This paper argues that the current crisis we are witnessing in Europe was inevitable and should be seen as a chance in disguise. It is not only necessary to solve the defects of the euro, but the pressure created by the crisis should be used to further promote the integration of Europe.
The creation of the European Monetary Union (EMU) constitutes one of the most significant events in the process of European integration. An important characteristic of the EMU is the dominance of political over economic considerations. The creation must be seen in the context of slow European integration in the 1970s and 1980s, post Cold War Europe and the German reunification. Helmuth Kohl for example told the German parliament in 1991 that he wanted the greatest possible number of countries in the euro and thereby opened the door for southern European states, against the will of the German central bank. A second feature is the EMU’s experimental character as first monetary union in history with fiscal policy carried out on the member state level. Although the transition to the euro in 2002 was completed without major setbacks, the economic situation in Europe ten years later is described by analysts in dark and mostly pessimistic ways, the “Euro-Crisis” has found its way into daily language.
The term “Euro-Crisis” is misleading and needs clarification prior to further analysis. The term suggests a crisis of the single European currency, which in fact does not exist. As Jeremy Gaunt argues, the European currency “has actually not had that bad a year, certainly against the dollar“ (Gaunt, 2011). The crisis will be dealt with as an economic and political crisis of the European currency area, not the euro itself. From an economic perspective, it is above all a European sovereign debt crisis, i.e. a period of time in which several European countries face the collapse of financial institutions because of high government debt. Politically, it is the inability of Europe’s political institutions to deal with the crisis quickly and. A third aspect emerges from the former two, a crisis of trust.
Regarding the causes of Europe’s sovereign debt crisis, the rising of government deficits constitutes a first one. Germany succeeded in introducing common stability criteria for euro member states in the 1990s, which led to the introduction of the Stability and Growth Pact (SGP). Although this agreement obliged governments to limit deficit spending and debt levels, it proved rather inefficient and was rendered ineffective after 2003 – another example for the priority of political over economic considerations. In particular Greece and Italy found ways to amount growing sovereign debt, hidden within more and more complex credit structures. A comparison between Germany and Spain on the other hand illustrates that complying to SGP standards alone does not explain the current situation.
The example of Spain stresses a second cause: trade imbalances in Europe. Whereas some countries in the recent two decades undertook major steps to improve their economic structure, other countries did not engage in that task. By implementing its Agenda 2010, Germany for example decreased unit labor costs significantly and increased its international competitiveness. Furthermore, the monetary Union itself led to a reduction of interest rates in countries like Spain, followed by a domestic economic boom. Subsequently inflation in those countries rose and further increased German relative competitiveness. This led to severe structural inner-European differences between import and export countries and to corresponding trade imbalances, which further increased sovereign debt in several states.
The second aspect of the crisis is the inability of European institutions to engage and counter these problems effectively. In essence the argument is that a monetary union without a fiscal union can not work. A first reason is the lack of flexibility regarding structural adjustment for monetary policy in Europe, as the SGP provides clear fiscal goals for politicians, without room to maneuver in cases where these goals would have to be trespassed. As van Treeck argues, the SGP focuses exclusively on the financial position of the state sector, while neglecting the private and foreign sector, which could balance the former one (Van Treek, 2010). Barry Eichengreen in this context also argues that states, deprived of their national currency, are not able to devalue their currency and the alternative to currency devaluation, the German “Agenda 2010 way”, is in fact “painful and slow” and was avoided in most countries (Eichengreen, 2012, 1) Consequentially the “heavily indebted, uncompetitive countries of the euro area” were left behind “between a rock and a hard place” (Ibid.).
Secondly, there are no institutionalized automatic sanctions for countries not complying to the SGP guidelines. Only few countries within the EMU, like Germany, Poland and Austria for example installed debt brakes and gave priority to price stability and the prevention of inflation. In other countries moral hazard rose when the idea that a country of the EMU could go bankrupt was forgotten, a position that was reinforced by the bail-out of Greece. Michael Bordo argues that “without a strict and credible no-bailout clause, the financial market mechanism is likely to fail as an efficient disciplining device on fiscal policy” (Bordo, 2011).
