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The real reason for euro zone collapse: heterogeneity of euro states

, October 15, 2012, 0 Comments

The first article of this Two part Series

Two weeks ago (Oct. 4), the European Central Bank (ECB) decided to let its key rate unchanged at 0,75%, its level since last July. The ECB also confirmed its program to repurchase debt, which includes unlimited buying on the secondary market of public debt securities of troubled countries.

Different European voices regarding the ECB plan

This program aims at reassuring investors regarding the euro zone, particularly Spain and Italy (whose borrowing rates have jumped this summer to unsustainable levels). To qualify for this program, these states will be forced to comply with a program of reforms, such as Greece , Ireland and Portugal.

As a matter of fact, the program has not been implemented yet, even if France and the European Union (EU) urge the reluctant Spain to act. Spain prefers to refer to the German stance that argues that the Spanish rate eased since the announcement of the program, and that Spain has managed to borrow 3.992 billion Euros, at a reasonable cost.

Is there any reason for Germany to ask Spain not to use the ECB plan?All this happens in a context where indexes measuring the activity of the private sector in the euro zone, say it has continued to contract in September for the eighth consecutive months.

Measures to reduce costs and increase layoffs in companies all over Europe darken further perspectives. If the German economy is showing signs of stabilization thanks to its extra-EU exports, it is threatened by the acceleration of activity decline in France and Spain, and by the severe contraction phase experienced by the Italian economy.

The only country which seems to have recovered is Ireland that started its recovery plan long before most European countries faced any crisis.

Historical institutional roots as an origin for the disagreements

To an outsider, especially from a Federal state like India, this European situation may seem quite strange. In India we are used to arguing about political direction to take but we end up deciding upon a direction to follow and we stick to it.

We are used to differences in different states’ economic activity, some states having more difficulties or handicaps than the others, some being more indebted than the others, some having a clearer look of the future than the others but it does not prevent us from acting globally for the economy at the Federal level.

Why are then the Europeans unable to take a unified direction, be it right or wrong?  In my opinion, there are two explanations: on one hand, there is no federalism in Europe; and on the other, economic systems are still very different.

For both, the common roots are to be found in History.

Federal system as a dead end

In the early 1950s, the founding fathers of the EU [i]  wanted to build a unified and fraternal Europe to free Europeans from repeated wars all over the centuries, in a motus vivendi of “never again” following the second World War. The 2012 Nobel Peace Prize underscores this fact.

The founding fathers were all trained as lawyers, not economists, so they thought that institutional building of Europe was necessary, thinking that it would lead naturally to a Federal system as in other countries, especially the USA.

However they knew that their people were not ready for a Federal system, war memories being still fresh. This is the reason why they decided to start with economic ties, thinking that once tight economic links would be established among European nations.

Then they would overcome their different political views, and Federalism would naturally impose itself on everyone as the best way to stabilize Europe.This was just the beginning of the thirty-year post-war economic boom.

When the political wish to go further in the building of Europe came in 1986 and 1992, crises had already struck Europe! As we all know, it is easier to make courageous political decisions and to make concessions in prosperous times than during the crises.

History and economic situation did not let the wish of the founding Fathers realize!Leaving the politics aside, to my point of view, and probably to any Indian, the solution to cure the European debt crisis seems obvious: federalism.

Even if voices in rich Indian states are complaining, it seems obvious that our global prosperity comes from redistribution from some states to the others:  our country is based on a global economic imbalance.

Losing one state would compromise not only our political integrity but also our economic strength towards external economic partners. Why do Europeans can not come to such a conclusion? In the US, nobody would question that the State of Wyoming or Iowa would help the indebted States of California or New York at a Federal level.

Why are the Germans so reluctant to help Greece when stability of the Euro Zone, and even the EU, is jeopardized?

Part of the answer is probably that the question was neither posed nor answered at the proper time, the 1997-2007 period. Of course, the present problem would not have been posed had the budgetary solidarity been established during the 1997 – 2007 economic expansion.

