As unemployment continues to ravage southern Europe and the economies shrink, a number of questions are being asked: How much solidarity could the North show to the South? How could this be done? Is it realistic or fair to expect taxpayers in some countries to bail out the others that have been less than disciplined and have lived ostentatiously? What does European solidarity really mean? What is it worth? Should a member that has mismanaged its economy in a way that threatens the survival of the whole group be asked to leave? At what point, and who decides this?
The vision and illusion
European integration was conceived as a project built on solidarity. This invoked the idealistic principle of one for all and all for one. It implied that all would stick together, share the pains of the bad times and enjoy together the good ones. To minimize the occurrences of “bad times”, some ground rules were set which all were expected to respect.
While a lot has been achieved in various aspects of the European project overall, over the years, there have also been some notable failures. These failures have today translated into nightmare situations for many in some of the European Union Member States, especially those that adopted the Euro as a common currency. There are currently lots of debates on the best way to get out of the crisis. While some advocate “growth”, others see adopting “austerity” measures as the way out. Whatever the policy adopted, one thing is clear, there are hard times ahead. Economic and financial figures are very bad in many countries and they are not going to get better anytime soon. While the focus has been on the political and economic aspects of the problem, there are social and human dimensions too. There are people in many Eurozone countries suffering the hardship of the current crisis. At the same time, some countries have continued to witness growth and their people have remained in relative prosperity.
Against this background, the issue of European solidarity has been raised in various quarters and has become a subject of debate. The question is; how much support should one member country expect from the others in times of trouble? Putting it more bluntly, what does one for all and all for one really mean?
The single currency was conceived as one of the key pillars of European integration. It was designed to implement and formalize the aspects relating to monetary integration. Together with the Schengen Treaty, which removed internal borders and created a 25-nation free movement area in Europe, the Euro is one of the most visible manifestations of the European project. To the political leaders, this was a key facilitator for the common market and therefore, one more step in the process of building a united Europe. To the man or woman on the street, the advantage of the common currency came in the form of its convenience in cross-border transactions.
At the design stage of the Euro, Germany insisted on the need for a “no bail out” clause and the independence of the future European Central Bank. A set of rules would guarantee the strength of the new currency. To set it in stone, the Maastricht criteria were made permanent under the “Growth and Stability Pact“. However, both soon showed their vulnerability. Greece joined the single currency without meeting the criteria, Germany and France for their own domestic reasons broke the rules of the Pact and a free-for-all floodgate was opened.
A case of mixed fortunes
In Greece, things might have worked differently if there had been restraint and discipline. But both of these were obviously in short supply. They got it wrong by interpreting membership of the Eurozone as a license to spend, spend and spend even more. Irresponsible policies by politicians who put premium on pleasing their electorate created a feel-good environment which was a step towards disaster that was just waiting to happen. From just around 90% a few years earlier, Greece managed to run up national debt to cancel out euro-for-euro its entire gross domestic product by 2001.
There were various factors in other countries that worked very much against their economies. Certainly, it is over-simplistic to blame all the woes on these countries themselves.
A monetary policy designed to get Germany out of its own crisis made things worse for the others. Countries like Germany and the Netherlands kept their finances sound because their economies were growing at the expense of their neighbours. This growth was based on exports to Southern Europe. Germany based its growth on social dumping in the same way as China by keeping wages comparatively artificially low.
In a nutshell, while Germany managed to keep wages down, those in Southern Europe became artificially high, and disparities started to build in the trade balance and in debt. A situation of north-south lender-borrower resulted from the imbalance.
European Solidarity: A two-way traffic
Solidarity did exist at the EU level under the form of structural funds – capital transfers from net contributors to net recipient countries. These transfers were intended as compensation to Southern Europe for the increased imports from their Northern partners. However, when Germany faced its crisis, the ECB monetary policy was tailored to the needs of the country. This more than cancelled out the funds transferred. As a result, today, every member country of the Eurozone feels itself a loser in the euro game. Northern Europe is very tired of subsidising its “lazy” Southern neighbours and Southern Europe feels resentful that the euro is bringing them unbearable doses of misery under the financial tyranny of their Northern neighbours.