A third aspect is the crisis of trust in Europe. Prior to the development of the crisis in Europe, it was broadly assumed that sovereign debt in Europe was safe, so Greece or Italy did not pay much higher interest rates than for example Germany. The crisis now “turned much of that European sovereign debt into the latest distressed asset, sending tremors through global financial markets not seen since the demise of the investment bank Lehman Brothers” (Alderman, 2011). In the contemporary economic and financial system banks have to trust states as well as other banks and states have to trust banks as well as other states. In the absence of trust, financial transaction circles are interrupted, fueling the crisis and transforming it into a self-pertaining process. This “inner-elite” mistrust is furthermore accompanied by popular mistrust of the EU itself, mistrust in the competence of its institutions, mistrust between center and periphery and also mistrust between certain countries, a case for which the heated rhetoric in German and Greek media gives testimony.
2.2. Ways out of the crisis
The EMU currently finds itself in a deep-rooted crisis for which there are no simple and quick solutions. What is needed in order to save the EMU is a comprehensive strategy, combining the different needs and positions of its member states and peoples. The consequences of a failure to stabilize the suffering countries, the European economy and the European project would be disastrous. Although there is no consensus about the economic consequences of a return to national currencies, the scenario of a crashing Euro is undoubtedly grim. Furthermore the political consequences on stability in Europe, and the moral consequences of the worldwide most advanced transnational integration project falling apart, cannot be risked. German minister of finance Schaeuble is therefore right to exclude the abandoning of the EMU as a political option.
The causes for the current crisis are highly complex, interconnected and rooted in European as well as international developments. On a European level, the crisis is threefold – economic, political and about trust. In order to address these problems, several steps have to be taken. First, Europe has to move towards fiscal union, including mechanisms to enforce fiscal discipline and counter the potential for moral hazard. European economic and financial government has to intervene not only into the fields of taxation, government spending and government debt, but also in the economic and employment policy of member states. Second, competitiveness across Europe has to be adjusted, which in practice means that states like Greece have to lower their unit labor costs significantly. Last but not least, Europe is in dire need of trust building measures. Without trust in each other and trust in the European project, a solution to the crisis is hard to imagine.
At least three essential problems follow from these prescriptions. The first one is the necessity for European leaders to agree on a common goal and a vision of the EU they work for together. The reactions of European politicians so far have been patchy, inadequate and belated, and they have thereby lost their reliability to resolve the crisis. According to some observers, the problem of agreeing on a comprehensive strategy is not only difficult, but politically and technically beyond reach. To disprove these observations wrong has to become highest priority.
Second, the required steps of further integration will lead to severe inner-European debates and conflicts about legitimacy, sovereignty and the character of the EU itself. According to Harvard economist Dani Rodrik, the European Union is currently aiming at achieving three goals – economic integration, democratic legitimization and the maintenance of national sovereignty (Rodrik, 2010). It is obvious that further economic integration will decrease national sovereignty and centralize a high degree of power. The question, in how far the European states are willing and domestically able to transfer further competences to Brussels is not yet answered.
Third, it is important to keep in mind that the EU not only stands for a functioning economic system. The Union is founded “on the values of respect for human dignity, liberty, democracy, equality, the rule of law and respect for human rights“ (European Union). In particular the case of Greece illustrates the need for a careful balance between economic considerations and the maintenance of these values. Although Greece in one way or another has to reduce its labor unit costs and restructure its economy, the impacts on Greek society are severe and pose a threat to stability in Greece and Europe, and EU legitimacy as a whole. The consequences of enforced austerity include a deterioration of Greek’s middle class and a collapse of the educational and health care system.
In retrospective, the crisis was inevitable. A monetary union without a fiscal union does not work; Europe does not constitute an exception in this regard. From that point of view, the crisis had to come, rather sooner than later. Keeping the strength and success of European integration in mind, the question is not whether the EU will get out of this crisis, but only how. In this sense, politicians who want to bring Europe forward should press debates and think bigger. What has been possible with the euro, is possible in other fields, too. Why not set up a plan for the combination of national budgets? Why not take the chance and initiate the abolishment of the anachronistic national armies in favor of a cheaper European army? To combine these incentives into one shared vision supported by states and people, intense debate is necessary to receive domestic support and legitimization.
With the decision for monetary union, Europe has crossed a point of no return. Arguing that every problem is a chance in disguise, the momentum created by the current crisis offers huge potential for the promotion of further integration. It should not be wasted on symptom fighting or short-term solutions, but result in the necessary fixing of the EMU’s “birth defects” and the initiation of a new phase of integration.
