The Eurozone has returned to growth, but it is still suffering from serious internal problems and needs significant reforms.
John Stephenson is a politics student at Lancaster University
Those keeping an eye out for economic optimism will have been pleased by the news from the Eurozone over the last two weeks, as the European Union announced a return to growth following almost 18 months of economic decline.
Yes, the likes of Mario Draghi, Oli Rehn and co are being modest – stressing the need for calm amid what has the potential to provoke a round of back-slapping and champagne receptions. Oli Rehn actually stated that “self-congratulatory statements suggesting the crisis is over are not for today”. Nevertheless they are failing to properly challenge the misapprehension that this is some form of “victory” for the EU.
Mario Draghi, President of the European Central Bank, came to the fore following economic turmoil within Europe, pledging that he and his colleagues would see that Brussels does “whatever it takes” to revive Europe’s economic fortunes. One measure announced was the proposed purchasing of the bonds and debts of weak member states in order to buttress a recovery. This never happened.
In fact evidence suggests that such moves are futile in attempting to resolve an economic downturn, because of the risk it creates when countries know they have a fallback option if things go awry.
In January 2011 the EU enacted new legislation designed to combat the recession. This consisted of minimum requirements for national fiscal frameworks and also sanctions against countries running up huge deficits. However evidence suggests that the effect such behaviour has is almost wholly reliant on factors not being addressed by the Union.
In 2012 the European think tank Bruegel published a paper illustrating the lack of influence that previous infringements of the Stability and Growth Pact had on a country’s spread with regards to bond yields and the German Bund. There was an evident lack of correlation – the member states in economic trouble were there because of the sovereign independence of banking sectors and a lack of dialogue between member states and the union regarding public debt.
It is these areas that are being severely neglected by Brussels, meaning that the Eurozone is liable to fall into the same difficulties it has done previously if any of the member states experience renewed instability in the coming years.
Furthermore, the policy provisions in place to protect against further insolvency appear fundamentally flawed. How are we to have a financial union if the EU remains the “lender of last resort” to member states following a financial crisis? The answer given from Brussels is budgetary consolidation, to ensure that such problems never occur again, thus rendering any bailouts unnecessary. Yet the IMF’s own figures show that for countries such as Greece and Ireland to attain debt ratios of 60% of GDP by 2030, they would have to maintain budgetary adjustments over 10%.
If the likes of Draghi and Barroso are to really save the Eurozone, then they need to enforce measures such as further fiscal union and a more powerful ECB. The argument over “more or less Europe” is becoming tiresome and to see technocrats in preparation for celebration is nauseating.
The EU needs to make decisions now and it needs to make them fast. I imagine the founding fathers of the EC will be turning in their graves seeing EU officials commend the union as being on track while unemployment in Spain remains at 25%.
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