October « 2012 « Euro

Archiv: October 2012

How Euro Area Trade with the Rest of the World Contributed to the Euro Crisis

31. October 2012, von Aldo Caruso, Comments (0)

by Ferdi De Ville

Right at the time that the euro crisis had begun (to the relief of decision makers) to retreat from the front pages of newspapers, in Belgium the Ford Genk tragedy happened. The decision of the Ford Europe board to close the plant in the Flemish province of Limburg, making 10.000 workers redundant, and move the production to Valencia, has many links with the euro crisis. First, the overproduction problem in the automotive industry, which may be structural in the end, has been worsened dramatically by the crisis. In difficult times, many people postpone the purchase of a car, and especially of big cars such as the models that were made in Genk. Second, according to some, the decision by Ford to close the Genk plant and move the production to Valencia is due to the lower wage costs in Spain. While this can be disputed, as the labour share in the cost of producing a car is very limited, it is indeed the case that the labour cost in Spain has quite substantially decreased since the crisis (with around 5%), and hiring and firing has been made easier. Successfully: Spanish exports are up 23.6% since the beginning of the crisis, according to Deutsche bank. Third, the harsh decision (and ruthless style of communicating it) has been seen as exemplary for the current power of multinational corporations that operate on an international scale, over governments and trade unions in Europe that still play (in the case of states at least still in fiscal and social matters) on the national level.
This only by way of introduction and to point out that the subject of this post is more topical than might appear at first sight. I want to highlight an interesting IMF research paper that handles on the role of external trade imbalances in the euro crisis.

It has been recognized by many prominent observers (e.g. Martin Wolf, Paul Krugman, Paul De Grauwe and Fritz W. Scharpf) that the (im)balance of payments problem in the euro area was the decisive factor in the euro crisis. Mostly, this accumulation of current account imbalances in the euro area has been explained as an endogenous process – as a vicious spiral caused by the one-size-fits-none interest rate of the European Central Bank. This in turn led to housing, financial and consumption bubbles in the peripheral countries and to divergent inflation and wage developments between the peripheral and core countries (especially Germany where real wages declined between the time of adoption of the euro and the crisis).

The IMF working paper now shows that the current account deficits of peripheral countries are to a large extent the consequence of external trade shocks, actually more than of internal trade flows. However, all is connected in the euro crisis. The authors note that ‘in particular, the rise of China generated strong demand for machinery and equipment goods exported by Germany while exports from euro area debtor countries were displaced from their foreign markets by Chinese exports’. Moreover, the higher oil prices and delocalisation of (parts of) firms to emerging Europe worsened the situation of peripheral economies while benefitting the German economy and outwardly integrated German machinery and equipment exporters in particular. To complete the circle, the worsening competitiveness situation in peripheral economies was compounded by the appreciating euro, but this was for some time sustainable through easy financing, in part thanks to interest in euro area financial assets because of this appreciation. However, international investors did not buy peripheral states’ bonds directly. These were purchased by core euro area countries’ banks, contributing to the enormous intra-euro area liabilities of the peripheral countries when the crisis erupted.

This important study not only shows that an important accessory to the euro crisis has hitherto been neglected: external trade. But this also questions an important part of the recovery and future growth strategy of the euro area and the European Union in general: to export itself out of the crisis (and towards sustainable growth). If an important problem of the peripheral countries in the past decade has been that it has a competitive production structure vis-à-vis China (while Germany and other core countries have a complementary economic fabric), than a policy of simply increasing exports to China and other emerging economies cannot be a solution for the troubled euro area countries. It is illusive (and undesirable) that these countries can compete on price with emerging economies any time soon. So if we want the peripheral economies, and Greece and Portugal in particular, to become export-oriented growth poles within the EU the coming years and decades to allow them to compensate for this crisis, we should not focus on their price competitiveness problem (alone). These countries need targeted investment in the export sectors of the future. It has been said repeatedly that, also taking into account the countries’ comparative climate advantages, the renewable energy sector is a first candidate.

Hopefully, besides the other important recent finding by the IMF that the fiscal multiplier in advanced economies is much larger than assumed (and, consequently, austerity is much more damaging to output in the near term than believed), this analysis will lead to a rethink of the euro crisis approach, and of the policy towards peripheral economies in particular. Together with the Ford Genk catastrophe, it also compels us to think more critically about the EU’s external trade policies. And finally, both should for the umpteenth time be an irresistible wake-up call to at last develop Social Europe.

