CC BY
60
АКТУАЛЬНАЯ ТЕМА
УДК 338.124 (045)
БОЛЬШАЯ РЕЦЕССИЯ И ЕЕ ВЛИЯНИЕ НА ЕВРОПЕЙСКУЮ ИНТЕГРАЦИЮ
ВИСЕНТЕ ДЖ. ПАЛЛАРДО ЛОПЕС
доцент отделения прикладной экономики, научный сотрудник, Институт международной экономики университета валенсии, Испания E-mail: [email protected]
АННОТАЦИЯ
Экономический кризис, который начался в Соединенных Штатах в 2007 г., привел к тяжелым последствиям всю мировую экономику, но рецессия оказалась особенно глубокой и продолжительной в Еврозоне, причем наиболее сильно пострадали страны ее периферии. Наложение таких факторов как несбалансированные экономики, отрицательные последствия глобального финансового кризиса и известные недочеты в институциональной структуре Европейского союза / Еврозоны вызвало не только тяжелейшие последствия для этих стран, но и серьезные тенденции к дезинтеграции в политической, социальной и финансовой сферах. Негативное влияние на валютно-финансовую интеграцию оказалось наиболее заметным, так как это была самая развитая область европейского проекта. Несмотря на то, что европейские институты и правительства стран ЕС предприняли целый ряд мер для противодействия возникшим проблемам (не всегда своевременным и/или успешным), кризис еще не преодолен. Требуются смелые и продуманные усилия для продвижения к более высокой степени интеграции (через банковский союз, налоговый союз и общую стратегию повышения конкурентоспособности) и для предотвращения ЕС от ренационализации и превращения в обычную зону свободной торговли.
Ключевые слова: Европейский союз, США, экономический кризис; глобализация, интеграция, банковский союз; налоговый союз.
THE BIG RECESSION AND ITS IMPACT ON THE EUROPEAN INTEGRATION
VICENTE J. PALLARLO LOPEZ
Associate Professor (Department of Applied Economics) & Research Fellow (Institute of International Economics); director, Master of economic internationalization. university of Valencia, Spain
ABSTRACT
The economic crisis started at the United States in 2007 led to severely damaging consequences for the global economy, but the recession has been particularly intense and protracted in the Eurozone, with its periphery countries being the most affected ones. The confluence of very seriously imbalanced economies, negative spillovers from the global financial crisis and well-known faults in the European Union/ Eurozone institutional design has caused not only terrible consequences for these countries but serious disintegration effects (political, social and financial) in the whole area. The negative impact on the monetary and financial integration has been of a particular relevance, as it was the most advanced area of the common European project. Even if the institutions and governments in Europe has taken a large number of measures (not always in a timely and/or successful manner) to deal with the problems, the crisis has not yet been overcome. A brave and intelligent effort to progress towards a higher degree of integration (through a Banking Union, a Fiscal Union and a common pro-competitiveness strategy) is most surely needed to prevent the EU to suffer from a renationalization and become a simple free trade area.
Keywords: European Union; USA; economic crisis; globalization; integration; banking union; fiscal union.
Evolution of the real GDP (2007 = 100)
2007 2008 2009 2010 2011 2012 2013 2014 2015
Advanced economies ^^^"Euro area
......European Union .....Central and eastern Europe
Commonwealth of Independent States ^^^ Developing Asia
Latin America and the Caribbean — — Middle East and North Africa 'Sub-Saharan Africa
Figure 1
Source: Own elaboration. Data: IMF
INTRODUCTION
The current economic crisis (the so-called "The Great Recession") has been the most devastating period for the world's economy (especially for OECD countries, with very few exceptions — e. g., Australia) since World War II. After exceeding its potential level during the years prior to the crisis (4.6 % of the annual average between 2003 and 2007), the global economy basically stagnated during the following biennium (annual growth of 1.1 %), before recovering at a rather weak rate (average of 3.8 % for the 2010-2013 period). The results for developed countries have been even worse (from a pre-crisis growth of 2.7 % at the downfall of 2008-2009, when the GDP descended at a rate of 1.8 % per year, to the current extremely weak recovery, with an average growth of 1.9 % between 2010 and 2013).
Although the crisis that began in the summer of 2007 in the financial markets of the United States as a result severely damaged most of the economy across the globe1, it isn't difficult to agree that the Eurozone, and in particular its periphery, suffered the most serious impact, both in terms of the intensity and the duration of the crisis. As shown in Figure 1, while in all emerging and developing regions, the real aggregate GDP never fell below the 2007 level or recovered that level no later than the year 2010, and in the OECD the level referenced
1 Some emerging economies exhibited a remarkable resistance to the crisis, but the macroeconomic policies implemented to reach this degree of resistance triggered problems which in turn didn't have an easy solution, from fiscal and monetary mismatches to sharp rises in the price of assets.
was restored in 2011, the economy of the European Union (and that of the Eurozone) is moving in real GDP levels lower than those reached during the crisis even in 2013.
Of course, a crisis of a similar magnitude caused Western Europe to have expected pernicious effects in terms of unemployment, poverty, and social problems, among others. However, the unique characteristic of the European crisis is that these problems (and the given responses that are not always sufficiently effective and/or quick) are threatening the most important economic integration project (and not just the economic one) of the last few decades. It is not necessary to go back any further than the summer of 2012 to read various comments questioning the survival of the euro itself. It is true that the majority of these opinions ignored the strong political will existing in the Eurozone towards keeping this crucial integration project up and running. This will was expressly most effectively with the declaration by the European Central Bank (26/07/2012) in defense of the single currency2. Since that day, the continuation of the Eurozone in the short term is a subject that basically is no longer being debated.