Prosperity helps people to open up to the others and share values. Had the system been existing earlier, nobody would have objected to helping Greece or Spain instead of investing into their own peoples.

It would then be easily acceptable for everyone to help their own states while sharing the debt burden of the EU member states. But since it had not been handled previously, the problem has to be faced in bad times.

How can you ask the Germans to help the Greek when most poor Germans have seen their revenues dramatically fall in the last 3 years? Economic dangers make people protect themselves from anybody who could take their part of what is left (the reason why racism is increasing everywhere in Europe).

How can you ask political courage from German or Dutch parties to help while a large part of their population is worried about its own future, about pensions?.  During the crisis, in those European countries that have all their own political system, and the politicians their own political agenda and electoral preoccupations, one cannot ask the European politicians to take any risk against the popular national opinion.

Concerning national opinions, the importance of national media in European countries can not be ignored. The Indians can have a global picture of India more easily than the Europeans. The phenomenon is reinforced by the fact that the Europeans speak different languages (there is no real common language).

A vast majority does not really know what is said in other European countries in media, despite the internet, except when they really wish to know.They are more concerned with their national economies. In each country, journalists tend to hold the others for economic problems, considering the national policies to be the best way, at least the most adapted to their country’s own situation.

TV or radio reinforce negative feelings towards other European nations, it reinforces the opposition to helping the Greeks or the Spanish in France or the Netherlands.

In this context, there is no way that a Federal Europe would be built. For quite a long time, it will be a dead end. To this point, one must consider three outcomes:

–  The disintegration of the euro zone, the heart of Europe, that most political decision makers refuse, even if national opinions – helped by the media – tend to be increasingly in favour of it blaming Euro to be the cause of their reduced purchasing power.

 Many politicians and intellectuals all over Europe are convinced that it would be a regression, that it would lead to more economic turmoil in many states, consequently to violence, racism and social instability.

Shortly it would mean going back to a situation against what EU was constructed.

–  The separation of euro zone in two or three parts: one around Germany and richer states; one around France and Italy which would face difficulties but would cooperate as a remaining of the socialist spirit still present in these Latin states; and some states like Greece that would leave and might drift a deeper economic and political chaos.

–   Some European leaders prove a bit more courageous than in the last months and try to go towards more solidarity, cooperation and concession regarding the debt crisis even if the people of their nations feels betrayed: it seems that this is what Germany and France are trying to do.

The newly elected socialist President has made concessions towards austerity and against its electoral promises to satisfy Germany, while Germany accepts that the ECB buy the debt of states in difficulties. This German reaction was unimaginable a few months ago.

In that way I am a bit more confident in the future of the Euro zone than I was six months ago. It seems that the European politicians’ will to save Europe and the Euro zone is still stronger than the voice of economically frightened people.

But even if one tends to accept some gradually increasing solidarity, would it be enough? Differences in national economies – the real problem of the Euro zone – remain and as a consequence, the solutions are only provisional.

Unless there is a European Federation or the United States of Europe, there will not be any global decision making with a common accord, neither the economic reforms necessary for a more unified and better coordinated European economy which may allow all the European leaders go in the same direction.

The Second article of this Two part Series
[1] The German Konrad Adenauer, the Luxembourger Joseph Bech, the Dutch Johan Willem Beyen, the Italian Alcide De Gasperi, the French Jean Monnet and Robert Schuman and the Belgian Paul-Henri Spaak.

About author
Laurence Dupré is Associate Professor of Economics and Management at Université Paris Est Marne-la-Vallée, member of the Research Center CEMI-EHESS and has been financial analyst at Fortis Securities France. She graduated at University Paris 1 Panthéon-Sorbonne, was a post-grad student at Trinity College Dublin, and a Phd student at Ecole des Hautes Etudes en Sciences Sociales, Paris. Her domain of research is mostly BRICS financial markets, cross-cultural communication and behavioral finance. ...more