Dr Ferdi De Ville is assistant professor at the Centre for EU Studies, Department of Political Science, Ghent University where he teaches and writes on economic and monetary union and the euro crisis.

Greek Days Have Started

30. October 2012, von Aldo Caruso, Comments (0)

by Carsten Brzeski

With three meetings in less than two weeks, eurozone finance ministers hope to finally strike a deal on giving Greece more time for its adjustment.

The decisive phase for Greece has started. Yesterday, Eurogroup president Juncker announced an unscheduled meeting of eurozone finance ministers on 8 November. With the scheduled conference call of ministers on 31 October and the already planned Eurogroup meeting on 12 November, ministers will have three meetings to decide on further steps for Greece. Even if the Troika report has not (yet) been officially released, it seems clear that the eurozone is willing to give Greece somewhat more time for the adjustment.

More time, however, would eventually also cost more money. According to earlier market reports, a two year delay of the austerity measures could lead to a financing gap of between €15bn and €30bn. This financing gap would have to be closed to keep the IMF on board of the Greek rescue and to be able to pay out the next tranche of the loan – of course, always assuming that Greece fulfils its obligations of the structural reforms and austerity measures.

Generally speaking, more time for Greece could be ‘bought’ by two main options: a third bailout package or debt forgiveness. This is what according to media reports is also proposed by the Troika. However, neither of these two options is politically attractive for most eurozone countries as both options would cost tax payers’ money. Therefore, it did not come as a surprise that the German government directly and indirectly tried to rule out both options, with opposition against debt forgiveness being much louder than against a third package. Particularly, German chancellor Merkel seems to be – very gradually – giving up opposition against a third aid package. While a third Greek bailout would probably not be supported by all of her own coalition’s lawmakers, Merkel could get parliamentary support from the biggest opposition party, the social democrats. Less than one year ahead of the federal elections, eurozone matters could increasingly be dominated by German domestic politics.

Debt forgiveness (aka Official Sector Involvement) would, according to the German government, be against the principle of no-bailout (for the government) and against the principle of no-monetary financing (for the ECB). While the monetary financing argument remains a strong one for the ECB, the no-bailout argument looks much weaker, particularly in light of all rescue actions of recent years. As a consequence, some kind of OSI should not entirely be ruled out. However, it would not come for free for Greece. In our view, OSI or debt forgiveness would come with even more strings attached than the current programmes, leading to more and far-reaching loss of sovereignty. The core eurozone countries would do everything to avoid the impression that OSI is relief for free. Otherwise, other eurozone peripheral countries could be tempted to ask for the same.
Given the broader consequences of OSI or debt forgiveness and the limited political appetite in several eurozone parliaments for a third bailout package, filling the funding gap for Greece will again require some creativity. A possible way out, at least in the short term, could be a combination of several options, such as lowering the interest rates on the first two Greek packages and front-loading parts of the funding of the second package. This could again kick the Greek can further down the road.

Dr. Carsten Brzeski (Carsten.brzeski@ing.be) is Senior Economist at ING BELGIUM SA/NV – Economic Research (©Carsten Brzeski)

‘For Europe’ – Finally Some Visions

11. October 2012, von Aldo Caruso, Comments (0)

by Ferdi De Ville

Since the outbreak of the euro crisis, many observers, including yours truly, have lamented the lack of vision in the way European leaders have dealt with the eurozone’s problems. While their strategy of muddling through has until now succeeded in preventing the break-up of the euro area, many opinion makers argue that this cannot indefinitely be kept up, let alone that the crisis could be definitively solved through half-baked measures. Such halfway solutions only repeat the mistakes made by the fathers of the euro when they knowingly set up the Economic and Monetary Union (EMU) in an incomplete fashion (for a similar argument regarding financial supervision reforms see here). Moreover, a long-term vision is necessary to convince the financial markets and citizens of, respectively, the irreversibility of the euro and the desirability thereof.

Last week, Guy Verhofstadt and Daniel Cohn-Bendit have published their vision “For Europe!: Manifesto for a post national revolution in Europe”. This is only the latest in a number of visions that have been or are being developed by European policy-makers since European Central Bank President Mario Draghi followed commentators in urging the politicians to spell out a long-term plan.

Shortly after his summons, Draghi together with European Council president Herman Van Rompuy and two other EU presidents (Manuel Barroso from the European Commission and Jean-Claude Juncker from the Eurogroup) started working on a ‘master plan’ for the euro. This roadmap towards a genuine Economic and Monetary Union identified the four building blocks for a stronger EMU: Banking Union, Economic Union, Fiscal Union and Political Union, but did not spell out the details of these reforms. This has already caused confusion and resentment with regard to the one pillar where the European Commission has made progress: on banking union. There is a discussion between especially Germany and the European Commission about the number and size of banks that will be supervised at the supranational level by the ECB, as well as on the interpretation of bank recapitalisation by the ESM that was also agreed at the June Summit.

