Assessing the current situation of the Euro crisis

Nicolas Véron, Senior Fellow at the Brussels-based Bruegel Institute, is a renowned economist specialised in financial regulation and in the transformations of capitalism. As he will be discussing the situation of the European economy at THiNK2012, it gives us an opportunity to assess the recent events and the measures taken by the European Union to deal with the ongoing crisis.

While the Spanish, Portuguese and Greek people protested massively against the “austeritarian” economic policies imposed by their governments, many economists raised their voices to criticise measures that would lead the eurozone countries to more recession, thus to a general pauperisation of the population bound to deepen the socio-economic inequalities, and to render impossible the path to recovery and growth.

The European Fiscal Compact that will come into force in 2013 is a move towards a complete economic integration of eurozone countries, under the 3% “grail” – this number marking the limit for national budget deficits. Countries of Southern Europe, deeply entrenched in crisis and recession, have chosen to reach this goal through violent cuts in public spending and a considerable raise of taxes. To finance their expenses, states rely on their fiscal revenues and on loans they take out on the financial markets – the worse their economic condition is, the higher the interest rates will be, generating a vicious cycle towards economic downfall. It is interesting to note that the main argument that comes back over and over in favour of drastically reducing the deficit and debt is a comparison made with a household: “a family cannot possibly spend more than what it makes”, they say, “and a country should stand by this rule as well.” The inanity of such an argument is typical of the agenda being pushed forward by the power structures in the EU, related to the role – or rather absence of role – of the European Central Bank.

Indeed, the ECB’s statuses prevent it from printing out money and refinancing states directly; it is only allowed to go through open market operations and banks, leaving to these private institutions the role of helping countries recover from an unprecedented crisis. A crisis which stems from the stimulus plans the EU put in place to save the banks after the financial breakdown of 2008, itself the result of years of deregulation and of non-supervision of these private actors. What is even more incomprehensible in the policies of the ECB is that it refuses to help states at the onset of their difficulties, yet finances them by triggering the European Stability Mechanism only once these states are already in an extremely dire situation. Of course, preventing the continuous collapse of Europeans’ purchasing power through an intervention from the ECB would generate inflation, the primal fear embedded in Germany’s position, which fears this would open a Pandora’s box that would lead, in their opinion, to hyper-inflation – the image of people carrying money in baskets and wheelbarrows: this could not be further from the truth, as Jean Pisani-Ferry (president of the Bruegel Institute) points out that a 2% level of inflation would be acceptable. Furthermore, once the storm would be weathered, the ECB could adjust the excess of liquidities by reversing its action, thus lowering the inflation. Unfortunately, Germany guards its principles relentlessly, and the legal status of the ECB prevents it from acting on the inflation and dealing directly with states.

Although the dogmatic and monetarist hawks would want us to believe that the publicly funded social programmes – that they want to dismantle – are the cause of the excessive debt of European countries, the real causes lie in the essence of the neo-liberalism they have pushed for. This ideology relies on the development of debt on various different levels, from the employee, who needs a credit because his salary has been lowered, to the State, which contracts loans because massive tax breaks have caused the plummeting of its fiscal revenues. To reduce and eventually get rid of their debt in the current situation, states can choose to continue on the austerity path, reimbursing their creditors completely at the expense of the massive impoverishment of their population and of the dismantling of social programmes; or states can resolve the situation through inflation or default. As pointed out by economist Frederic Lordon, the EU has clearly sided with the creditors, promoting ad nauseam austerity measures. The gridlock exercised by those who fear inflation leads the eurozone to its implosion, whether through the default of one (or more) States, or through the outburst of a violent – and justified – revolt of European populations against the equally violent austerity policies.

It seems quite clear that this is not an issue that should be resolved by dogmatic minds, insofar as it is that precise mindset which has led the EU to where it stands today. The global financial markets and the economy of many countries rely on the imports of European States and on the purchasing power of European consumers, which makes this historical moment more than a Euro-centric situation.

We are impatient to hear Nicolas Véron’s take on this issue at THiNK 2012.

- Ayan Meer

(The views expressed in this column are the writer’s own)

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