — 11.5 per cent overall and 26 per cent in shell-shocked Greece. There, the left-wing Syriza party, which is leading ahead of Sunday’s vote, has said it plans to reject the bailout conditions, a step that could lead to Greece running out of money and leaving the eurozone.
The troubled countries lack the safety cushion that comes from having their own currency, which would fall in value and make them cheaper places to do business. Instead, they have to cut labour costs.
“So the burden of adjustment … falls squarely on labour, basically on cutting labour costs,” said Simon Tilford, deputy director of the Centre For European Reform in London. “That, politically, is a precarious basis for a currency.”
The eurozone has added safeguards since the crisis started in 2009, particularly a bailout fund to lend to troubled countries and common banking oversight to keep failing banks from busting government finances. Rules limiting deficits were toughened and countries’ budgets, labour costs and trade balances subject to common review.
Yet eurozone growth was only 0.2 per cent in the third quarter last year and inflation was minus 0.2 per cent. Inflation that low is a sign not just of lower oil prices but of weak demand that some fear could persist for years — or even decades, like it has in Japan.
Still, calls for sharing some spending or financial risk — such as by ramping up common spending on infrastructure, or borrowing collectively through so-called Eurobonds — is still facing a firm “no” from Germany and several other countries such as Finland and the Netherlands.
So what can be done?
Draghi argued since U.S.-style budget transfers between richer and poorer “are not foreseen,” it’s time for countries to make up for that by deciding their economic policies together, to the point of sharing sovereignty. Members need to push each other harder for basic reforms such as clearing away the excessive bureaucracy that holds back economies such as Italy and France.
Draghi left the details blank. One possible way to make common decisions, economists say, would be an EU body which sets an overall eurozone fiscal stance.
There are other ideas out there. New European Commission head Jean-Claude Juncker has launched a fund to attract private investment in new infrastructure such as roads and bridges. Think-tank economists churn out proposals for things like shared unemployment insurance, shared bonds, and EU-wide deposit insurance. Many experts think integrating capital markets — so people can hold shares in companies in other countries — would help spread the pain when trouble comes.
Deepening monetary union is on the agenda for an informal exchange of views when EU leaders in February.
Yet big changes — involving changing the basic EU treaty — appear off the table for the short term.
“Economists realize today there is no political momentum to move in any significant way, and as a result, many economists have tried to develop technical solutions,” said De Grauwe. “That’s fine, but it’s not a technical problem. It’s a political problem.”