In a recent article, Alexander Reisenbichler and Kimberly J. Morgen argue that ‘Germany won the Euro Crisis’[i]. I doubt that any country can be the winner of a major economic crisis, especially if we are talking about an exporting nation. Of course Germany does benefit from some economic developments of the current Euro Crisis–in particular the low interest rates for German government bonds which reduce public spendings for interets payments on public debt. However, as an exporting nation, Germany depends on stable economic conditions in Europe. Thus a sluggish economic situation in several European economies has a negative impact on German exports and thereby on Germany’s real domestic product (GDP) and labour market. Hence I would argue that Germany benefits from the Euro, not from the Euro Crisis.
Over the past year, Europe has enjoyed calm financial markets. At the core of the market’s comfort were two assumptions about policy. First, that the European governments would do just enough to keep the process of European integration moving forward. Second, that the ECB would, in the words of Mario Draghi, do “whatever it takes” to save the euro. The centerpiece of the ECB’s subsequent efforts was expanded liquidity (through long-term repurchase operations and easier collateral requirements for banks to access ECB liquidity) and a commitment to purchase government bonds to support countries return to market (the OMT program). Even many pessimists who fear that Europe is trapped on a unsustainable, low-growth trajectory remain optimistic that Europe will do what it takes to navigate the near term risks. It may be time to question that optimism.
As many have noted, there is an increasing sense of adjustment fatigue in Europe, reflected in pressure on governments and the rise of anti-austerity, anti-establishment parties across the Eurozone. In rhetorical terms, Europe has responded, and fiscal policy looks likely to be broadly neutral in the year ahead. However, an overall fiscal relaxation that is needed in the euro area as a whole looks unlikely, as peripheral countries can’t afford much additional spending, while the core countries that can spend more seem disinclined to.
The global economy is strongly integrated, and domestic economic policies are strongly… well, domestic.
A landmark report by Chatham House and the Centre for International Governance Innovation (CIGI) argues that the way in which nations design their economic policies is woefully inadequate to prevent financial and economic crises.
Entitled “Preventing Crises and Promoting Economic Growth: A Framework for International Policy Cooperation“, the report is the outcome of a nine-month international research project. Authors Paola Subacchi and Paul Jenkins consulted with finance and foreign affairs ministries, multilateral institutions and research institutes in Europe, Asia and North America.
They call for national policy-makers to recognize the spillover effects of their policies on other countries as well on the wider economic system. In practice, this would mean accompanying internationally relevant domestic policies by “international impact assessments”.
The report also proposes a new framework for G20 policy cooperation. Indeed, cooperation tends to be “only feasible when interdependencies are made clear by incidents of instability and volatility as happens during crises, i.e. when the costs of non-cooperation are painfully evident“.
As Asian economies keep posting positive growth numbers with the momentum for a full recovery shifting irreversibly to the East, and as banker’s bonuses and Wall Street profits return to pre-2007 days, the temptation to look away from the root causes of the global financial crisis is as great as ever. But has the chance to learn a valuable lesson really just been lost in the face of a fragile recovery?
Some resources from our Digital Library to help you answer this key question:
- Today’s ISN Insights partner takes a look back at the recession, particularly lessons learned/not learned.
- A Congressional Research Service report on the similarities and differences that define this latest recession compared to previous ones.
- Historical growth patterns and the current crisis in context in a Kiel Institute for the World Economy paper.
- A Chatham House report on the impact of the financial crisis on EU-Asia relations.
- The reasons why the global financial crisis did not impact migration flows across the world as much as expected in a Geneva Center for Security Policy paper.
- A Center for Economic and Policy Research paper on the fragility of the recovery.
With Spain next on the list of eurozone countries on the brink of financial abyss, nerves about the future of the great European experiment are at an all-time high. The narrative of the euro’s crisis seems self-fulfilling as markets move from one financially challenged euro country to the next, and after the Irish bailout, Portugal and Spain seem to be next in line, with cups in their hands and market speculators on their backs.
The collapse of the Spanish economy, with its overstretched banks, chronically high unemployment and a much larger economy than previous recipients of EU/IMF bailout money, is a particularly worrying prospect, yet European leaders seem committed to saving the euro. Even Britain’s George Osborne, the deeply euro-skeptic Chancellor of the Exchequer, acknowledged last week that despite not joining the euro (and still thinking it was a bad idea- “Hah, I told you so!”), it is in Britain’s interest to help with the bailout efforts and to ensure that neighboring countries like Ireland are repaired and revitalized.
With the air of crisis set to loom over Europe for months to come, EU leaders and Europhiles everywhere must be asking themselves: How do we get out of this mess (and how did we get into it in the first place)? Because as much as Americans or even the Brits might enjoy gloating in the face of this largely self-inflicted mess, the EU and its experiment with a common currency are here to stay.
For an excellent set of resources on this highly topical issue, check out our Euro keyword.