Greece’s fiscal emergency is a most mystifying crisis. At one level, it is the most serious test of the eurozone’s unity since the launch of the euro in 1999. Unless correctly handled, the problem with Greece’s public finances could shake the foundations of Europe’s monetary union.
At another level, however, Greece itself seems to be getting off remarkably lightly. Germany suffered a 5 per cent slump in gross domestic product last year; Greece is expected to have suffered a fall of about 1.1 per cent. Spain has a 19 per cent unemployment rate; Greece’s rate is only 9 per cent. The Irish government is imposing extreme austerity measures on its citizens to protect Ireland’s eurozone membership; Greece’s government is, so far, doing nothing of the sort. No wonder Greece’s 15 eurozone partners, the European Commission and the European Central Bank are furious with the political classes in Athens. Read more
Buried in this month’s “Annual Report on the Euro Area 2009″ from the European Commission is some absorbing material on competitiveness in the eurozone. Some countries, above all Germany, Europe’s export champion, have consistently outshone others in terms of business competitiveness since the euro’s launch in 1999. The result has been the accumulation of large current account deficits in countries such as Cyprus, Greece, Portugal and Spain – but also in Ireland, Malta, Slovakia and Slovenia.
As the Commission says, in impeccably understated language: “The build-up of large external liabilities has increased exposure to financial shocks… In the current downturn, financial markets have become more responsive to the net external financial asset position for the euro area countries. Even if to a large extent the net external position is related to the private sector, the public sector can be affected by private sector debt in the form of potential bail-outs and other fiscal implications.” Read more
From a European Union perspective, it’s somewhat surprising that the extraordinary financial crisis we’ve been living through has not generated more pressure for another big push at EU integration – if not in the political sphere, then at least in the economic one. According to conventional EU wisdom, it usually takes a crisis to make Europeans understand why closer integration is a good thing. But on this occasion, it’s not happening – or at least, not yet.
For the perfect explanation as to why this should be so, I recommend an article by Otmar Issing, the European Central Bank’s former chief economist, in the latest issue of the journal Europe’s World. Issing’s article discusses the merits of issuing common bonds for the 16-nation eurozone – an initiative that would, in theory, mark a major step forward in European integration – and comes down firmly against the proposal. Read more
Mikolaj Dowgielewicz is truly a new Pole. Not yet even 37 years old, he is a minister (for European Union affairs) in Poland’s centre-right government, speaks fluent English and French, was educated partly in the UK, and has spent more of his life in an independent democratic Poland than in a Soviet-controlled communist Poland. When I was listening to him speak at a think-tank breakfast in Brussels this morning, it struck me with force that he would have been just a small boy when I first visited Warsaw, Krakow and Gdansk in the summer of 1980 and witnessed the emergence of the free trade union Solidarity.
Now, like other new Poles, Dowgielewicz talks breezily about Poland’s growing weight in the EU, which it joined five years ago, and its prospects for adopting the euro as early as 2012. Poland doesn’t want or need the eurozone’s entry rules to be bent, he says. “We’re not proposing any amendments to the entry criteria. Not that we think they make absolute sense, but it’s not feasible. You’d have to change the EU treaties. We think the criteria strengthen the eurozone’s credibility. It will have to be down to the merits of each individual country.” Read more
There are two schools of thought on whether Latvia should devalue the lat, or fight tooth and nail to keep its currency peg to the euro. One, espoused by the Latvian government, the International Monetary Fund and the European Commission, is that devaluation would destabilise the Latvian banking system, wouldn’t really address the long-term challenges facing the Latvian economy, and would risk spreading shock waves beyond Latvia across the Baltic and into other parts of central and eastern Europe.
The other view, espoused by some of the world’s leading economists, such as Paul Krugman and Nouriel Roubini, can be summed up as: “Get Real”. Without devaluation, the only path that Latvia can go down to extract itself from crisis is massive deflation, through spending cuts and sharp falls in wages that will inflict terrible damage on society and will unnecessarily prolong Latvia’s recession. Read more