However, it still remains that serious doubts persist among economists and political experts on
2 The already famous phrase by the president of the ECB, Mario Draghi, who declared on that date: «.. .Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.», is probably the most important one of the entire crisis from the viewpoint of continuing the European project.
R&D Expenditure (% GDP; last available data between 2007-2009)
■
■ ■
■
, ■ ,
Germany OECD relanc Portugal Spain Italy Greece
Figure 2
Source: Own elaboration. Data: OECD
the sustainability of the euro (and even the European Union) with its current structure, while the unhealthy distance felt and shown by a very high number of European citizens with respect to the European Project is one of the most worrying collateral effects of the current crisis.
This paper draws out an explanation on the causes of the differential impact of the crisis on the European Union, the potential disintegrative consequences of the crisis, and some ideas on the future of the European project. All this is being tackled with an approach that attempts to gather the specific worries of the periphery (the South especially) of the Eurozone, without getting carried away by the black-and-white narrative being so sadly drawn out about culprits and victims3. We will attempt to clarify the content of the obstacles to be overcome in order to put the European project on the right track once again. Otherwise, we cannot completely rule out a comprehensive failure of the Eurozone, with a negative impact expected for the entire European Union and any new ambitious integration project that could be implemented in other parts of the world.
OWN SINS...
A very persistent narrative in the south of the Eurozone (to a lesser extent Ireland) on the current economic crisis emphasizes the external factors
3 The lazy and irresponsible of the South according to the Central Euro-
pean narrative and the lack of solidarity and one's committing «austerity suicide» in the Mediterranean version.
causing it: the greed of American bankers, the German obsession for macroeconomic balances, competition between low labor costs and the dumping of Asia in development (China in particular), global deregulation, tax havens, assessment errors and excessively pro-cyclic behavior by the financial markets... among other arguments to justify the severity of the crisis, all of them agreeing to place responsibility on the outside.
Although many of these factors did play a significant role in creating and prolonging the recession, the first step in understanding and resolving the problems of the European periphery is founded on accepting that most of the responsibility for the current situation is domestic, not imported. There are two reasons for this: first of all, as uncomfortable as it is, it is true that most of the responsibility falls on every country and their economic agents, especially on those with more knowledge and decision-making abilities; and second of all, only by accepting one's own responsibility can understanding be expected from the members of the center and north of Europe.
It is impossible for this article to offer all of the keys, even for just one of the periphery countries, of the accumulated imbalances (among the excesses of the public sector in Greece and Italy and the excesses of the real estate and the banks in Spain and Ireland, there are clear differences in the factors that provoke and emphasize the crisis in each case), but it is possible to establish a reduced number of decisive parameters shared by all of these countries,
Table 1
145,0 140,0 135,0 130,0 125,0 120,0 115,0 110,0 105,0 100,0 95,0
Unit Labor Cost (2000 = 100)
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 •••••Greece Ireland — Italy — - Portugal Spain Germany
Figure 3
Source: Own elaboration. Data: Eurostat
International ranking for selected indicators (2008)
Global Competitiveness Index Doing Business Index Staff training Legal Rights Index Nature of Competitive Advantage Utility Patents
World leader US Singapore Denmark Hong Kong Germany Taiwan
Ireland 22 8 21 8 18 23
Portugal 43 37 70 72 55 38
Spain 29 38 63 29 28 28
Italy 49 53 109 93 14 25
Greece 67 100 81 93 34 42
Germany 7 20 12 8 1 9
Source: Own elaboration. Data: World Economic Forum; World Bank.
with the occasional exception. First, an economic growth model in the previous expansive period that ignored in an unprecedented way the factors involved in the advancement of work productivity, from the investment effort in R+D+I to the improvement of regulation tending towards favoring business activity, through the formation of human capital or an efficient use of public resources.
Figure 2 and Table 1 are offered up as mere examples demonstrating this trend. As you can see, only Ireland is doing better in indicators4 linked to productivity and the competitiveness of the
4 The selected data corresponds to the end of the expansive period, to avoid the awful results from being attributed to a possible contamination of the crisis, such as through cuts in investment.
economies, but in this case an excessive increase in salary led to the same global outcome: a dizzying increase in unit labor costs not only in comparison to emerging countries, but also to Europe's central countries5 (Figure 3).
A select reduced group of big exporting and innovative companies in Ireland, Spain, and the north of Italy, as well as some multinationals located in these territories, barely recovered from this loss in competitiveness. Those few firms were very little to
5 The unit labor cost is the ratio between the labor cost per worker and work productivity. Therefore, an excessive expansion of this could be due to a disproportionate increase in salaries (Ireland) or to stagnation, if not a fall, in productivity (Southern Europe). The existence of high non-salary labor costs, such as in the case of Spain or Italy, also do not contribute at all to improving the evolution of this critical indicator of competitiveness.