Not less struggle should be expected on the concrete interpretation and put into practice of economic, fiscal and political union. At the European Council next week (18-19.10.2012) the interim report of the Roadmap will be discussed (the draft conclusions have been leaked here). The most salient ‘new’ proposals, situated in the areas of economic and fiscal union, are for ‘individual contractual arrangements’ between eurozone countries and the European level on reform programmes and the mentioning of fiscal solidarity and an appropriate fiscal budget for the euro area.

Another ‘official’ visionary paper is the final report by the Future of Europe Group, made up of the Foreign Ministers of Austria, Belgium, Denmark, France, Italy, Germany, Luxembourg, the Netherlands, Poland, Portugal and Spain, thus not only representatives of euro area member states but also including an opt-out and a pre-in country. The time-horizon of this report is further away than that of the Van Rompuy roadmap, so it also proposes more profound reforms such as closer cooperation in external action, strengthened cooperation between European and national parliaments, and other reforms to enhance the democratic legitimacy of the Union, inter alia through the nomination of a European top candidate by each political group for the next EP elections. It also contains some ideas on how to improve the efficiency of the EU, as by reforming (the working of) the Commission, as well as the parliamentary system, with a European Parliament with the power to initiate legislation and a second chamber for the member states.

But the most utopian of these recent visions developed by politicians is without doubt Verhofstadt and Cohn-Bendit’s ‘For Europe’ called a ‘realistic utopia’ by the authors themselves. Verhofstadt and Cohn-Bendit give their all to advocate a real ‘Federal Europe’, hitting out at those who are merely defending their national interests during this crisis or, worse, want to use the crisis to (re)allocate competences to the state and regional level and play nationalist or regionalist emotions. It is also an unvarnished swipe at Barroso’s idea of a ‘Federation of Nation States’, yet another vision, which he outlined during his State of the Union. Verhofstadt and Cohn-Bendit claim that the democratic revolution (led by an avant-garde within the European Parliament) is not only a logic conclusion from an analysis of the crisis, but can simply be its single effective solution.

‘For Europe’ is less-detailed than its much shorter variants, insisting chiefly on the need to radically reform the constitutional structure of the EU (if necessary creating a two-speed or -lane Europe), and giving the federal level a substantial fiscal competence and budget. The authors expose themselves to easy criticisms that they simultaneously damn nationalism and advocate a kind of European pride, a post-national nationalism that could very difficultly not be seen as a contradiction. However, given the character of the authors this should be interpreted as provocation, rather than naivety. Verhofstadt and Cohn-Bendit are equally knowingly daredevillish when they propose that the European Parliament should declare itself a Constituante after the 2014 elections and should write a Constitution that is subsequently offered to the European populations on a take-it-or-leave it basis.

While the visionary politicians blame each other for being too timid or other-worldly, their discord is to a large extent explicable by their different positions – la fonction fait l’homme, en effet. More interesting is that on a more distanced reading we note some convergences that were unthinkable only a couple of months ago. We see some proposals returning in each of the visions discussed, most notably the (more) direct election of the President of the European Commission and the need for a eurozone budget that allows automatic redistribution, for example trough a European unemployment insurance scheme. It is now tensely waiting on the final version of the Van Rompuy Report that should be ready in December.

Dr  Ferdi De Ville is assistant professor at the Centre for EU Studies, Department of Political Science, Ghent University where he teaches and writes on economic and monetary union and the euro crisis.

Blog Authors

Adriaan SchoutAdriaan Schout

Dr Adriaan Schout is Deputy Director Research/Europe at Clingendael, Netherlands Institute of International relations. (read more...)

Alexandre AbreuAlexandre Abreu

Dr Alexandre Abreu is a 33-year-old Portuguese economist with a PhD from the University of London. Currently he is a lecturer in Development Economics at the Institute of Economics and Business Administration, Technical University of Lisbon, and a Researcher at the Centre for African and Development Studies of the same University.

Almut MöllerAlmut Möller

Almut Möller is a political analyst in European integration and European foreign policy. She is currently the head of the Alfred von Oppenheim Centre for European Policy Studies at the German Council on Foreign Relations (DGAP) in Berlin. (read more...)

Supported by