European Parliament, Strasbourg (CC BY inyucho)
As bad as the crisis has been—and it has been extremely damaging, not least for the many people out of work—that should not stifle Europe’s achievement of a closely integrated region. The crisis revealed weaknesses in the regional architecture and national policies, while eroding political support for closer ties. But integration has yielded substantial benefits for Europe so far, and continues to point the way forward.
While introduction of a single currency significantly deepened financial integration, the global crisis caused that process to go into reverse. In the periphery, financial fragmentation has led to high interest rates for enterprises and households, and disrupted monetary policy transmission. In the core-Eurozone, it has led to extremely low interest rates for savers and potentially distorted asset prices.
Europe’s economic performance since 2008 has been disappointing. The European Central Bank has been timid about quantitative easing, when most single currency members were forced to pursue austerity measures. The European economy is still more than 2% below its pre-crisis peak while the US Federal Reserve greatly contributed to an expansion in the US economy to ca. 8% above its pre-credit crunch peak. US unemployment has declined to around 5.5%, while in Europe it is still over 11%. Fortunately, there are external circumstances that have helped Europe: over the last six months international oil prices have approximately halved which means a relief for the European consumer.
The ECB started with its securities markets programme (SMP) in 2010, proceeded in 2012 with the (unused) outright monetary transactions programme (OMT) and has lately finally launched a government bond purchasing programme exceeding €1tn (EAPP, Expanded Asset Purchase Programme). In the euro area (except for Greece) yields and interest rate differentials are extremely low. What is even more important, it has contributed to almost 20% euro decline against the dollar, boosting European exports.
Due to the decrease in interest rates, the fundamental conditions for fiscal policy have considerably improved. Nonetheless member states lack the political will to make the best use of the headroom the ECB has given them. Europe’s growth may increase to 1.5% in 2015, as the ECB is forecasting. However, even if that happened, by end-2015 the European economy would still be below its pre-crisis peak. Stronger growth will help reduce unemployment, which is around 25% in Greece and Spain (but only ca. 5% in Germany and Austria).
However, the ECB’s actions may still not be enough – it is still possible that euro members will no longer be perceived as a cohesive community which may hurt market confidence and raise doubt on the euro’s further existence. Greece’s problems should be a trigger for a more pronounced action of policy-makers about the fall-out from years of economic underperformance which has led to the political deterioration – confined not only to Greece.
Europe’s political economy is at a critical stage. On the one hand there are signs that Europe might be on its way to a meaningful recovery, but on the other – Europe’s politics seem to be fragmenting at a hastening pace as a result of failure in meeting economic expectations. Whether Europe can avoid a downward political and economic spiral will depend on whether the recovery has sufficient force to reverse the last few years’ political aggravation.
A return to growth might give Europe some breathing space and head off the chance of political setback. The difficulty is that, although there is clearly a connection between economic hardship and political extremism, the relationship is not precise. One of the examples that comes to mind might be the political landscape after the Great Depression.
A depression, or a prolonged recession, does more than create economic difficulty. It also serves to discredit mainstream ideologies and to whip up anger against political elites — and those effects can last well beyond the point where the economic figures show some improvement.
Improving medium to long-term prospects in Europe require structural reforms. National governments began implementing challenging macroeconomic adjustment programs, with the overarching goals of reducing fiscal deficits and improving the competitiveness of their economies—unwinding the imbalances that had grown in previous years and laying the basis for more sustainable long-term growth. Many southern European economies have taken necessary action to consolidate budgets, cutting welfare and pensions, lowering employment and salaries for government workers, and raising taxes.
The latest anti-austerity protests in Frankfurt underlined people’s discontent over measures to tackle Europe’s structural and economic problems. Rescue packages to stave off default in struggling member states have sparked off predictable dissatisfaction in these countries. The Greek example shows that tough negotiations on austerity and reforms have not always led to satisfactory implementation, causing growing discontent among citizens from countries both providing financing and those being on a receiving end. Unless growth resumes and political integration takes off, the ECB will be caught in the middle of simmering dissatisfaction from debtor and creditor nations.
Europe’s longer-run economic and social prosperity would seem to depend crucially on whether its economic rebound is much faster than its deteriorating politics. The EU is primarily an economic community, so it is seen through the prism of economic competitiveness. The only sustainable way forward lies in more economic growth and stronger political integration.
European policy-makers need to move quickly in supporting the ECB’s easing with meaningful structural economic reform. While the recent crisis in Europe differs from previous challenges in its nature and calls for far-reaching actions, a look back reminds us of the momentous hurdles Europe has overcome in the past, as well as the approach it has taken in those hard times: greater integration. If political will can once again be summoned, further integration along with steps to boost growth can create a more durable foundation for prosperity in the region. The whole Europe would benefit from lasting financial reintegration.
The author holds a PhD in economics and works in the National Bank of Poland’s Financial Stability Department. The views expressed are those of the author and do not reflect the official position of the National Bank of Poland.
