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Richard Prins, 2510403. Course Instructors: Dr. Hulst & Dr. Crum. 23/3/2014.

Macro-economic policy in the Euro zone. In 2009, fear of a sovereign debt crisis grew, partly because of high government expenditures to counter the banking crisis in 2008, such as the European fiscal stimulus package. In 2010, Greece especially experienced a rising price for government borrowing leading to an inability to finance its budget. This formed the risk of contagion to other southern European states, and the break-up of the Euro zone itself. The governments initially responded (although late) through the intergovernmental providing of a loan to Greece. Euro zone leaders also agreed on initial programs (EFSF and EFSM) to provide financial support to governments in need. In 2011, the sovereigndebt crisis intensified, as the financial aid programs would not be able to support larger states. In 2011 and 2012 the six pack and the Fiscal Compact were agreed on, introducing stronger surveillance on the budgetary discipline of Euro states. Also in 2011, the ESM was signed as a successor to the previous programmes, also using an intergovernmental decision structure (Hudson & Puetter, 2013). While van Rompuy has declared that the existential threat to the Euro is over, others are not so relieved (Glienicker group, 2013). This paper will look at the future of the Euro. An option has always been the break-up of the Euro zone, but this paper will focus on policies in which the Euro is retained. These policies can be divided in two categories. The first one is to continue the course set by the intergovernmental treaties signed in 2010-2012, under the leadership of firstly Germany and secondly France, called muddling through (Overbeek, 2012). The second option is to transfer a considerable amount of decision-making authority with respect to national macroeconomic policies to EU institutions, Europeanization (Overbeek, 2012). Muddling through is politically the easiest option, and the natural tendency of the EU (Overbeek, 2012). Furthermore, this option is in the best interest of Germany, economically the strongest Euro state and therefore the state with the strongest negotiating position. It has opposed the buying up of bonds by the ECB, and it has opposed the creation of Eurobonds. Both would make Germany more vulnerable in the case of the default of a Euro state (Overbeek, 2012), while the Eurobonds would also raise the cost of borrowing money for Germany (Pisani-Ferry, 2013). And while

Northern European countries have been able to adapt to the post-crisis economy and are experiencing minimal economic growth again, the Southern European economies are facing economic decline (Darvas, 2012). Furthermore, Eurobonds would provide a disincentive to budgetary discipline in economically weaker states. When there is a Eurobond however, states can keep on borrowing at the same rate, even when they are putting themselves in a more risky position. However, there is a suggested solution for this problem, stricter budgetary oversight (Pisani-Ferry, 2013). According to Bordo, Jonung, and Markiewicz, (2013) other examples of fiscal unions indicate that having a no-bailout rule is the best for stable budgets, a no-bailout rule meaning that the highest governance level should not assume the debts of the member states. According to Pisany-Ferry (2013), the current Euro zone policy amounts to the enforcing of fiscal discipline, which, they assert, is not enough to restore stability. Countries with less than a 60% of GDP debt have in the past still suffered default (Pisany-Ferry 2013; Bogdandy et al. 2013). The current approach of intergovernmentalism reacted rather slow. This has driven Germany and France to take the lead. This style of government carries with it a legitimacy dilemma. Because of the intergovernmental character, the European Parliament is not involved to provide democratic oversight (Fabbrini, 2013). National parliaments are incapable however of effectively controlling collective European intergovernmental decision-making (Fabbrini, 2013; Overbeek, 2012). Because of the disadvantages associated with muddling through, many authors do not find this a feasible option (Overbeek, 2012; Pisani-Ferry, 2013; Glienicker group, 2013; Darvas, 2012). According to the Glienicker group, the problems underlying the crisis have not been solved, debt problems continue to grow, and Southern Europe remains in a deep economic recession (Glienicker group; see also, Darvas, 2012). Their suggested solution is a deeper Europeanization. Europeanization would mean i.a. the forming of a minimal fiscal union (a tighter common fiscal framework and a mutual guarantee of part of the public debt (PisaniFerry, 2013, p. 12) with Eurobonds. Member states would have a common way of financing their debt and would guarantee each others debts. In exchange, states would have to submit their budgets for approval, and would be liable for sanctions if their

borrowing behavior would transgress certain rules. Eurobonds would create a safe asset for banks to invest in, and provide all states with a reliable borrowing option. As mentioned above, this will mean higher borrowing costs for Germany and other economically strong states, but lower costs for weaker states (Pisani-Ferry, 2013). An obstacle to these options is the mistrust between states, and the complexity of the structures required in the absence of deeper political and fiscal integration (Darvas, 2012), especially in the light of France's unwillingness to form a more federalist system (Pisani-Ferry, 2013). Another suggested policy is the creation of a banking union, moving the responsibility for supervising and for saving banks to the European level. Currently there is a bank-government interdependence problem. Banks often hold large amount of government bonds, making them dependent on governmental budgetary stability, whereas governments have had to put themselves into deep debts to save their banks (Darvas, 2012; Pisani-Ferry, 2013). According to proposals banks would be regulated more, to incentivize them not to rely that much on the bonds of one state. This might be effective but it might also lead to difficulties for weaker Euro states to finance their debts. Furthermore, debt restructuring will retain its large impact on banks because of the scale of member state governmental debts as compared to e.g. US state debts. Changing the bank system may also have its impact on a wide range of topics like pension funds assets (Pisani-Ferry, 2013). Some way of restoring the economies of Southern European countries is also suggested to be part of a plan of Europeanization. Overbeek (2012) and Darvas (2012) suggest some form of transfers, where a larger budget is given to the EU so that it can support lagging regions, in effect transferring money from richer to poorer member states. The small amount of investment is not enough however, to boost growth, and the Southern economies also have bigger structural problems that need solving (Darvas, 2012). Overall, it seems that European institution need larger decision making authority in the light of the slowness and inability to address deeper problems of the current reaction. Furthermore, Europe needs to have more macro-economic tools at its disposal such as a more concerted fiscal policy, and common pooling tools such as Eurobonds.

The stalling economies of the South need to be helped by other forms of solidarity such as transfers, and the Southern economies need to boost competitiveness. However, large political obstacles remain as Northern states will have to foot the bill of these plans, and because resistance to a more federal Europe remains strong, especially in France. The future of the Euro necessitates action however, as muddling on seems not to be an option.

Literature Bordo, M. D., Jonung, L., & Markiewicz, A. (2013). A fiscal union for the euro: Some lessons from history. CESifo Economic Studies, 59(3), 449-488.

Darvas, Z. (2012). The euro crisis: ten roots, but fewer solutions. Bruegel Policy Contribution, (No. 2012/17).

Fabbrini, S. (2013). Intergovermentalism and its Outcomes: the Implications of the Euro Crisis on the European Union. LUISS School of Government Working Papers Series (SOG-WP1/2013).

Glienicker group (2013). Towards a euro union. Retrieved from: http://www.bruegel.org/nc/blog/detail/article/1173-towards-a-euro-union/

Hudson, D. & Puetter, U. (2013). The EU and the Economic Crisis. In Cini, M., & Borragn, N. P. S. (Eds.). European Union Politics (pp. 367-378). Oxford: Oxford University Press.

Overbeek, H. (2012). Sovereign debt crisis in Euroland: Root causes and implications for European integration. The International Spectator, 47(1), 30-48.

Pisani-Ferry, J. (2012). The euro crisis and the new impossible trinity. Bruegel Policy Contribution, (No. 2012/01).