EUI debates solutions to euro zone crisis

Written by Rosie on . Posted in Events

Martin Wolf

Martin Wolf, chief economic commentator, Financial Times

EUI professors predicted dark days ahead for euro zone countries at September’s Debating Europe event, while the Financial Times’ Martin Wolf spoke of the probable default and exit from the single currency by some member states.

“It’s quite likely that some part of adjustment will include the default by a major state – not Greece,” said Wolf. While much of the discourse over the euro zone crisis has focused on the risk posed by the southern member states, the Financial Times’ chief economics commentator  took a different approach: “The probability it will be a German exit has increased and the probability it will be a Greek exit has diminished.”

Wolf was speaking on ‘Euro crisis: Symptoms, sources and solutions’ and was joined by a panel of four professors: political scientist Pepper Culpepper, economists David K Levine and Massimiliano Marcellino, and Richard Rose, director of the Centre for the Study of Public Policy.

The commentator went on to say that within a decade he expected there to be ex-members of the euro zone, a proposition put forward by Rose who said that Wolf’s analysis needed to distinguish further between the various ‘Europes’. Rose named two of these as the political new member states and the potentially former euro zone members.

A struggle for solutions

Although divergent in their approaches, the panel was broadly united in their view that Europe would have to endure many years of economic woe before recovery could be realised. “We are probably going to see a long and painful process of adjustment and reform and misery, complaints, anger and frustration,” said Wolf, although put this as preferable to the less likely, catastrophic partial or complete break-up of the euro zone.

Turning his attention to solutions, Wolf was clear that the narrative of the current situation as a fiscal crisis must change. Comparing countries’ public debt in recent years demonstrates that fiscal crises are a symptom rather than cause of the current situation, he said, citing Spain and Ireland’s good positions pre-crisis as one of many examples. “The correct view – that this is a financial crisis – puts the blame on both the creditors and the debtors, which is better economics and ought to be better politics,” he said.

“It would be a very good start if a large number of countries started writing off quite a large party of what they provide to the debtor countries,” he said. Although Wolf deemed debt restructuring essential, he admitted it remains unclear whether creditors’ or debtors’ taxpayers will ultimately pick up the bill.

Levine agreed that a lack of clarity remains, stating that this stems from a problem inherent to the system: “It’s a system where one person writes the cheques and another person actually puts the money in the bank – Spain gets to spend money and Germany picks up the tab. Brazil tried this; the provinces got to spend whatever they wanted and the federal government was responsible for the debt that they incurred. Needless to say the provinces of Brazil had a huge amount of debt.”

“The losses have to be allocated in a particular way so that everybody knows who lost what,” he added.

Marcellino highlighted the human cost of such losses, stating the economic problem had “blown into a fully-fledged social crisis…[with] more than 15 million people unemployed”. While lamenting the short-term costs of labour market reforms he saw few alternatives, with fiscal stimulus now low in credibility and an increase in exports marred by weakening international demand. With incomes falling the possibility for more private consumption was also seen as low, and Marcellino saw uncertainty in greater private investment.

Political problems

For Culpepper the euro zone’s failures could be put down to a lack of solidarity at the outset: “Real solidarity in politics comes from shared risk or shared membership. Membership of the euro zone right now has roughly as much attachment for most Europeans as my membership to Lufthansa air miles.”

There must be a political overhaul alongside the economic one, he said, as the citizens of Europe at present see themselves in national rather than European terms. “We have to develop a political rationale for shared distribution,” he said, “Somehow we have to take what is happening and use it to reenergise the way that political parties behave with their populaces but more importantly engage with the cross-border debate.”

Politicians’ actions have been grossly inadequate according to Wolf, who criticised the “fundamentally foolish and irresponsible legislation which cannot possibly be made justiciable”.

“Telling governments to slash deficits, cut spending and raise taxes on the proposition that they will fail to meet a notional bargain which cannot be measured by anybody at all…Even by standards of the European Union, this strikes me as truly insane.”

While the panel concluded that a period of reform and adjustment was the most likely course for the euro zone, all saw weaknesses inherent in the member states’ approach. Wolf left little optimism in the air with his damning summary of the single currency: “This is a political project and the political project won’t work.”

Tags: , , ,