Economy, Europe

The Failure of European Economic Integration

The symptoms of the global financial crisis started in 2007, although the causes naturally can be traced further back, primarily to loose monetary policies, allowing for credit to become easier and easier. The crisis began in the US housing market and quickly spread worldwide, however whereas “green shoots” appear to now be showing in the US, with its economy growing, albeit slowly, the European economy is still struggling and growth has either never returned (i.e. Greece, Spain), ceased (i.e. UK, France) or slowed (i.e. Germany). These particular European problems can be traced back to the structural setup of European economic integration, and not, in of itself, to certain countries over-borrowing.

The vast majority of countries utilise some form of fiscal transfers from wealthy areas to poorer areas of the country, such as regeneration funds, targeted placement of public sector jobs, geographically variable tax rates and variable central funding to regions. The EU, although not a country, does this as well, with its regional development fund, with recipients varying from the poorest countries, such as Romania, to the poorest areas of some of the wealthiest countries, such as the United Kingdom and Germany. The EU however has far too little resources for these fiscal transfers to be meaningful. The 2011 budget was €142 billion (£122.6 billion/$179.5 billion), which represents 1% of the gross national income of the 27 member states. In comparison, the US federal budget was €2.87 trillion. Almost €3 trillion for 314 million people, versus €142 billion for over 500 million people highlights the lack of serious fiscal transfers.

Further to the lack of finances to facilitate the empowerment of weaker areas of the EU is the lack of movement of labour. Whilst it is true that there is free movement of labour within the EU, this is limited for all practical purposes by language. Unlike the USA, where there is only one official language – English, the EU has 23 official languages, therefore someone who can only speak Spanish is unlikely to be able to find meaningful employment in Germany.

Another major problem for the EU is the European Central Bank. Although the central bank has control over monetary policy within the eurozone, interdependence within the EU means ECB decisions have serious ramifications for the entire EU. The ECB has been notable for its inflexible monetary policies throughout the crisis. Like other central banks, the ECB supplied large-scale bailout funding for the major financial institutions in 2007, however whereas the US Federal Reserve and the Bank of England actively increased supply of money through quantitative easing, which is effectively printing new money, the ECB restricted its policies beyond the bailout to inflation only, reducing base interest rates, but going no further. The ECB was effectively hamstrung before it was even created due to the German fear (irrational or otherwise) of hyperinflation. More recently, the ECB has engaged in bond purchases from weaker eurozone states, however the sovereign debt crisis in the eurozone continues and this is in part due to the inability and unwillingness of the ECB to expand inflationary policies.

It’s a lovely building, rather a shame the people inside do not have the powers usually given to central bankers. Source: Telegraph

Inflation has in the years immediately preceding the global economic crisis been seen as a thing to be feared, however even with inflationary pressures from sharply rising commodity prices and taxes, eurozone inflation remains at only 1.6%. The ECB can afford to be adventurous with its monetary policy, without any serious concern of high inflation. Even with inflationary quantitative easing and increases in Value-Added Tax (a sales tax), UK inflation is still only 2.6% and has been broadly falling, suggesting strong deflationary pressures.

There are no easy solutions for the EU economies. Defeatism seems rampant within much of the EU, with a belief that Europe’s time at the top table has come to an end. This is not true, the economies across the EU represent 20% of global GDP and the EU deserves that top table seat. However, if European citizens and governments refuse to see this, the EU will continue to flounder and likely cause the single currency project to stutter and potentially fail, which would cause a new global financial crisis.

Angela Merkel of Germany and François Hollande of France. These two people have the finances and political power to solve the sovereign debt crisis. The real question is: will they?

The institutions and government of the EU need to be daring and take significant risks. Allow for inflation, an inflation rate of 5% historically is incredibly low, it is only in recent years we have become inflation adverse. Higher, but still healthy, inflation will stimulate the economy by encouraging people, businesses and governments to stop sitting on savings and start pumping money back into the economy. Coupling this with much more extensive intervention by the ECB, comparable to that of the Federal Reserve, Bank of England and Bank of Japan, will relieve immediate pressures from those eurozone countries at the epicentre of the sovereign debt crisis. None of these policies will directly cost the European governments any money and therefore will not add to the sovereign debt crisis. The positive action by the ECB would also calm investors, which would allow for interest rates for government lending to fall, which would then allow for a more relaxed reduction in expenditure, preventing the shocking economic collapse and civil unrest seen in Greece being repeated elsewhere in the EU.

Inaction will certainly see Greece collapse out of the eurozone and potentially the EU. It seems likely that inaction will also force Spain, Portugal, Ireland and even potentially Italy out of the eurozone. Such a significant abandonment of the currency could well precipitate a total collapse of the Euro. The European institutions and governments must act now for the good of the European economy, for the good of their own country’s economy and for the good of the world economy. Growth throughout the Western world cannot truly restart without Europe. China cannot continue to grow at such high rates without Europe. The world cannot grow at significant rates without Europe. Europe is essential and the European governments need to remember this now and stop acting scared and defeated.

About Greg Dawson

Greg also gained his BA in Politics and International Relations at the University of Portsmouth and has continued to study there, now studying a MA in Public Administration. Primary interests are in European politics, especially British, German and European Union politics, exploring reasons for the policy decision making process in foreign policy. Further interests are in the post-2008 global financial crisis and the challenges of public sector reform.

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