It may not seem likely as we head toward Thursday’s eurozone summit but the European Union could be thanking Greece in a few years’ time. Granted, the mutual appreciation and back slapping seems a distant dream given the current angst over the debt crisis, with Italy becoming the latest euro country to run into trouble almost two years after Greece became the first member of the single currency area to hit a wall. Yet the crisis has made the European Union, and the eurozone countries in particular, re-examine their economic and monetary union. The euro area is experiencing a make-or-break moment and while there are some who fear the consequences of the debt crisis are so wide and deep they will lead to the breakup of the single currency as we know it, there are plenty who believe, and are working on, this period of turbulence being the moment that really makes the euro.
“What we’re witnessing is that the EU and the eurozone are at a turning point,” says Jens Bastian, a senior economic research fellow at the Athens-based think tank ELIAMEP (Hellenic Foundation for European & Foreign Policy). “The debt crisis is not only forcing the 17 eurozone members to pool their resources in an unprecedented manner but also to readjust economic sovereignty. That was unthinkable just a year ago.”
Bastian, who has lived and work in Greece for the past 14 years, was one of 10 experts brought together by the Bertelsmann Foundation, a German think tank, to discuss the eurozone crisis and ways that the EU can tackle it through developing a form of economic governance that would also reduce the likelihood of similar problems in the future. Several of the experts who took part in the round tables were in Athens recently to present the group’s findings at an event hosted by ELIAMEP.
Like a growing number of economists, the members of the expert group agreed that the euro and the method of economic governance that accompanied it had serious flaws from the start. “There is a dark secret at the heart of economic and monetary union, which is that it was always a compromise,” says Iain Begg, a professor at the London School of Economics’ European Institute, who also took part in the discussions.
The group set out some of these weaknesses in their report: “Procedures of macroeconomic policy were ineffective and inadequate. Fiscal discipline was poor. The constraints of the Stability and Growth Pact imposing a 3 percent budget deficit ceiling and setting maximum government debt at 60 percent of GDP were regularly flouted and hardly any member states respected the Pact’s medium-term objective of keeping budgets ‘close to balance or in surplus.’
While some have singled out Greece’s failure to control its public spending and revenues since joining the euro as a root cause of today’s eurozone crisis, the group brought together by the Bertelsmann Foundation is adamant that structural weaknesses in the single currency played a key role in the current difficulties and the lack of convergence between the economies of the 17 members of the euro.
“Cheap money in the more inflation-prone member states contributed to substantial differences in real economic growth rates in the pre-crisis decade,” their report says. “But it also fueled credit booms and house price bubbles and led to growing current account deficits, while countries gaining in competitiveness, such as Germany and the Netherlands, accumulated growing surpluses.”
The debt crisis has prompted changes on two levels. Firstly, the eurozone members in the worst trouble are attempting to fix their economies: Greece, for instance, is reducing the size and cost of its public sector while Ireland is addressing the problems with its banks. But there are wider changes being undertaken. The European Commission and a task force operating under European Council President Herman Van Rompuy has embarked on a process of overhauling economic governance within the EU and it is in this respect that the Greek debt crisis may prove a pivotal moment in the Union’s history.
“The Van Rompuy team has seized the opportunity of the crisis to make phenomenal changes to economic governance over the last year,” says Begg.
“The sovereign debt crisis has unleashed a process of structural reforms that would not have happened so quickly and so comprehensively across the continent without the crisis,” says Bastian. “We welcome this reform process but we also identify deficits. This is a work in progress.”
Van Rompuy and his task force have put together six pieces of legislation, the so-called six-pack, aimed at tightening up rules within the eurozone and creating a sounder base for economic governance. The proposals, going through the legislative process at the moment, seek to strengthen the EU’s Stability and Growth Pact and to avoid the kind of budget shortfalls seen over the past few years. Member states would be sanctioned after a first warning and penalties can only be overruled with the backing of a majority of member states (a reverse qualified majority).
States would be fined for failing to comply with the Commission’s plans to put debts on a downward path and those with debts above 60 percent of GDP would need to reduce their debts by an average of 5 percent per year over a three-year period.
The panel of experts said the new framework “can be expected to provide for significantly better prevention, making sovereign debt problems less likely and establishing a refined toolbox to deal with them should they arise.” However, they expressed concern about whether some aspects, especially sanctions for members that stray from the path, would be effective.