Figure 4
Source: Own elaboration. Data: IMF
Table 2
Total debt; composition by institutional sectors ( % GDP; 2010)
TOTAL HOUSEHOLDS FINANCIAL SECTOR CORPORATE NON-FINANCIAL PUBLIC SECTOR
IRELAND 1185 129 664 278 114
SPAIN 472 90 113 205 64
PORTUGAL 413 103 65 154 91
ITALY 388 50 99 119 120
GREECE 312 6 oo 21 71 152
Source: Own elaboration. Data: IMF
avoid the economic collapse that occurred starting in 2008-2009.
The second factor explaining the crisis shared by all of the periphery countries of the Eurozone was the extreme amount of debt accumulated by its companies. As revealed in Table 26, while Greece and Italy basically had a problem in the public sector, in Spain, Ireland, and Portugal the most worrying levels came from the non-financial private sector (in the first two cases, in large part due to the mortgage debts of families and construction and real estate companies). In Ireland, what stands out, without a doubt, is the debt in its entirely involved financial sector7.
6 This is data on debt in 2010, a year when, with the outbreak of the crisis of sovereign debt in Greece, financing the debt of the European periphery became extremely difficult.
7 As we can see, the data from the Spanish banking sector is also striking,
All of this debt, which was undoubtedly voluntary and generally used in activities that were far from necessary in fostering productivity and sustainable growth in the long term, was facilitated by an exacerbated amount of credit, also granted with few demands and at very low interest rates8. The money necessary for such excess clearly stemmed from the rest of the world, especially Central Europe, where some countries, led by Germany and the Netherlands, accumulated current account surpluses (i. e. an excess of savings) and financed the current account deficits of the periphery,
but to a much lesser extent; it should come as no surprise, therefore, that unlike the case of Ireland, only a part of the banking system had to be saved (none of the later major entities had problems), particularly a large part of the Savings Banks, controlled by political parties and trade unions. 8 The credibility of Spanish and Irish regulators, especially their Central Banks, was highly damaged due to their incompetence and/or unwillingness to tackle these excesses in credit.
Figure 5
Source: Own elaboration. Data: ECB
which reached historic records in the years prior to the crisis (except in the case of Italy, with much higher internal savings), as shown in Figure 4.
The unloading of all this massive cheap funding was precisely one of the most used arguments in the European periphery in demanding a better distribution of responsibility in the adjustment facing the crisis. Even though the borrowers had obvious excesses, is it any less true that the moneylenders made a mistake in funding such behavior so eagerly?; as a result, shouldn't they have assumed part of the losses derived from the inevitable end of the expansive period? These issues allow us to link internal responsibilities for the crisis with the external ones.
...AGGRAVATED BY EXTERNAL ERRORS
The first of the bad external influences stemming from difficulties in the situation of the periphery countries of the Eurozone, emphasizing the internal errors that were already mentioned, took place before the outbreak of the global crisis. In a world flooded with liquidity, where the quest for profitability was very arduous and the undervaluation of the risk clear, the flow of capital towards those periphery countries, whose noteworthy growth rates and dynamic evolution of the price of assets made them particularly attractive, was massive, and without a care. That excess of liquidity has been explained by errors in the monetary policy, above all in the Federal Reserve ("too low for too long"), by the excess of
savings in the emerging countries ("global saving glut") and/or by the scarcity of safe investment assets ("short-asset hypothesis"). For example, see Taylor (2011) [1], Bernanke (2005) [2], and Caballero (2010) [3], for a presentation of the three points of view. However, the reason behind this excess in liquidity, although relevant, is less important than the consequences (brutal excess of debt and financial and real estate bubbles).
As revealed in Figure 5, focused on the public debt (the cost of private debt is of course linked to the cost of that public financing), for almost a decade, long-term financing (that is to say, financing that should have been more linked to the structural features of the economies), flowed towards the south of Europe and Ireland at a cost equal to the financing that reached Germany for example.
The aforementioned avalanche of funds should be taken as a major error in the markets, that they didn't evaluate the true capacity to repay the agents going further and further into debt. This is explained by a poor analysis (including that of rating agencies, which never questioned the capacity for repayment of the enormous debt being accumulated in the European periphery), due to the manipulation of official statistics (in the case of Greece), due to the belief that any country in danger in the Eurozone would be aided by its members, in spite of the «no bail-out» clause of the Maastricht Treaty, or due to any of the other factors. What is certain is that the periphery of the Eurozone had
gotten used to spending far more than they produced with the resource of cheap external financing, without the financial markets showing any worry in that regard. And thus came the second blow from the outside.
The outbreak of the global financial crisis, especially starting with the events of September 2008 (fall of the Lehman Brothers, bailout of AIG...), came from an abrupt reassessment of investments, tolerable levels of risk, and the degree of confidence in the various borrowers. The flows of funds towards the European periphery (among other economic areas that began to be considered less secure) started to weaken, especially when worry grew about the health of the banking systems in the European Union9 and upon realization of the real situation of public finances in Greece. Starting in the spring of 2010, the «flight to quality» segregated the developed world into two blocks: countries financing themselves at costs below historical minimums (sometimes even with negative interest rates, such as in Germany, Denmark, or Switzerland), and basically excluded countries (Greece, Portugal, Ireland, as well as Iceland, already bankrupted previously) or ones financing themselves at prohibitive costs (Spain, Italy) in the international capital circuits. How do we sustain economies that had lived on outside money which, almost from night to day, not only stopped flowing but also tried to flee as quickly as possible? The adjustment was inevitable, but, at what rate and magnitude?
