M.N. Hebbar :
It was a widely held belief in the EU that the crisis was all about government profligacy that was now compelled to make amends by slashing spending even in the face of mass unemployment. Greece, the ‘bad boy’, was held up as an object lesson of what will happen if we don’t watch out. Indeed, the government of Greece was irresponsible and which was cleverly hidden by creative accounting, with consequences that we are all now familiar with.
But lo! and behold! By the EU’s own rules of its rotating presidency, Greece has just taken over the reins as the current president and has given rise to speculation over a rather grim picture of the next six months which will prove critical as Greece will be tasked with striking a flagship deal on the eurozone banking union legislation.
It is not government profligacy alone that has brought about the eurozone mess. Politicians have ensured that the single currency would be adopted well before the continent had a political union in place to facilitate the experiment. One only needs to look at Spain, which on the eve of the crisis seemed a model fiscal citizen. Its debts were low – 43 per cent of GDP in 2007, compared with 66 per cent in Germany. It had budget surpluses and had exemplary bank regulation.
But a housing boom between 2000 and 2008 saw the prices of goods and services produced in Spain rise by 35 per cent, compared with a rise of only 10 per cent in Germany. Spanish exports became increasingly uncompetitive. And then the bubble burst.
Unemployment has shot up – it is 26 per cent today – and the budget went into deep deficit and a splash of red ink. Its woes in the crisis are now well documented.
Greece is in even deeper trouble because the Greeks, unlike the Spaniards, actually were fiscally irresponsible. Austerity measures have produced violent street protests and have not ceased. Greece, however, has a small economy whose troubles assumed huge proportions mainly because they spilled over to much bigger economies, such as Spain’s.
What happens now? Deepening disquiet within the eurozone has seen clamours for a thorough overhaul of the treaty to safeguard the single currency that presently is so disruptive. A new EU treaty is certainly needed to put the eurozone on firmer foundations and to protect the interests of countries like Britain that are outside the single currency area.
Britain has been a strong voice in demanding new rules that it says is inevitable to strengthen the euro and protect those outside the eurozone. Indeed, Britain’s Chancellor of the Exchequer Peter Osborne has warned European leaders that Britain could be forced to leave the EU unless its treaties are rewritten as current rules are seen as “not fit for purpose” and bad for Britain and the eurozone.
EU’s declining competitiveness is seen as an important and compelling reason for immediate reforms. Figures have it that the EU accounted for 7 per cent of the world’s population, 25 per cent of its economy and 50 per cent of global welfare spending. This is untenable in the face of economic sense.
Although Germany’s Chancellor Angela Merkel has won her national elections, she is rather shaky on the idea of a full-scale treaty revamp, reflecting fears across Europe that this would trigger awkward referendums, thereby strengthening the euro-sceptic cause. But most of the EU bloc’s 28 member states would gladly avoid treaty renegotiation as they fear it could lead to referendums which could turn politically disastrous, witness the cases of France, Netherlands and Ireland in recent years. Germany was agreeable to treaty changes in the past but had increasingly tried to keep revisions narrowly focused on eurozone reforms in order to avoid succumbing to the truth.
The truth is that Brussels is being forced to adopt legal manouevres, so to speak, in order to stretch existing treaties to fit a situation they were not designed for. However, it cannot be denied that there was a compelling case for reform, with benefits to the member states such as Britain of the EU single market far outweighing the costs.
In the meanwhile, migration within Europe has raised its controversial head again. Germany’s coalition has been shaken by partner CSU’s call for new measures to prevent EU immigrants moving abroad to access Germany’s liberal welfare benefits but the grand coalition with SPD has withstood the challenge.
Here, Britain’s David Cameron has joined the chorus of similar protests from across the EU spectrum fearing hordes of immigrants from its member states seeking access to its liberal welfare benefits. The issue has been exacerbated by the recent lifting of restrictions by the EU that debarred Romania and Bulgaria, although EU member states, from seeking employment in other EU countries. But European Commission President Jose Manuel Barrosso has allayed such fears by saying that national governments have sufficient powers to curb possible abuse of immigration within the bloc.
The eurozone debate is not going to end anytime soon. Christian Lagarde, Managing Director of the IMF has warned the EU that deflation remained the biggest threat to recovery in the eurozone. New bailouts will surely be accompanied by high unemployment and savage austerity in tow.
‘Austerity’ will, however, continue to be the watchword for the EU as a whole and Germany in particular, asserted finance minister Wolfgang Schaeuble at the just concluded World Economic Forum meet in Davos, Switzerland. Brace yourself for fresh bailouts!
(M.N. Hebbar is a veteran journalist and commentator on European affairs)
