Listening to the media, and some gloating EU-critical politicians and analysts one could think that the eurozone’s existence had caused the global financial crisis of the last few years. This is as wrong as blaming the current crisis on an overspending public sector living beyond its means. Both scenarios treat the crisis mainly as a sovereign debt crisis, and focus exclusively on the refinancing of public debt. Standard solutions offered so far, like cutting expenditure and raising taxes are in danger to cause the economy to grow slower or even contract.
Ireland and Spain for example were in better shape than Germany in terms of their budget deficits and debt to GDP ratios prior to 2008. In both cases it was a wrongly balanced growth model – the economies becoming too dependent on financial services and the property market – which came crushing down and started off the crisis. When the model crashed, not only in Spain and Ireland, but also in the UK, it left governments with rising transfer costs and the need to bail out their banks, while their tax revenue was falling – which altogether led to an explosion in their sovereign debt.
The proposed fiscal contraction which proponents of the austerity paradigm take as necessary will not lead to economic recovery – as proven by the lack of development in the UK, Ireland and Greece so far.
Of course austerity politicians are – in their own way – interested in new growth going forward. However, their (so far failed) recipe for a return to growth assumes that what prevents growth is a lack of confidence by the markets, which is again caused by excessive sovereign debt. Under that model what needs to be done is to cut public expenditure at a time when private capital is withheld and not invested.
Increasingly, experts and analysts from Krugman to Stiglitz and Soros have been pointing out that we need to explore different and more constructive strategies for the future than austerity offers.
For example, concepts such as eurobonds as a means out of the crisis have been discussed widely in recent weeks and months by those who manage to take a step back from the still dominant but unhelpful austerity framework.
Allowing the eurozone to break up would have disastrous consequences across the world economy as well as for individual countries, not least for the UK, even though it is not in the eurozone itself.
A continuation of piecemeal fire-fighting by politicians allowing themselves to be pushed around by troubled markets will not deliver that. Equally giving in to nationalist temptations and allowing nations to be pitched against each other will make matters worse.
However, the EU is not only the eurozone. A common currency does need political union. The EU is also a project to jointly develop a sustainable future based on a fundamental European consensus of combining ambitious market economies with fair social models and with reliable democracies.
In order to develop this big vision – no matter from which end of the ideological spectrum one looks at it – Europe needs courageous and active politics to stabilize the situation and take the fundamental idea of Europe into a new era.
by David Schoibl, first published in The European, May 2012 issue http://www.euromove.org.uk/fileadmin/files_euromove/EMiL/The_European_-_issue_30.pdf