So in these circumstances, many citizens of the periphery looked once again to the institutional framework of the Eurozone (and the European Union) in search of answers. The result was doubly negative, and made up a third of the external impacts worsening the crisis in the periphery. From a structural point of view, it was sufficiently understood that the European Monetary and Economic Union was a long way off from being what literature refers to as an Optimum Currency Area; that is to say, a monetary union with compensation mechanisms for severe disparities in the economic cycle or asymmetric shocks on the various territories involved (e. g., United States; for greater details, see the seminal work of Mundell (1961) [4]
or, specifically for the European Union, Baldwin and Wyplosz (2004) [5]. In the European Union, the product and factor markets, especially in employment, lacked the necessary flexibility to facilitate adjustment through the mobility of people and investments, not only due to economic and institutional factors, but also to cultural factors. Additionally, there isn't even a central budget that is big enough, nor an emergency transfers program, nor mechanisms for the joint emission of debt, not even respected fiscal rules10 providing the capacity for a national response to the crisis. In other words, neither the automatic response of the European economy nor the response of fiscal policy would be of much use in tackling a crisis that could (as it did) grow to such a size that it would threaten the very integrity of the European project.
However, there remained the possibility of orchestrating an efficient response while the events took place. Before any other consideration, it is fair to underline that the difficulty in responding to an unprecedented crisis as it occurs is extreme, and that, as will be explained later, sufficient measures were adopted to avoid the collapse of Europe. However, neither the European institutions, nor the national governments, nor the European citizens (an extremely important factor) were prepared to respond to a severe European crisis together and in a coordinated way that would likely occur, in the case of the territories of a country, some very damaged by the crisis and others that were less affected and capable of aiding the former.
Thus, the European Union (and the Eurozone) responded to the crisis from a remarkably fragmented point of view, with the center and north of Europe on the one hand and the periphery on the other. The recourse to an external agent, the International Monetary Fund, whose reading of the response suitable for different periods of the crisis was frequently opposed to that of the European Commission and the European Central Bank11, is but an expression of this fragmentation, inasmuch as the European Union had the necessary financial resources to tackle the crisis on its own and,
9 The banking problems in Europe did not affect the central countries to a lesser extent than the periphery countries, but the former showed greater diligence and power (and, in the case of Germany, a greater availability of funds) to tackle these serious difficulties.
10 The failure of the Stability and Growth Pact was already declared years before the current crisis.
11 These three institutions make up the famous Troika, in charge of making decisions regarding the total or sectorial bailout programs for the countries in crisis, and it is so well-known due to what is discussed in its proposals as well as its internal disagreements.
Interest rate on credit to non-financial corporate sector (loans 1-5 years and up to €1 million)
8,0 -
00000000000000*-H*-H*-H*-H*-H*H
oooooooooooooooooooo
(■MrMrMrMrMrMrMrMrMrMrMrMrMrMrMrMrMrMrMr^
ECB Policy rate "•••Spain Italy ^^^Germany
Figure 6
Source: Own elaboration. Data: IMF
strictly speaking, did not need the financing of other countries12.
As a result of the above, the European response to the crisis has been characterized by uncertainty, slowness, last-minute commitments, continuous patches, some severe and conspicuous errors and incongruences, discrepancies on sharing responsibility for the adjustment, the eternal foolish discussion on austerity or growth (instead of austerity PLUS growth), and the bitterness of the pressure by the citizens, both in the center and in the periphery, against what some perceived as an unacceptable transfer of resources to those irresponsible parasites in the South and the others as a savage economic and social strangling, forced upon them by the North.
That the Eurozone has resisted these trends is a testament to the strength of a long, complex process of integration, as well as the political will of not too few agents to ensure survival. But it is still not the time to declare victory. Let's go one step at a time.
SHORT-TERM OUTCOME: STRONG DISINTEGRATIVE EFFECTS
During an initial phase, until well into the year 2009, the Great Recession had an equally extreme impact on western economies as a whole, and even the big exporting powers, such as Germany
12 Certain comments of several politicians and analysts requesting aid to emerging and developing countries, whose per capita income levels are noticeably lower than the European ones, make up one of the more embarrassing episodes of the crisis.
and Japan, suffered the blow of the crisis to a large extent before the collapse of global trade, which shrank 11 % in 2009. However, since 2010 the already mentioned fragmentation has taken place among countries with financing capabilities (that is to say, with a current account surplus), plus those in need but capable of maintaining credibility (United Kingdom) or a traditional «exorbitant privilege» (United States), on the one hand, and countries in need of financing and whose capacity for repayment has started to come into question, on the other hand.
This breaking into two blocks was especially clear in a monetary area like the Eurozone, because it very seriously affected those monetary and financial aspects in particular where the integration process had progressed substantially in the previous decade. A full analysis of the disintegration processes gone through by the European Union can be consulted, for example, in the EBRD (2012) [6]. We'll go briefly over some of these processes, before indicating the adopted response measures.
Naturally, the most mentioned aspect on the popular and journalistic level was the exponential increase (see graph 5 again) experienced by the spread in the cost of financing within the periphery and the center of the Eurozone. In fact, the risk premium became a subject of conversation in even the most mundane social gatherings in Spain, Italy, and Greece. Looking beyond the anecdote, while the countries with less fiscal difficulties were financed at historically low costs, the most
Figure 7
Source: Own elaboration. Data: IMF
overwhelmed ones with more acute crises were paying unacceptable rates. or they simply could no longer be financed in the markets.
