Wednesday, May 19, 2010

Greek crisis and the EU

In an op-ed piece from the beginning of April, former German Foreign Minister Joschka Fischer discussed Greece's credit problems and what other EU countries should learn from them: Griechische Lektionen für Europa Der Standard 01.03.10.

Ireland had run into problems with their speculative debt policies before Greece. When the Great Recession hit, they faced problems paying the interest on their official debt. They were able to come up with the funds by cutting other government spending. But, Fischer points out, the Greek situation is different. In Ireland's case, their economy was basically healthy. Greece's wasn't.

Fischer, like many other commentators, criticizes Greece for living beyond their means. The EU, however, can neither allow Greece to just go bankrupt nor leave it to the International Monetary Fund (IMF) to clean up. Because if similar problems develop in Spain, Portugal and Italy:

Dem Euro würde dann aber die Gefahr eines Scheiterns drohen, und damit wäre zum ersten Mal in seiner Geschichte das gesamte europäische Integrationsprojekt ernsthaft gefährdet.

[But then the euro would be threatened with failure and thereby for the first time in its history, the general European project {he means the EU} would be seriously endangered.]

He notes that the Maastricht Treaty requirement for EU countries to maintain debt levels at no more than 3% of their GDP budget GDP had already shown itself to be a problematic idea. But in any case, that criterion was never designed for something like this current continuing crisis.

[The EU's Stability and Growth Pact under the Masstrict Treaty set a guideline that "the planned or actual government deficit" of each member country should not exceed "the reference value of 3% of GDP".]

Fischer emphasizes that to avoid such an outcome, the EU will need to come up with new central economic policies, though he thinks it would be a waste of time right now to try to change the EU governing structures again. One intriguing idea of his is to create Eurobonds to support the countries facing possible bankruptcy. With the risk of default spread among many countries rather than one, this would provide countries like Greece, Spain and Portugal more flexibility to address immediate financial squeezes without such heavy reliance on their current course of cutting government spending in the middle of a recession, the opposite of what counter-cyclical policy needs to be.

Since then, the EU has moved in the direction Fischer indicated, with the establishment of a central bailout fund of substantial size.

As Fischer also notes, the EU was facing rising skepticism among the European publics. This is due in large part to what is rightly called a democratic deficit in European politics. Although people do elect representatives to the European parliament, democratic politics still focuses primarily on individual nations. The ordinary citizen's commitment to the Union as such is not strong enough right now to sustain the development of the EU over the long haul.

The economic crisis has taken the pressure to rectify that problem to a new level, with the taxpayers of Germany, France and other countries not so hard hit in their governmental finances being required to bail out other countries.

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