Europe’s Quest for Harmony

To Germany’s credit, there are signs that it is envisioning a future for the entire Eurozone

On 13 January, Standard & Poor’s slashed the credit ratings of eight EU countries, saying that Europe’s new ‘fiscal pact’ addresses the euro crisis only partially. In the rating agency’s view, beyond government overspending by EU members, the crisis can be traced to ‘rising external imbalances’ and ‘divergences in competitiveness’ between the Eurozone’s strong core (Germany) and weak periphery (Portugal, Italy, Ireland, Greece and Spain). “Yes, the basic problem is one of structural imbalances in competitiveness,” agrees Derek Beach, associate professor of political science at Denmark’s Aarhus University, “The current account deficits/surpluses for 2010 or 2011 show that countries like Germany profit enormously from the euro, whereas Italy and Spain are relatively uncompetitive, resulting in the need to import large amounts of capital.” Given the unevenness, he adds, the European Central Bank’s one-size-fits-all monetary policy (cheap credit for all) inflates property bubbles and bloats banking sectors in sluggish parts of the zone, leaving them bedevilled by debt. 

“The main flaw of the politicians’ plan is the assumption that fiscal austerity, combined with a new version of the original Stability and Growth Pact, will solve the problem,” says Pierre Siklos, senior fellow at Centre for International Governance Innovation, Canada, “There was little thought given by politicians to the consequences of an ageing population and differences in competitiveness on future economic growth.”

Austerity might mean a stagnant economy, and if this begins to trouble Europeans at large, reforms to fix other problems might run into popular resistance. And a backlash could kill the euro dream. European leaders are not unaware of the fact that private efforts at crunching costs and boosting productivity on the periphery are crucial to the euro project’s survival. The ‘Euro-Plus pact’ signed in mid-2011 focuses on fostering competitiveness by monitoring wages and productivity trends across the Eurozone. However, Daniel Gros, director at the Centre for European Policy Studies, is sceptical of its achieving its goal. “Competitiveness measured as relative unit labour cost is a relative concept,” he says, “Hence, if one wants to restore the competitiveness of Greece, then Germany must accept deterioration in its.” Why would Germans do this?  “Well, it is in Germany’s interest to address it,” says Almut Möller, head of programme, Alfred von Oppenheim Centre at The German Council on Foreign Relations, “There is a growing realisation among Germans that its competitiveness is based on the competitiveness of the EU as a bloc.” 

To Germany’s credit, there are signs that it is envisioning a future for the entire Eurozone; Chancellor Angela Merkel’s call for austerity and efficiency extends to private enterprise as well, especially in weaker countries. If this serves to harmonise business efficiency across the Eurozone, it could yet save the common currency. “A sincere ambition is there to address productivity across the entire Eurozone,” according to Möller, “but in terms of delivery, Europe still has a long way to go.”

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Shailendra Tyagi