Of course, disintegration is not limited to public financing. No less important was (and continues to be even today) the radical differentiation in access to credit in the private sector, especially in small and medium-sized enterprises (SMEs). Apart from the contrast between the liquidity of the granting of loans in Central Europe and the severe restrictions on the periphery, even when the countries of the South obtained credit, they have been paying it with spreads of more than 200 basic points with respect to equivalent companies in Germany and Netherlands (see Figure 6) competitors in a single Monetary Union (that is to say, with the same currency).
It should not be forgotten that one of the most unique aspects of the crisis of the European periphery, especially in Spain and Ireland, was the connection between banking problems and financing difficulties in the respective public sector. In the absence of external financing for everyone, the governments felt obligated to aid their banking systems with funds coming from those same banks, by purchasing the national public debt for them. The money to cover these needs came from exceptional liquidity injections of the ECB, which, at first, were destined towards granting loans to the non-financial private sector. Therefore, as a side-effect, banks and governments diverted part of the funds that should have gone to the non-financial
private sector. This was truly a «vicious cycle» that still has not been fully broken today.
The dramatic situation in terms of the development of credit was also aggravated by the stigma suffered by the not too many companies in the European periphery capable of appealing to the capital markets (see Figure 7). In the last few years, the Spain, Italy, Ireland, not to mention the Greece and Portugal brands, have been an encumbrance for solvent companies located in these countries13.
This clear and unjust imbalance14 is in fact the main argument used by the European Central Bank in justifying their non-conventional interventions in the last three years: the threat to the euro's survival came in large part from the failure in practice of monetary and financial integration in the Eurozone, as clearly explained by ECB Council members, (see Praet (2012) [7], Asmussen (2013a) [8] or Coure (2013 a), as well as in the press conferences of the last two years by Mario Draghi after the meetings of the ECB's Governing Council. If the companies in the periphery did not have their own resources for the fall in sales as a result of that very crisis, neither public support for the fiscal crisis of its Governments, nor banking credit
13 The Spanish press, for example, in 2012 and 2013 gathered information reflecting the intent of big multinationals in the country to NOT be identified as Spanish in foreign markets.
14 From the data indicated in the first synopsis of this paper, there is a clear need to reduce the debt in the European periphery, and this means, among other things, that credit cannot flow freely. However, that healthy companies with a future do not have financing or have a financing cost much higher than that of their competitors in the center and the north of Europe is a palpable injustice.
Bank of Spain: net position vs. the Eurosystem
Figure 8
Source: Own elaboration. Data: IMF
ooooooooooooooo
CTlOTHrNm':±Ln^Or--OOCriOTHrNm СЛООООООООООтНтНтНтН СЛОООООООООООООО ^HfNfNfNfNfNfNfNfNfNfNfNfNfNfN
for the problems of its entities and the closing of the transfer of international private capital, nor the ability to appeal to the markets due to the stig-matization of the European periphery, it should come as no surprise that activity and employment would continue to be in free-fall (more generally, the Eurozone banking problems and their link to the difficulties in financing SMEs are analyzed in the latest Global Financial Stability Report (IMF, 2013)) [9].
The most graphic expression of this monetary and financial disintegration can be found in the unprecedented imbalances in the positions of the Central Banks of the Eurozone in the cross-border payment system for the euro (TARGET-2). With the capital exiting the periphery countries en masse and taking refuge in the center, the negative net positions of the Central Banks of the South in the Eurosystem (see Figure 8, with Spain as an example) increased drastically (in contrast, this also happened with the creditor position of Germany). Although this was simply the logical result of the European Central Bank's exceptional provision of liquidity in order to alleviate the fragmentation of the Eurozone, the alarmist voices that talked about an additional hidden bailout for the periphery from Germany constituted one of the examples of how the economic problems were used by some to stoke the fire in the fragmentation between European societies. In fact, the out-of-control controversy regarding the TARGET-2 is one of the most absurd and unjustified ones since the start of the
crisis, but it is an important example of the conflicting internal drift that the Eurozone has gone through. The interested reader can confirm how the discussion was stirred up in academic forums (Sinn, 2011; Sinn and Wollmershauser, 2011) and journalistic forums (Wolf, 2011), and the responses to those comments in Alloway (2011) [10], Buiter et al. (2011) [11], Whelan (2011) [12], or De Lucia (2012) [13].
Of course, the European authorities did not sit idly by awaiting the collapse of the shared project. The European Central Bank, as head of the monetary policy and the homogeneous transmission of it, has perhaps been the most effective institution, in spite of the scathing criticisms made about it (not all of them unjustified, but often supported by a national vision, whether from the North or the South, but not a community vision, as is the one that should be dealt with by the ECB). Its monetary policy decisions, both conventional and non-conventional, showed important turning points in the progression of the crisis (Praest, 2013) [14]. It was especially so with the exceptional provision of liquidity in the long term to the banks (Long Term Refinancing Operation) at the start of 2012, or the announcement of the program for potentially purchasing public debt of the countries with financing problems who requested it and complied with the terms established (Outright Monetary Transactions).