Europe’s economic policies and institutional architecture
It is clear that without the right policy mix, any solidarity scheme that may be prescribed will be useless. Therefore, a very first step to take would logically be to correct the economic policy. So far, one has seen that what was originally a Greek problem has rapidly spread to become that of the Eurozone. Wrong economic policy and especially, wrong monetary policy had a lot to do with contagion to other countries that have now become vulnerable. Thus, a first step would be to correct this.
When a monetary system is designed, there is a need for two types of institutions; a central budget and a central bank. The EU’s structural funds have timidly played the role of a central budget but the European Central Bank (ECB) has not ensured financial stability. On the contrary, it has created a big financial mess. Its independence has been questionable and it has only served the interest of a few countries.
Economic realities of external forces on the Eurozone
It is not only domestic economic policy that matters. It is important to note that Europe does not operate in a vacuum and other economies have used a mercantilist policy. Europe belongs to the world trading body which implies that what happens outside Europe has the potentials to affect individual European economies as well. And indeed, it does. For example, European countries that once had very healthy export markets to several developing countries, notably in Africa and the Middle East, have witnessed these markets evaporate into thin air. Cheap exports from China and India have flooded the markets and most European exporters have found themselves very uncompetitive. Southern Europe once specialised in labour intensive manufactures saw itself excluded from the European market. Eastern countries did not even have a chance to benefit from their abundance of cheap labour.
Social solidarity for integration – how far can it go?
Unemployment is ravaging Southern Europe and the economies are shrinking. They are set to even lose more weight, making a bad employment situation even worse. Belt tightening in whatever form can only lead to more woes.
As this continues, a number of questions are being asked: How much solidarity could the North show to the South? How could this be done? Is it realistic or fair to expect taxpayers in some countries to bail out the others that have been less than disciplined and have lived ostentatiously? What does European solidarity really mean? What is it worth?
Should a member that has mismanaged its economy in a way that threatens the survival of the whole group be asked to leave? At what point, and who decides this?
The situation in Europe calls for a new approach. There is for example a need for a central administration with a sizeable budget which can act as an automatic stabiliser. Solidarity among countries would then be, if at all, a mutual help and assistance among countries sharing the euro as their currency. There is also a need for a fiscal authority.
The views of the people
In spite of some discontent with the working of the EU and the unsatisfactory performance of its leaders, solidarity remains strong. Statistics show that in most countries, a majority of the people think that their country should help other EU countries in trouble. Even in the UK, 45% of the people are of this opinion. Also, all the European countries (except Slovakia and the UK) strongly favour contributing to the Financial Stability Fund to aid governments with budgetary difficulties.
Despite the fact that the European project has suffered a significant blow to its credibility and feasibility, in part through an intensified negative pressure by the press, the European sprit and the solidarity among Europeans has remained high.
The last words
Most of the problems encountered by Europe could have been avoided if the current leaders and those who designed the institutional architecture of the common currency have had some knowledge of international economics. Their failures caused a borrower-lender, north-south situation: Northerners and Southerners will need time to come to terms with what has happened, forgive each other, and heal their wounds. Unfortunately, inappropriate economic policies continue to be prescribed through an international treaty and constitutional amendments. Yet, the important issues that have long-term implications such as, fostering growth, changing the institutions or reforming the banking system are currently absent from the agenda.
The full paper
This article is extracted from a Read-Online.Org reflection paper (which contains a number of graphs) written by the authors. For information on the paper, please click on this link.
José Antonio Poncela, is a member of the Editorial Board of Read-Online.Org. He was a former General Director of Budgets, Economic Planning and European Funds at the Government of Castilla-La Mancha. He is a researcher at CEET and a lecturer of Macroeconomics at the University Carlos III. (Contact: Jose-Antonio.Poncela@Read-Online.org )
For other contributions by this author, please visit his page by following this link
Edward Ojo is a member of the Editorial Board of Read-Online.Org and a socio-economic researcher. (Contact: Edward.Ojo@read-online.org)
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Opinions expressed in this article are those of the author and do not necessarily reflect the editorial views of Read-Online.Org