Matthias Scholz hat seinen Bachelor in Neuerer und Neuester Geschichte (HF) sowie Islamwissenschaft (NF) im August 2011 an der Universität Freiburg abgeschlossen und studiert nun im ersten Semester International Relations and Diplomacy an der University of Leiden, sowie dem Netherlands Institute of International Relations Clingendael in Den Haag.
Alderman, L: Europe’s Banks Found Safety of Bonds a Costly Illusion, in: New York Times 10.11.2011. (Available at: http://www.nytimes.com/2011/11/11/business/global/sovereign-debt-turns-sour-in-euro-zone.html?_r=1).
Baker, P: Euro crisis: decision to create a single currency in Europe was an eminently political decision, 15.05.2010. (Available at: http://sluggerotoole.com/2010/05/15/euro-crisis-decision-to-create-a-single-currency-in-europe-was-an-eminently-political-decision/).
Bordo, M.: A fiscal union for the euro: some lessons from history, NBER Working paper 2011. (Available at: http://www.voxeu.org/index.php?q=node/7007).
Bundesregierung Deutschland: Die Schuldenbremse – fuer die Zukunft unserer Kinder, online presentation. (Available at: http://www.bundesregierung.de/static/flash/schuldenbremse/index.html).
Darvas, Z.: The ten roots of the euro crisis, Bruegel Institute, 2011.
Eichengreen, B.: Implications if the Euro’s Crisis for International Monetary Reform, Journal of Economic Policy Modeling, 2011.
European Union: The founding principles of the Union. (Available at: http://europa.eu/scadplus/european_convention/objectives_en.htm#RIGHTS).
Gaunt, J.: Why is the euro still strong?, Reuters 2011. (Available at:http://blogs.reuters.com/jeremy-gaunt/2011/11/10/why-is-the-euro-still-strong/).
Guerot, U.: Europe’s Crisis of Trust, The European Council on Foreign Relations, 2012. (Available at: http://ecfr.eu/blog/entry/europes_crisis_of_trust).
Hosli, M.: The Euro. A Concise Introduction to European Monetary Integration, Boulder 2005.
Investopedia: European Sovereign Debt Crisis. (Available at: http://www.investopedia.com/terms/ e/european-sovereign-debt-crisis.asp#axzz1nxNnGkHr).
Knipper, T.: Der Geburtsfehler des Euro, Cicero 2011. (Available at: http://www.cicero.de/comment/14014).
Kohl, H.: Speech in the German parliament in 1991. (Available at: http://www.cvce.eu/viewer/-/content/12090399-dc71-42ee-8a3d-daf2420c0a9a/de;jsessionid=93762CEC326519458A0E290683346DFE).
Meier, C.: Die deutsche Wirtschaft am Pranger, in: Manager Magazin 2010. (Available at: http://www.manager-magazin.de/politik/weltwirtschaft/0,2828,725646-2,00.html).
Riedel, D.: Schaeuble schließt ein Zerbrechen der Euro-Zone aus, in: Handelsblatt 30.12.2011. (Available at: http://www.handelsblatt.com/politik/deutschland/zukunft-des-euro-schaeuble-schliesst-ein-zerbrechen-der-euro-zone-aus/6005928.html).
Rodrik, D.: Das Trilemma der Weltwirtschaft, in: Financial Times Deutschland 16.05.2010. (Available at: http://www.ftd.de/politik/konjunktur/:zeitalter-der-globalisierung-das-trilemma-der-weltwirtschaft/50114226.html).
Rosamond, B.: Theories of European Integration, Basingstoke 2000.
Sandholtz, W.: European Integration and Supranational Governance, in: Journal of European Public Policy 4 1997, p. 297-317.
Ruehle, A.: Griechenland im Freien Fall, in: Sueddeutsche Zeitung 20.02.2012. (Available at: http://www.sueddeutsche.de/wirtschaft/griechenland-im-freien-fall-1.1288560-4).
Taubert, M.: Sachwerte bieten Sicherheit, in: Handelsblatt 04.12.2011. (Available at: http://www.handelsblatt.com/finanzen/boerse-maerkte/anlagestrategie/profi-anlageempfehlung-sachwerte-bieten-sicherheit/5913404.html).
Van Treeck, T: Why the Stability and Growth Pact does not work, Duesseldorf 2010. (Available at: http://column.global-labour-university.org/2010/01/why-stability-and-growth-pact-does-not.html).
Wolf, M.: Mercozy failed to save the eurozone, in: Financial Times, 06.12.2011.