Concurrently, the European Council and the European Commission, in collaboration with the
Table 3
Selected questions Eurobarometer Survey
Question Pre-crisis (2006/07 Surveys) Last Survey (spring 2013)
You trust the European Union 47-50 % 31 %
Image of the European Union (positive answers - negative answers) 30-35 % 1 %
Future of the European Union (positive answers - negative answers) 35-40 % 3 % (<0 in all peripheral countries but Ireland)
My voice counts in the European Union (positive answers - negative answers) -15 to -20 % -39 %
Source: Own elaboration. Data: Eurobarometer
ECB itself and the IMF, articulated the comprehensive bailout programs for Greece (two, plus twice restructuring the private debt), Portugal and Greece, a partial one for the Spanish banking sector and the first one which since the beginning has entailed a cost for private agents (Cyprus). Packages of measures have been established (very conflictive ones on many occasions) to restore balances, the ability to pay, and the competitiveness of the periphery countries. Successive mechanisms were created to bring together the necessary shared funds with those that aid the countries in crisis (Mechanism/European Rescue Fund, Mechanism/European Financial Stability Fund). Emergent steps were made to give and distribute specific funds destined towards addressing the critical needs of the periphery countries (from young unemployment to loans for SMEs). An effort was made to lay the groundwork for a more solid European Union in the future, an aspect that we will come back to shortly. Ultimately, slowly and with disagreements, not unusual among countries with very different socioeconomic interests, sensitivities, and situations, measures were implemented that were aimed towards resolving the crisis, repair the open wounds of the European Union and the Eurozone, and guarantee the future of the European project15.
However, the sensation is that, in the short term, the crisis is winning the points battle against European institutions and governments, although
fortunately not forcefully enough to cause more than six decades of integration efforts to fail. Thus, in political terms, criticisms exchanged between governments, the European Commission, and the ECB prevail, as well as the tendency to justify the adjustment measures (or measures to aid others, depending on the case) in terms of «that's what Europe needs», as if every country left to their own devices could do precisely the opposite of what they are «obligated» to do by Europe16.
In social terms, there is an extremely worrying distance between citizens of the center and the periphery of Europe, in their perception of the causes of the crisis and how to resolve it; even more dangerous are the outbreaks of aggravated nationalism, of extremism on the left and the right, of racism and xenophobia scattering the European landscape. With regard to European citizens' assessment of the Union, the results of the Eurobarometer say it all (Table 3 offers a summary approximating the general trend of the survey).
With respect to the strategic field, it is good to remember that rooted in the crisis is the emphasis of reflections towards what would be a truly authentic disintegration. Therefore, there are certain calls to separate the Eurozone into a central and northern European zone (the «strong euro") and a southern Europe zone (the «weak euro"), the distancing of the United Kingdom (which could turn into abandoning the European Union) or the standstill or deceleration of the process of adding new members in eastern Europe (and Turkey).
15 For greater detail on the efforts made by European institutions in this respect, you can consult the section of the European Commission's website on the single market, dedicated to managing the crisis (http://ec.europa. eu/internal_market/bank/crisis_management/)
16 Additionally, Europe's management of the crisis does not do well in terms of the assessment by the developed partners, emerging countries, and various international institutions.
Table 4
GDP Growth ( % annual) Rate of Unemployment 2013 ( %) Variation rate of unemployment 2008-2013 ( %) Level of Public Debt ( % GDP) 2013 Variation level of Public Debt ( % GDP) 2008-2013
GREECE -4,3 27,0 19,3 175,7 62,8
IRELAND -1,1 13,7 7,3 123,3 79,2
ITALY -1,4 12,5 5,7 132,3 26,2
PORTUGAL -1,2 17,4 9,8 123,6 51,9
SPAIN -1,0 26,9 15,6 93,7 53,5
GERMANY 0,7 5,6 -2,0 80,4 13,6
EUROZONE 0,3 11,4 3,8 93,0 26,5
Source: Own elaboration. Data: IMF
Finally, in terms of the economic results most noticeable by the citizens, Table 4 offers a summarized vision showing up to what point the dramatic consequences of the crisis for the periphery countries are keeping it away from the average development of the Union, not to mention the evolution of Germany, especially in terms of unemployment.
Ultimately, the European Union in general and the Eurozone in particular are faced with a dilemma of historic proportions, where merely sustaining the «status quo» does not seem viable and, therefore, there seems to only be room for the alternatives of more Europe, strengthening the shared project, or less, very little Europe, scarcely a free trade area, in which case the disintegrative effects in the short term would become stronger and more permanent. Where are we heading?
Middle and long-term outcome: towards full integration?
Five and a half years after the beginning of the Great Recession and almost three years after the outbreak of the crisis of sovereign debt in the Eurozone, in spite of all the difficulties and mistakes made, national actions, actions coordinated at the European level, and the enormous effort made by many citizens in the periphery countries have resulted in some of the imbalances commented on in this paper to be corrected. Many of these improvements are essential in channeling a sustained recovery: therefore, the unit labor costs, which have gone down considerably in the last two years (see Figure 3 again) or the current account balance, already positive for Ireland, Spain, Portugal, and
Italy and with hopes of becoming a surplus as well for Greece in 2014 (last section of Figure 4).
