The eurozone has entered a vicious circle feeding on consolidation measures that weigh heavily on growth, hampering deficit reduction and requiring new adjustments to be made. Since the countries caught up in the crisis do not have the option of depreciating their currency, all they can rely on is structural reform to make their economies more flexible. Since these measures can only take effect gradually, ‘adjustment’ has become synonymous with recession.
The gravity of the eurozone situation can be appreciated if a comparison is made with that of the United States. Growth in Europe collapsed in 2012 while continuing to be maintained in the United States. A 3% growth rate is expected for the United States in 2014, but the International Monetary Fund (IMF) expects a modest 1% growth rate next year in the eurozone. Reflecting this development, the unemployment rate ought to decrease to 7.5% in the United States, but it is expected to rise to 12.3% in the eurozone in 2014.
There are numerous factors to explain the stalling of the eurozone economy.
- The current budgetary consolidation is considerable and widespread.
- The problem of moral hazard limits the scope of financial aid available for the countries in difficulty, thus contributing to an increase in the adjustment efforts they are required to make.
- The crisis has damaged the transmission channels used by the European Central Bank (ECB) for its monetary policy. As a result, bank interest rates are considerably higher in Italy and Spain than in Germany.
- The competitiveness deficit of the countries of southern Europe has deprived these countries of the option of recovery through exporting. Consequently, they have had to resort to the internal devaluation route, one that continues to impede prospects for growth.
The passivity of European leaders in the face of the eurozone’s economic standstill threatens its very future. In fact, it can by no means be taken for granted that countries in difficulty can stick to their course of austerity without experiencing social and political tensions that might encourage them to leave the eurozone. These countries have hitherto considered that the benefits associated with abandoning the euro were inadequate in comparison with the difficulties that had to be overcome. This being the case, there is a certain point at which the benefits and costs associated with abandonment of the euro emerge as being equal. The longer the prospects for growth are blocked, the greater the temptation will be to get out of it.
Recent statements made by the President of the European Commission and the European Commissioner Olli Rehn suggest the Commission is starting to worry. That is a step in the right direction. If the Commission is going to have a genuine influence on the way things pan out, it ought to go as far as the logical conclusion and present an official recovery plan for growth at the European Council meeting in June. The plan could be based on the following lines:
- All the countries in the eurozone should pledge to take no new budgetary consolidation measures in 2013 and 2014. In exchange for this, they would have to adopt a programme of structural reforms in order to ensure they return to a balanced budget by 2018.
- The countries of southern Europe need to launch new plans of action to reinforce the competitiveness of their business sector, especially through reducing the cost of labour.
- The Commission should materialise the importance it has attributed to the long-term financing of the European economy in the Green Paper it has just published, adopting an ambitious plan of action to facilitate direct financing from institutional investors, channelling long-term savings into financing the real economy and making it easier for SMEs to gain access to bank and non-bank finance.
- The ECB needs to offer solutions to reduce the cost of credit in the southern member countries of the eurozone.
The Commission needs to focus on credible estimates designed to convince informed observers that the eurozone can once again produce growth rates greater than 2% starting in 2014. This demonstration – if it can be achieved – ought to contribute to supplying a virtuous circle within which a return to growth will increase confidence and stimulate the expenditure that reinforces growth.