The Eurozone also rises
The EU economy is finally growing again, but will need years to resolve its structural problems
30. Aug. 2013 –
First, the good news. Between April and June 2013, Greece’s economy only contracted by 4.6 percent against the same quarter in 2012. The social, economic and political catastrophe in the Mediterranean country hasn’t come to an end, but the situation is not as dramatic as it used to be – in the first three months of this year, the figure was 5.6 percent.
These are the cheerful messages Europe is sending the world right now. Still its partners will have to cough up several more billions for another Greek aid package.
But to limit the news to Athens’ problems would be too harsh. Actually, there are signs that the 17 countries in the eurozone now have the nadir of their economic slump behind them.
“The first phase of structural change appears to be slowly coming to an end,” said Ferdinand Fichtner, an economic researcher at the German Institute for Economic Research (DIW) in Berlin. In Greece, Portugal, Spain, Cyprus, Italy and other eurozone countries, millions of people have no job. The unemployment rate there is as high as 27 percent right now. Thousands of companies are broke, many have cut their employees’ salaries and states have cut back their social welfare schemes and payments. Their reasoning: Government debt needs to shrink, and the economy requires lower production costs to become competitive and generate stable income.
Is this the turnaround in the euro crisis?
Certainly, the statistics on the economy have finally stopped their downward trend. They are not good, but at least they indicate an improvement. Eurostat, the EU’s statistical office, recently confirmed that the EU as a whole grew for the first time in 18 months. In the second quarter of 2013, joint economic output rose by 0.3 percent. Hopes are high because France (+0.5 percent) and Portugal (+1.1 percent) joined Germany (+0.7 percent) in boosting production – in all cases, against the previous quarter.
Most economists are taking this to mean that the outlook is positive for a gradual recovery. “The second phase, during which new structures will be established, could be five to 10 years long,” according to Fichtner.
In this phase, one area of focus will be the development of new, competitive producers, whose products will generate higher demand in the domestic and international markets. Greece, for example, could target the food or pharmaceuticals sectors, or concentrate on producing power from sun and wind plants. The country is trying to modernize its administrative system to channel money away from the shadow economy and into its tax revenue coffers. “Barring a political catastrophe, we seem to be poised for a European upturn,” said Jens Boysen-Hogrefe from the Kiel Institute for the World Economy.
However, not everyone believes that Europe is really overcoming its crisis. James K. Galbraith, an economics professor at the University of Texas in Austin, is one of the skeptics. “Looking at the situation in the cold light of day, Europe is still in a desolate condition. It's closer to collapse than a solution to the crisis.”
Galbraith and others underscore the many risks that could have an adverse impact on the slight recovery. If, for example, convicted tax evader Silvio Berlusconi allows the Italian government to go under, the trust that international investors are placing in Europe again could quickly dissolve.
Major banks in Germany, Spain, France and Italy are not necessarily on a firm footing. It is entirely plausible that some of them are still holding thick portfolios of worthless investments and lack the equity to withstand market shocks.
It is clear by now that Greece faces its next debt restructuring and that its euro partners, with Germany leading the pack, will have to reach deep into their pockets for a third time. The German government tried to ignore these facts ahead of the Sept. 22 elections, but four weeks ahead of the poll, Finance Minister Wolfgang Schäuble let the cat out of the bag.
Athens’ debt level is around 170 percent of its annual GDP. And the amount owed to the EU bailout fund, the European Central Bank, and the International Monetary Fund is rising; among other reasons, because the Greek economy is still contracting.
Athens is already making interest payments equal to far more than 10 percent of the national budget. This burden may seem bearable, but if it continues to grow, it will throttle the government.
The obvious next question is: Do Portugal or Spain also need to impose a haircut? Even discussing the issue could open the door to another crisis of confidence, widespread insecurity, a rise in the interest rate for government bonds – and facilitate the return of the crisis.
Galbraith has also voiced a very fundamental, critical question. His accusation: The rich, hardhearted North is leaving the poor, needy South high and dry, violating a basic premise of the European Union in the process. “How can they stand by and watch while people in Europe don’t have anything to eat,” asked the American economist.
Claus Offe, professor for Political Sociology at the Hertie School of Governance in Berlin, follows a similar line of logic. He points out that in the wake of the crisis, anti-democratic, anti-European, and radical right-wing organizations like the Greek Golden Dawn party or Jobbik in Hungary are gaining in popularity. Offe’s recommended solution: “reconstructing the social welfare state, which has been riddled with holes on a national level, and elevating it to a supranational level.”
This approach is gaining traction in Europe, too, on the grounds that the EU can only overcome its crisis if it stops and reverses the process of impoverishment that started in 2008. Greece, Portugal, and Spain would not be able to withstand an unemployment rate of 27 percent for very long.
DIW economist Fichtner and his colleague Sebastian Dullien have developed a concrete response to this challenge. They both argue in favor of introducing Europe-wide unemployment benefit. Under this model, workers in all EU member states would transfer part of their social security contribution to Brussels, and receive part of their benefits from Brussels as required.
This system has at least one advantage in comparison to today’s purely national social welfare systems: A European unemployment benefit scheme would guarantee employees some level of basic security, even if their country is reeling under the impact of a crisis. European social welfare transfers would also stabilize demand and the economy in general, according to Fichtner and Dullien.
However, there is little appetite for such a proposal among European decision makers. Many politicians, especially in Germany, think it goes too far. Berlin’s position is that social policy has always been a national issue and will remain so. Chancellor Angela Merkel likes to emphasize that Europe will have to continue along the stony path of austerity and restructuring – while pointing to the current slight upturn as proof that the approach is working.