The public deficit has also been corrected in a noticeable way, even more so than in central countries (France, the Netherlands), whose crisis was much lighter. To achieve this, in truth, the economic and social cost of the increases in taxes and the cut-backs on public spending have been enormous, even after eliminating what were simply excesses of the previous economic boom era.
Although these successful processes for rebalancing will be fundamental for the future, what still remains in the European periphery is the already mentioned brutal destruction of employment and the permanency of a problem whose resolution is extremely complex but without which it will be difficult to create a sustainable recovery of internal demand: the overall debt of these periphery economies (see Table 5 and compare it to Table 2 in order to see that there wasn't any reduction in debt, because decreasing the amount of private debt has meant an increase in public debt at a similar degree). In fact, any positive account of the periphery economies in the last quarters is supported by external demand (exportation and tourism, with Spain and Ireland in the lead). Therefore, we still have a long way to go to reach the end of the crisis in the Eurozone.
However, with our eyes already fixed on the middle and long term, we should go back to the issue that we introduced at the end of the previous section on what Europe wants. And if the response is an integrated Europe, there are two big
Table 5
Total debt; composition by institutional sectors ( % GDP; 2012)
TOTAL HOUSEHOLDS FINANCIAL SECTOR CORPORATE NON-FINANCIAL PUBLIC SECTOR
IRELAND 1168 120 691 244 113
SPAIN 473 89 109 196 79
PORTUGAL 434 105 63 154 112
ITALY 3 oo O-J 51 97 112 123
GREECE 331 70 33 75 153
Source: Own elaboration. Data: IMF
challenges to be overcome: one, gaining back the citizens' confidence; two, restoring the already built-up integration (the monetary and financial) and rebalance it by going into depth on other aspects of the integration (Gual, 2012) [15]. With respect to the first challenge, success will only be possible insomuch as the most affected economies recover, create employment, and the European response towards a future crisis is more effective and coordinated. Obviously, all of this depends on the way in which the second challenge is addressed. To overcome it successfully, the following steps seem to be necessary.
1. It is essential to repair what still remains from the financial and monetary fragmentation in the Eurozone as soon as possible. Although the indications of the past few months are positive, continuing to provide sufficient liquidity on the part of the ECB, their agreement to use loans to companies as collateral in fundraising by the banking system and the development of specific programs (probably under the umbrella of the ECB and the European Investment Bank) for stimulating the credit of SMEs in the European periphery are measures that could be a decisive contribution to said repair.
2. The countries of the Eurozone and the European Union (all of them, not just the periphery ones) are not sufficiently active in the design and implementation of the structural reforms necessary to face an increasingly competitive world. Reforms aimed at the labor markets, but also the service markets; a strategy in the field of energy that is coordinated and sustained over time; a growing and continuous investment in physical, technological, and research infrastructures; reforms to national and European public
administrations; transformations in the State of Well-being, without eliminating it, but making it sustainable., the list goes on and it isn't necessary the same for every country. But no country is exempt from needing to make some of these changes.
3. The Banking Union. There is a nearly unanimous certainty that only through making progress on the Banking Union project can the vicious cycle being replenished (and dragging the non-financial private sector) between banks and countries with financing problems be broken. Of course, additionally, this Banking Union should allow for better regulation and monitoring, a playing field that is more homogeneous for the entire European banking sector, and a resolution of the entities in crisis which do not commit funds by the taxpayers.
The first part of the Banking Union, the single supervisor, is already underway, not without first doing an analysis on the previous situation of the European bank (through the already well-known «stress tests"), which means that the problems that could have been detected in this analysis should be tackled by the country of origin of every entity having difficulties. The responsibility for monitoring (from the second half of 2014) has been granted to the ECB, although only for entities starting at a certain size. The others continue to be under the command of national supervisors, although the ECB may request information.
With respect to the second pillar, the unification of the national bank resolution mechanisms, under a single resolution entity, follows the process of defining it (under the control of the European Banking Authority), although significant progress was made in approving the Bank Recovery and Resolution Directive (see Council of the European
Union (2013)) [16] for the details. In more general terms, on the European Banking Union and its need, see Coeure (2012) [17], or Asmussen (2013b)) [18].
Finally, there are no advances with respect to the third pillar (in fact Germany does even think that it should be part of the Banking Union), consisting in a single Deposit Guarantee Fund, which substitutes the national DGFs.
4. Progress towards a Fiscal Union. It is not feasible at this time to consider full fiscal harmonization in terms of taxes or a global delegation of taxation powers to a European supranational body. There isn't even the smallest degree of political will nor the backing of the citizens to similar proposals. It would be putting the cart before the horse. However, the current crisis has shown that the Monetary Union needs a greater degree of integration and fiscal coordination, which it could begin reaching via elements such as the following.
First, some fiscal rules that are efficient and flexible, respected, and backed by credible sanction mechanisms for those who do not comply. Initially, the so-called «Fiscal Compact» (formally «Treaty on stability, coordination and governance in the Economic and Monetary Union"; see Council of the European Union (2012)) [19], agreed upon by 25 countries in the European Union (everyone except the Czech Republic and the United Kingdom) is intended to satisfy this requirement.
Second, a greater centralized European budget (not smaller, as occurred in the last heptannual review), one that is more efficiently managed and oriented towards innovation and competitiveness, sensibly reducing historic records, like the one aimed towards the Common Agricultural Policy. It would be important for the funds to come from a shared European tax, such as an environmental tax.
