Mario Draghi reassured the markets at the 21 January press conference of the European Central Bank (ECB) by making it clear that the Governing Council is unanimous in its desire to reassess economic conditions at the upcoming March meetings and to reconsider its policy stance if necessary. He stressed that there is no limit to the action that the ECB can undertake to achieve its mandate. And he reiterated that whatever the actual policy decision in March, the ECB is already working to resolve any technical issues that might prevent it from using the full range of instruments at its disposal. The response in the markets was immediate. Bonds and equities rallied while the euro moved lower against the dollar – all good things from the ECB’s perspective. ECB watchers were cautiously optimistic. A few voices noted that the ECB had promised in October of last year only to under-deliver in December; this time actions should speak louder than words. So should results. Draghi has reiterated his July 2012 promise to do ‘whatever it takes’. What he did not say is that ‘it will be enough’. Instead, he insisted: ‘We don’t give up.’
Tag / European integration
Austerity and Anti-Politics
Italian Prime Minister Matteo Renzi gave an interview to the Financial Times shortly before Christmas to criticize the impact that successive waves of austerity are having on political stability in southern Europe. The interview had particular resonance in the aftermath of the Spanish national elections. Spanish Prime Minister Mariano Rajoy was in many ways Europe’s ‘best’ student in terms of economic policymaking. Rajoy not only narrowly escaped the doom loop that tied the fate of the Spanish government to the solvency of its banks, but he also avoided the indignity of falling under official European economic tutelage. He has not always does as told by his European counterparts but his government is often held us as a model of successful macroeconomic adjustment and fiscal consolidation in the face of crisis. His ‘reward’ has been a splintering of the Spanish electorate and a hung parliament. For Renzi, the fate of his ‘friend Mariano’ is an inevitable consequence of Europe’s obsession with austerity.
Lessons from Greece? Individuals Matter
European integration is a process that derives from broad social movements. We look for its origins in the terrifying experience of the twenty years’ crisis, bookended by two cataclysmic world wars. ‘Europe’ is not necessarily a rejection of the nation state, but it is an attempt to rescue the nation state from its inherent limitations and vices. It is a forum within which France and Germany can reconcile their differences; Britain can adapt to its relative decline; Southern Europe can find a bulwark for democracy; and Eastern Europe can emerge from communism.
But Europe is made by people and sometimes individuals can play a decisive role. The events of the past summer are a good example. There are many prominent scholars who have tried to cast the Greek crisis as some kind of clash of economic cultures or institutional path dependence gone wrong. Those arguments have merit. But they do not capture the essence of what happened; they fail to explain how Europe came so close to disaster; and they make it harder to anticipate what could still go wrong.
Europe’s Banking Union: ‘Failing Forward’?
Between the euro crisis, the refugee crisis, tensions within the single market, and anti-European political extremism, the European Union appears on the surface to be failing. This isn’t quite true though. Every time Europe faces a setback, it tends to make progress in response. This progress is usually only partial (or incomplete), but it is enough to lay the foundations for more comprehensive solutions to emerge in the future. What looks like failure is actually ‘failing forward’, a dynamic that Dan Kelemen, Sophie Meunier and I examined in a recent article in Comparative Political Studies. The latest incarnation of this concept is the recent developments – or lack thereof – at the December 2015 European Council summit, which was supposed to shore up European financial markets by pushing ahead with the construction of common institutions to safeguard European banks.
Europe’s Controversial Single Market
When critics want to explain why the European Union (EU) is in crisis, they usually point to the euro or the Schengen Agreement. These are areas of vital national sovereignty, they argue. A government without a currency cannot preserve its national competitiveness and has no status as a lender of last resort. A government that cannot monitor its borders cannot stem the flow of illegal workers, criminals, and terrorists. There is merit to both of these arguments but they miss the deeper point. Europe’s problems do not originate in money or migrants; they stem from the single market.
Continuing European Economic Vulnerability
The European Commission’s autumn economic forecasts paint a bleak picture. The headline is cautiously optimistic. European growth is moderating but should improve in the forecast period thanks to an accommodating monetary policy, a neutral fiscal stance, and a gradual relaxation of ‘headwinds’ coming from other parts of the globe. The analysis itself is more troubling. European growth relies excessively on external markets; price inflation will recover as commodity prices stabilize at low levels; and monetary policy accommodation in Europe contrasts with a gradual tightening in the United States with uncertain implications for market volatility and global capital flows. The bottom line is that things may get better and yet then again they may not. Although the authors of the forecast would argue otherwise, this is not a message that offers much hope.
European Capital Markets: Efficient . . . but Resilient?
The goal of the capital markets union is to make European financial market integration more efficient. Firms will be able to gain access to international credit (and other forms of capital) directly from the market rather than having to rely on banks for intermediation; savers will be able to gain access to cross-border investment opportunities without facing high transaction costs.
Accusations of Arrogance
It is no secret that Europe is facing multiple crises. Migration, deflation, Greece, and Ukraine top the list, but the issues that come after are no less challenging for being less prominent. Let’s not forget, Europe was ‘in crisis’ at the turn of the century and before any of these headline issues emerged. That earlier agenda – which includes population aging, welfare state reform, energy security, industrial change, market competition, and connecting ‘Europe’ to ‘the people’ – still needs to be addressed. Then as now the two questions are whether Europe will hold together and whether European leaders will energize and focus that unity with a sense of purpose. Unfortunately, increasing accusations of ‘arrogance’ suggest that neither unity nor purpose should be expected.
What’s Wrong with European Economic Performance?
Pessimism is building across the euro area about economic performance. Growth has slowed in most euro area economies, even as inflation remains persistently low and unemployment persistently high. The question is whether to blame this poor performance on external factors or on decisions made by European policymakers. If this is just another patch of bad luck, then the only challenge is to batten down the hatches and ride it out. It would be more worrying, however, if Europe’s economic policymakers have set their economy sailing off in the wrong direction.
The easy answer is to blame the outside world. Growth in emerging markets is slowing. This is not only sapping demand for European exports but also pushing down commodity prices and increasing volatility in exchange rates. At the same time, other major economies are underperforming. The recovery in the United States is quicker than in Europe but it is still too uneven for the U.S. economy to help pick up slack elsewhere. Japan is much weaker. Worst of all, Europe is surrounded by tragedy. The human cost of violent conflict and desperate migration is all too apparent; what is less obvious is the toll on European businesses that have lost access to neighbouring resources, relationships and markets.
The European Political Centre Cannot Hold (But the EU Can)
Europe’s politicians have cleared the last hurdle in accepting Greece’s third financial bailout but the voting was uncomfortable for everyone. The left-wing populist government in Greece relied on representatives from the more traditional centre-left and centre-right to cover for defections from the ruling coalition; the German government used Social Democrats within the ruling coalition to cover for defections from the Chancellors own Christian Democrats; and the Liberal (VVD)/Party of Labour (PvdA) government the Netherlands got extra support from the left-liberal D66 party to add to its slender one-seat majority.
As a result of these different movements toward the political centre – and similar developments in other countries – the Greek government will get the money it needs to keep up with its debt payments and shore up its banks. That is a good thing for anyone who wants to see Greece have a reasonable chance at recovering from this ongoing crisis. Unfortunately, that centre cannot hold. A populist party like Syriza cannot govern easily with the old pillars of the Greek political establishment; Germany’s grand coalition is an historical anomaly; and the result of eight years of close cooperation between VVD, PvdA and D66 was bad for all. So the question is whether Europe’s political centre will splinter before the Greek situation becomes sustainable.
Erik Jones 