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Yannos Papantoniou warns that the widening economic gap between the eurozone’s northern and souther members could lead to the monetary union’s collapse. – Project Syndicate
ATHENS – As the eurozone debt crisis has steadily widened the divide between Europe’s stronger northern economies and the weaker, more debt-laden economies in the south (with France a kind of no man’s land economy in between), one question is on everyone’s mind: Can Europe’s monetary union – indeed, the European Union itself – survive?
While the eurozone’s northern members enjoy low borrowing costs and stable growth, its southern members face high borrowing costs, recession, and deep cuts in incomes and social spending. They have also suffered substantial output losses, and have far higher unemployment rates than their northern counterparts. Unemployment in the eurozone as a whole averages about 12%, compared to more than 25% in Spain and Greece (where youth unemployment now stands at 60%). Indeed, while aggregate per capita income in the eurozone remains at 2007 levels, Greece has been pushed back to 2000 levels, and Italy today finds itself somewhere in 1997.
Europe’s southern economies owe their deteriorating circumstances largely to excessive austerity and the absence of measures to compensate for demand losses. Currency devaluation – which would boost the competitiveness of domestic industry by lowering export prices – obviously is not an option in a monetary union.
But Europe’s stronger economies have resisted pressure to undertake more expansionary fiscal policies, which would lift demand for its weaker economies’ exports. The European Central Bank did not follow the lead of other advanced-country central banks, such as the US Federal Reserve, in pursuing a more aggressive monetary policy to cut borrowing costs. And no financing has been offered for public-investment projects in the southern countries.
Moreover, fiscal and financial measures aimed at strengthening eurozone governance have been inadequate to restore confidence in the euro. And Europe’s troubled economies have been slow to undertake structural reforms; improvements in competitiveness reflect wage and salary cuts, rather than productivity gains.
While these policies – or lack thereof – have impeded recovery in the southern countries, they have yielded reasonable growth and very low unemployment rates for the northern economies. In fact, by maintaining large trade surpluses, Germany is exporting unemployment and recession to its weaker neighbors.
As Europe’s north-south divide widens, so will interest-rate differentials; as a result, conducting a single monetary policy will become increasingly difficult. In the recession-afflicted south, continued fiscal consolidation will demand new austerity measures – a prospect that citizens will reject. Such impasses will lead to social tension and political crisis, or to new requests for financial assistance, which the northern countries are certain to resist. Either way, financial and political instability could lead to the common currency’s collapse.
As long as the eurozone establishes a kind of wary equilibrium, with the weaker economies stabilizing at low growth rates, current policies are unlikely to change. Incremental intergovernmental solutions will continue to prevail, and Europe’s economy will soldier on, steadily losing ground to the US and emerging economies like China and India.
For now, Germany is satisfied with the status quo, enjoying stable growth and retaining control over domestic economic policy, while the ECB’s limited powers and strict mandate to maintain price stability ease fears of inflation.
But how will Germany react when the north-south divide becomes large enough to threaten the euro’s survival? The answer depends on how Germans perceive their long-term interests, and on the choices of Chancellor Angela Merkel. Her recent election to a third term offers room for bolder policy choices, while forcing her to focus more on her legacy – specifically, whether she wishes to be associated with the euro’s collapse or with its revival.
Two outcomes now seem possible. One scenario is that the economic and political crisis in the southern countries spreads, inciting fears in Germany that the country faces a long-term threat. This could drive Germany to withdraw from the eurozone and form a smaller currency union with other northern countries.
The second possibility is that the crisis remains relatively contained, leading Germany to pursue closer economic and fiscal union. This would entail the mutualization of some national debt and the transfer of economic-policy sovereignty to supranational European institutions.
Of course, such a move would carry considerable political costs in Germany, where many taxpayers recoil at the notion of assuming the debts of the fiscally profligate southern countries, without considering how much Germany would benefit from a stable and dynamic monetary union. But a new grand coalition between Merkel and the Social Democrats could be sufficient to make this shift possible.
Even so, there could be victims. Indeed, the continued failure of smaller countries like Greece and Cyprus to fulfill their commitments reinforces the impression that they will forever be dependent on financial assistance. The exit of one or two of these “undisciplined” countries could be a requirement for the German public to agree to such a policy shift.
Europe’s north-south divide has become a time bomb lying at the foundations of the currency union. Defusing it will require less austerity, more demand stimulus, greater investment support, deeper reforms, and meaningful progress toward economic and political union. One hopes that modest recovery in the south, aided by strong German leadership in the north, will steer Europe in the right direction.
The heads of state signed the deal in Uganda’s capital, Kampala [AP]
|The leaders of five East African countries have signed a protocol laying the groundwork for a monetary union within 10 years that they expect will expand regional trade.
Heads of state of Kenya, Tanzania, Uganda, Rwanda and Burundi, which have already signed a common market and a single customs union, said on Saturday that the protocol would allow them to progressively converge their currencies.
In the run-up to achieving a common currency, the East African Community (EAC) nations aim to harmonise monetary and fiscal policies and establish a common central bank. Kenya, Uganda, Tanzania and Rwanda already present their budgets simultaneously every June.
The plan by the region of about 135 million people, a new frontier for oil and gas exploration, is also meant to draw foreign investment and wean EAC countries off external aid.
“The promise of economic development and prosperity hinges on our integration,” said Kenya’s President Uhuru Kenyatta.
“Businesses will find more freedom to trade and invest more widely, and foreign investors will find additional, irresistible reasons to pitch tent in our region,” said Kenyatta, leader of the biggest economy in east Africa.
Kenyatta, who is due to face trial at the International Criminal Court on crimes against humanity charges in February, took over the chairmanship of the bloc from Ugandan President Yoweri Museveni, hosting the summit.
Kenya has launched a $13.8 billion Chinese-built railway that aims to cut transport costs, part of regional plans that also include building new ports and railways.
Landlocked Uganda and Kenya have discovered oil, while Tanzania has vast natural gas reserves, which require improved infrastructure and foreign investment so they can be exploited.
Tanzania, where the bloc’s secretariat is based, has complained that it has been sidelined in discussions to plan these projects, but Kenyatta said the EAC was still united.
Kenneth Kitariko, chief executive officer at African Alliance Uganda, an investment advisory firm, said the monetary union would boost efficiency in the region’s economy estimated at about $85 billion in combined gross domestic product.
“In a monetary union, the absence of currency risk provides a greater incentive to trade,” he said.
Kitariko said, however, that achieving a successful monetary union would require convergence of the union’s economies, hinting that some challenges lay ahead.
“Adjusting to a single monetary and exchange rate policy is an inescapable feature of monetary union … but this will take time and may be painful for some,” he said, referring to the fact that some countries may struggle to meet agreed benchmarks.