By Lieven Tack 

Lieven TACK is the course director of our new Executive Education Course on EU Economic Governance that will take place on the Bruges campus from 17 to 21 October 2016. In this column, he reflects on the economic and financial crisis affecting the eurozone and on challenges ahead towards a fully fledged Economic and Monetary Union.

For roughly half of its existence, the euro has been struggling to overcome the most serious financial and economic crisis since the establishment of the European Community in the 1950s. In particular, unemployment in the eurozone rose rapidly from 7.6 percent at the start of the crisis in 2008 to a record high of 12 percent in 2013. In addition, public debt grew from 70 percent of gross domestic product (GDP) in 2008 to 94 percent last year. These record numbers will remain in our memory for a long time to come.

ANTI-CRISIS RESPONSE

The response of the European Union and the eurozone to the crisis has focused on three areas:

• In response to the drying-up of the financial markets after the toxic bubble of unbridled securitisation burst, monetary easing flooded markets with excessive amounts of cheap credit. Hopeless as ever, the European Central Bank (ECB) reached deep into its toolbox and launched impressive asset buying operations (Securities Market Programme, Outright Monetary Transactions and Targeted Long-Term Refinancing Operations).[1] Simultaneously, ECB president Draghi drastically lowered interest rates, soon followed by commercial rates tumbling to practically zero percent.
• Several spending programmes were launched within a relaxed state aid regime, largely aimed at the recapitalisation of the banking system. Southern European Member States in distress were sustained on a drip thanks to a brand new Treaty-based permanent rescue fund worth 700 billion euro (the European Stability Mechanism).[2] Another European fund, totalling 315 billion euro, was set up for investments in infrastructure, research, innovation and the business sector (the European Fund for Strategic Investments).[3]
• An ambitious package of structural reforms in labour and product markets was agreed upon (Europe 2020).[4] In addition to this long-term growth strategy, rigorously enforced rules for maintaining public deficits and debts (the Sixpack and the Twopack)[5]^,[6] and economic imbalances (the Macroeconomic Imbalance Procedure)[7] below specific limits are part of the EU’s ‘new economic governance’.[8] This new surveillance system for budgetary and economic policies focuses on anti-cyclical government finances and is coordinated and monitored in the context of the ‘European Semester’.[9]

The whole set of anti-crisis measures will pave the way for the achievement of a deep and genuine Economic and Monetary Union (EMU) by 2025.[10] The roadmap for this fully fledged EMU includes two stages. The first step aims to create an economic union, a fiscal union and a financial union (including the Banking Union).[11] It will be followed by a Commission White Paper in Spring 2017 that will put forward proposals for a more binding convergence process and a euro-area treasury.

ECONOMIC DEADLOCK

Unfortunately, the path towards a more resilient and complete EMU is steep and not without obstacles. Unlike the successful transition of the US economy to solid growth and job creation, Europe’s economic deadlock has become alarming. Even worse, our economies seem to be hostage to a long-lasting Greek crisis that reinforces the downward spiral.

There are four reasons that explain Europe’s structural shortfall:

• The EU suffers from an external growth gap with other continents, such as the US. Whereas the US growth rate largely exceeds 2 percent (2.5 percent in 2015), our continent is growing at below 2 percent (eurozone at 1.6 percent and EU at 1.9 percent in 2015). Besides, European unemployment is double the American jobless rate (eurozone at 11 percent, EU at 9.5 percent and US at 5.3 percent in 2015). There are several factors behind this persistent gap: insufficiently flexible labour markets, unsynchronised business cycles, fragmented product markets, rigid public services, inadequate legal and institutional frameworks, diverging political opinions across national borders and significant language barriers that hamper labour mobility.
• Despite ambitious reform programmes such as Europe 2020, internal economic divergences remain hard to bridge and tear the EU further apart. An interesting map from 2006 (note: this is before the outbreak of the crisis) shows significant differences in regional GDP across the Union, ranging from below half of the EU average in Eastern Member States to more than 125 percent of the average in certain parts of the centre and the North. Another example of worrying divergences concerns public finances. From the outset of the euro in 1999 (again: this is long before the current crisis), the Greek and Italian public debts have been hovering around 100 percent of GDP (significantly above the 60 percent limit introduced by the Stability and Growth Pact in 1997). The EU’s increasingly opaque institutional framework with cluttered non-concentric policy alliances, such as EU-28 for the Sixpack, euro-19 for the Twopack and EU-25 for the Fiscal Compact,[12] further enhances these divergences.
• The lack of confidence among investors and consumers and serious political uncertainties undermine prospects for solid recovery and growth. For example, the threats of Grexit and Brexit hang like the sword of Damocles over the EU’s head and discourage us from investing and consuming. It appears that the EU is drowning in a destructive crisis of credibility. The fact that the eurozone has never managed to stick to its own 60 percent rule on public debt, is not unrelated to the absence of confidence and credibility.
• European legislators made use (or abuse) of the devastating effects of the crisis on people’s jobs and wealth to push through legislative ‘integrationism’ in an unprecedented way which arguably undermines democratic norms and processes. Many rules forming part of Europe’s new economic governance were unimaginable before the crisis: the binding debt rule that forces Member States to keep their structural deficit below 0.5 percent of GDP (Fiscal Compact); the system of ‘reverse’ qualified majority voting that monopolises the power of the European Commission at the expense of the Council of Ministers (Sixpack); the obligation to submit national budgets by mid-October to the Commission, often before national parliaments have a say on them (Twopack); the fact that Member States are requested to discuss (before adoption) major economic policies with other Member States; and the introduction of fines for excessive macroeconomic imbalances. This overactivity contrasts sharply with the absence of public support and economic rationalism and uncovers a clear trend towards integrationism in a Union that is divided in both economic and political terms.

In conclusion, the future of our common currency strongly depends on the willingness of our politicians to implement the reform agenda of a politically and economically divided continent. This is only realistic insofar as EU leaders show unity and courage to press the reboot button ‘Ctrl-Alt-Del’: Ctrl = control the current crisis and protect us against inevitable future shocks; Alt = focus on change and step up structural reforms; Del = get rid of imbalances and bridge socio-economic divergences. The euro is staring into an abyss and concerted and decisive action is urgently needed to pull it back!

More information on the course EU Economic Governance

[1] See https://www.ecb.europa.eu/mopo/implement/omo/tltro/html/index.en.html.

[2] Treaty Establishing the European Stability Mechanism (ESM) (2012).

[3] Regulation (EU) 2015/1017 of the European Parliament and of the Council of 25 June 2015 on the European Fund for Strategic Investments, the European Investment Advisory Hub and the European Investment Project Portal and amending Regulations (EU) No 1291/2013 and (EU) No 1316/2013 - the European Fund for Strategic Investments.

[4] Communication of the European Commission COM(2010) 2020 final “Europe 2020: A strategy for smart, sustainable and inclusive growth” (2010).

[5] Council Directive 2011/85/EU of 8 November 2011 on requirements for budgetary frameworks of the Member States.

[6] Regulation (EU) No 473/2013 of the European Parliament and of the Council of 21 May 2013 on common provisions for monitoring and assessing draft budgetary plans and ensuring the correction of excessive deficit of the Member States in the euro area.

[7] Regulation (EU) No 1176/2011 of 16 November 2011 on the prevention and correction of macroeconomic imbalances and Regulation (EU) No 1174/2011 of 16 November 2011 on enforcement measures to correct excessive macroeconomic imbalances in the euro area.

[8] European Commission Fact Sheet “The EU’s economic governance explained” (2015).

[9] See http://ec.europa.eu/europe2020/making-it-happen/index_en.htm.

[10] The Five President's Report: Completing Europe's Economic and Monetary Union (2015).

[11] Communication from the Commission to the European Parliament and the Council COM/2012/0510 final “A Roadmap towards a Banking Union” (2012).

[12] Treaty on Stability, Coordination and Governance in the Economic and Monetary Union (2012).

The Website holder is not responsible for and does not identify with the opinions of its users and collaborators.