In 2011 global mass media was focused on the fate of a single European currency. It was a focal point for European and other politicians and experts; newspapers and TV channels broadcasting in different languages were stuffed with comments and forecasts, the future of the euro was a vital issue for ordinary people and not only in the European countries.
Today, as it became clear that financial and political actions undertaken in 2011 had only postponed the arrival of the crisis to the South of Europe and the rescue recipe for the euro area is yet to be found, the public attention is directed to the following questions: are those anti-crisis actions able to keep the Euro area alive in its present shape?
In 2011 global mass media was focused on the fate of a single European currency. It was a focal point for European and other politicians and experts; newspapers and TV channels broadcasting in different languages were stuffed with comments and forecasts, the future of the euro was a vital issue for ordinary people and not only in the European countries.
Today, as it became clear that financial and political actions undertaken in 2011 had only postponed the arrival of the crisis to the South of Europe and the rescue recipe for the euro area is yet to be found, the public attention is directed to the following questions: are those anti-crisis actions able to keep the Euro area alive in its present shape? And which countries will benefit from these measures and what is the future for Spain and Italy (for Greece only various default options are discussed)? And, of course, the burning topic is the future of the euro area if defaults of Spain and Italy can not be prevented.
These are important questions, but some tome horizon is needed to answer them. The current discussion in mass media and business papers are somewhat lop-sided –the future of the Greek debt is widely debated while practically nobody speaks about its origin and the absence of similar debts in other euro-area countries. There are apocalyptic scenarios of economic losses should one or the other country leave the euro area, but little is said about the benefits and disadvantages of the euro project membership. Maybe the economies of the European South do not need a fixed and expensive euro and the sooner they leave the euro area the better? That’s why the current crisis in the euro area should be viewed from the beginning, not from the end.
Pluses and minuses of South Europe membership in the euro area
Upon joining the euro area the countries of Southern Europe have gained:
- Low inflation rate – ECB managed to maintain low inflation rate in the euro area what earlier was unachievable for Italy, Spain and Greece.
- Elimination of currency conversion costs
- Access to cheap capital – state and corporate securities were denominated in the euro and until recently were deemed to be as reliable as their German and French analogues.
- Parity of prices – the prices and consequently the salaries in the South quickly reached an average European level.
At the same time, upon becoming members of the euro area the South-European countries have lost:
- The possibility to cover state expenses by emissions and high inflation.
- Revenues of the banking sector from conversion transactions.
- Disciplining impact of the import of costly capital.
- Low domestic prices making the economies of these countries, mainly living with agriculture and tourism, rather competitive. (With the increase of domestic prices flows of tourists from the North of Europe moved to the countries with cheaper currencies – such as Turkey and Egypt. The same is true for the real estate and service industry in general).
It is obvious, that admission of the countries to the euro area brought not only advantages but also diminished their economic competitiveness. And those pluses and minuses didn’t occur simultaneously.
Crises of the euro project
The period of economic exuberance started in Spain, Italy and Greece when the euro came to these countries. Real income of the population went up, people become able to buy the goods that were unaffordable earlier, companies were easily attracting low-cost capital, the governments didn’t have any problem to place the debt and the debt servicing was much cheaper than before! Negative implications of the euro area appeared later. The competitiveness of the European economies decreased, wages of Spanish and Greek workers reached the level of German workers while the labor productivity in the South had always been lower compared to the industrialized North. And ultimately – the excessively competitive political system of the South-European countries caused the competition between politicians in the sphere of social expenses – every new government extended its welfare commitments and increased the state debts (while it was easy to do due to the euro). Comprehensive crisis of a welfare state in Europe also made its contribution.
This situation might have remained stable for a long time but for a global financial crises of 2008. European governments had to provide considerable funds to support national economies and the social sector (and to borrow these funds) and that frightened the markets. The economies of the North still looked attractive for investors, but the southerners were deprived of the low-cost funds. This moment put the start to the Euro project crisis.
The euro became a two-edged sword for the countries in the South of Europe: a membership in the euro area on the one hand allowed inefficient economies and governments to attract low-cost capital and to stay afloat, but on the other hand made these economies vulnerable to a sudden loss of cheap funding, as it actually happened. Too good is not good either.
New measures to save the euro area
What are the proposed measures to overcome the crisis and how effective they are? The majority of answers to these questions are attributable to policy, not to economy.
First of all, there is a set of measures aimed to curb the crisis, to restore the trust of investors, to avoid the default or to make it controllable. These measures include the issuing of loans to governments from the European stabilization facility (up to 780 bln. Euro) and IMF (up to 600 bln. Euro), sovereigns bail-out and writing off the debt (i.e. – controlled default).
Secondly, governments of the South-European countries introduce austerity measures which imply the cutting state expenses, laying off civil servants and scaling down welfare programs.
Thirdly – the euro area countries are invited to accept a common coordinated budgetary and fiscal policy, i.e. to live strictly within the income and not to make debts.
Which of these measures can stabilize a single European currency and what sacrifices the Europeans are ready to make for its stabilization?
Extinguishing of a financial fire with money, if the donor-countries agree to carry this burden, will definitely ease the crises and the situation shall stabilize for some time. What next? Spanish, Greeks and Portuguese are suggested to work more and to earn less, to retire later and with a smaller pension, to put up with the limited access to education and health care services. And – forever – if, for example, Spanish wished and could become Germans and work as Germans they would have done it already. What will prevail – national cultures and interests or a common European identity?
South-Europeans have already benefited from the euro project – they have built the infrastructure, houses and some industries – now it’s time to pay the bills. But do they want to do it? The majority of South-European debts are held by foreigners, and Greek, Portugal and other societies do not have influential public groups eager to ensure the fulfillment of national financial obligations. It’s possible that nationalists may emerge among politicians and publicmen of South Europe to lead the movement for the withdrawal from the euro area. If it happens, these countries would have to leave the international debt market and face significant financial and economic problems (e.g. – pensions are placed in the euro funds), but no one in today’s Europe will conquer them and they will go on with a traditional cheerful life style. What’s more important for them – a forced economic growth or the quality of living? More and more Greeks, Spanish and Italians come to participate in demonstrations and rallies and, in essence, vote for the latter. The euro area will survive this situation but within smaller boundaries, the project to create “a new historical community – a European nation” will slow down and the euro will become one of regional currencies, as it has always been. The Germans, French and Belgians are more to lose in this case, that’s why they are concerned about the unfolding crisis more than jolly southerners.