Third, a mechanism for the mutualization of public debt in the member countries, at least in the Eurozone, up to a determined level of debt (the rest must continue to be issued individually by each Country), which would reduce the cost for periphery countries in the short term and for any country with serious timely difficulties in the future. Additional sections of debt backed by the entire EMU could be authorized in case of an especially severe crisis, under strict compliance with fiscal regulations.
Lastly, a general commitment to practice countercyclical fiscal policies, in periods of expansion as well. That is to say, the creation of budgetary cushions during good economic times (like the «rainy day funds' typical in various American states) should become obligatory, with the European Commission being able to intervene otherwise. This would allow for a greater capacity to counteract the low moments of the cycle using fiscal policy. Additional interesting ideas in relation to the Fiscal Union can be found, for example, in INET (2012) [20], or in Deutsche Bank (2013) [21].
Ultimately, European integration, following a similar comparison to the pedals of a bicycle, only has the option of going forward if it wants to avoid a fall of unforeseen consequences. The debate on all the necessary elements to complete the Union (fiscal, banking, structural) is fully open, and progress continues to be ballasted by the still devastating effects of the same crisis trying to be overcome with this intensification of the integration process.
CONCLUDING REMARKS
The European Union, and especially the Eurozone, has been and continues to be subjected to a «per-fect storm» due to the convergence of extreme internal imbalanced in the periphery countries, the biggest global crisis of the last three fourths of the century, the deficiencies in its institutional design, and the severe disputes in the way we should tackle the difficulties between the member countries. Although the shared response of the national governments and European institutions has been far from perfect and lacked the leadership and a minimal educational capacity for giving explanations to the citizens, it has been sufficient in sustaining the European framework, and in particular the single currency, which was threatened at times in 2011 and 2012. However, the European integration project weakened in the last five years, and the doubts on it have not yet dissipated.
So, apart from the need to soundly recover from the economic crisis and alleviate its effects, especially in the periphery of the EMU, the European economic, social, and political agents are faced with the challenge of making progress in those areas of integration which are either most damaged by the crisis or non-existent in the face of the crisis.
Of course, this isn't a simple task, nor is there any agreement on how to carry this out, but it seems to be the only alternative if the most important integration project in the world wants to continue moving forward and not merely become an area of free trade. Progressive success in the
needed steps indicated in this text would not only entails achieving something very similar to a true Optimal Currency Area, but it would also lay out the groundwork for a no-doubt far-off future for the European Political Union with the countries that make that decision.
REFERENCES
1. Taylor J. «The Financial Crisis and the Policy Responses: An Empirical Analysis of What Went Wrong,» A Festschrift in Honour of David Dodge's Contributions to Canadian Public Policy, Bank of Canada, November 2008, pp. 1-18.
2. Bernanke B. S. «The Global Saving Glut and The US Current Account Deficit», remarks at the Sandridge Lecture, Virginia Association of Economists, Richmond. March, 2005.
3. Caballero R. «The «Other» Imbalance and the Financial Crisis», NBER WP 15636. 2010.
4. Mundell R. A. «A Theory of Optimum Currency Areas», The American Economic Review, 51, 4, 1961. pp. 657-665.
5. Baldwin R., Wyplosz C. The Economic of European Integration. Ed. McGraw Hill. New York. 2004.
6. European Bank for Reconstruction and Development. The Transition Report 2012. EBRD. 2012.
7. Praest P. «Heterogeneity in a Monetary Union: What have we learned?», speech at the 14th ECB and its Watchers Conference. June, 2012.
8. Asmussen J. «Saving the Euro», speech at The Economist's Bellwether Europe Summit. April, 2013.
9. International Monetary Fund. Global Financial Stability Report: Transition Challenges to Stability, October, 2013.
10. Alloway T. «The wonkiest web debate ever — Germany's stealth bailout», Financial Times, 8th June, 2011.
11. Buiter W, Rahbari E., Michels J. TARGETing the wrong villain: TARGET2 and intra-Eurosystem imbalances in credit flows», Citi Global Economics View, June, 2011.
12. Whelan K. «Professor Sinn misses the target», VoxEU.org, 9th June, 2011.
13. De Lucia C. «At the root of TARGET2 imbalances», Economic Conjuncture, BNP Research. September, 2012.
14. Praest P. «Monetary Policy on the context of balance sheet adjustments», speech at the Peterson Institute for International Economics. May, 2013.
15. Gual J. «European Integration at the Crossroads», «La Caixa» Economic Papers, 8. April, 2012.
16. Council of the European Union. Treaty on Stability, Coordination and Governance in the Economic and Monetary Union. November, 2013.
17. Coeure B «Why the Euro needs a banking union», speech at the conference «Bank funding — markets, instruments and implications for corporate lending and the real economy». October, 2012.
18. Asmussen J. «Towards a Banking Union — the state of play from the ECB's perspective», speech at the Handelsblatt Conference «Banken im Umbruch». September, 2013.
19. Council of the European Union. Directive of the European Parliament and of the Council establishing a framework for the recovery and resolutions of credit institutions and investment firms. June, 2013.
20. INET «Breaking the Deadlock: A Path Out of the Crisis», Document by the Institute for New Economic Thinking. July, 2012.
21. Deutsche Bank «Do all roads lead to fiscal union?», EU Monitor Document, DB Research. April, 2013.