Even though the “six-pack” has been in the making for about a year, it is increasingly clear that it is just the first step in the measures that the EU has to adopt to create a more robust and realistic form of economic governance. “The question now is whether this filling in of the gaps goes far enough to stabilize for the long term the future of the economic and monetary union,” says Begg.
Other issues raised by the panel of experts included whether countries should include a “debt brake” in their constitutions to bind governments to specific limits, whether there should be a pan-European system for monitoring state pensions, if a “scorecard” for wages and productivity should be kept, what the role of the European Central Bank might be (i.e. should it focus on economic growth as well as monetary policies) and if it should issue eurobonds, thereby providing a more level playing field for the economically weaker members of the eurozone.
There is also the question of whether beyond having the European Financial Stability Facility (EFSF) — which will become the European Stability Mechanism (ESM) in 2013 — to support eurozone members in trouble, the EU should consider the creation of a European Monetary Fund (EMF). It’s easy to get lost in this alphabet soup of financial bodies but the experts gathered by the Bertelsmann Foundation are adamant that after the way the Greek crisis has been handled, such a development would be welcome.
“Setting up an EMF to deal with euro area member countries in financial difficulties is superior to the option of either calling in the International Monetary Fund or muddling through on the basis of continuous ad hoc decision-making procedures and institutions,” they said in their report. “Such a fund would include an orderly default mechanism, operate as an insurance scheme and be based on the compliance of the eurozone countries with the Maastricht fiscal deficit and public debt criteria.”
At the heart of this whole debate about more coordinated economic governance is the issue of whether there will be greater fiscal union within the eurozone and what form this might take: Will it see the Commission and the European Central Bank have more oversight of national policies, for example, or will there be greater transfers from the better-off member states to the fiscally challenged?
“We’re used to transfers in every single member state — the scale of such transfers is phenomenal,” says Begg. “To give you one example, in the north of Sweden, the two poorest counties receive a net fiscal transfer equivalent to about 30 percent of their disposable income. Fiscal union of that sort was also part of German reunification.
“What we do not have in Europe so far is willingness to countenance that form of direct payment for public expenditure. What we have at the moment is lending, not direct payment.”
However, for the European Union to become a transfer union, a development that some countries, such as Germany, have vehemently opposed, politicians will have to find the will and legitimacy to embark on this path, which implies involving voters and parliaments, including the European one, far more in the process than they have so far.
“One of the deficits in economic governance in the European Union is a lack of democratic accountability,” says Joachim Fritz-Vannahme, a project manager at the Bertelsmann Foundation. “The executive has had to run so fast in a race against rating agencies and financial markets that the legislature has not kept up. “
“There is no longer a natural social and political consensus in favor of common European policies,” the experts state in their report. The group suggests that the media, political parties and broader civil society play a part in communicating the ideas to the public. “If we explain to people what is going on, we stand a better chance of them accepting it,” says Begg.
However, the EU’s problem at the moment is that several countries, not just Greece, Portugal and Ireland, are implementing severe austerity measures, which the public closely associates with the shortcomings of the Union or the single currency, while voters in countries with more robust economies, such as the Netherlands, are becoming increasingly averse to taxpayers’ money being used to bail out other members, even if these funds are returned with interest.
“The big issue in Europe at the moment is the growing incompatibility between economic necessity and political feasibility,” says ELIAMEP president Loukas Tsoukalis. “There is no inevitability in history,” he adds, suggesting that the strengthening of the EU rather than its demise is not a given.
There is a fear that the seeds of the eurozone’s disintegration are being laid in Greece and that the combination of the EU’s lack of decisiveness with the pain of the fiscal adjustment measures will take its people past breaking point. “How much austerity is politically and socially tolerable in a democracy?” asks Tsoukalis. “I have no answer to that but we may be playing dangerously with those limits with consequences that could be very unpleasant.
“Greece is a test case and a precursor of things to come elsewhere. That’s why there is so much attention paid to it.”
Greece’s future remains uncertain but if in the days, weeks and months to come, the EU can find a way to help rescue it, Athens may reciprocate by providing the defining moment that saved the Union itself and led the eurozone to an era of more effective economic governance. Then, the exchange of thanks will be mutual.