Europe looks troubled.
Unemployment is exceptionally high in a number of European countries. There is
also the danger of recession threatening the whole continent. Once the shining
example of cooperation and development, how come Europe came to the brink of
malady? There are conflicting explanations that are confounding.
The explanation of
American conservatives, who are cold to the welfare state and its popular
support schemes, is that helping the poor and the downtrodden consumes much of
the national resources that should go to investment and production. But then if
this argument were true, successful examples of welfare states, namely Norway,
Sweden and Denmark, would be a failure. They are not. They are all wealthy and growing
steadily. Instead those countries that are financially in trouble, such as
Greece, Italy, Ireland, Spain and Portugal, are not welfare states and they
spend much less on social programs than the renowned welfare states of Europe.
The assumption that welfare state practices are the real cause of the economic
crisis in Europe does not hold in the face of reality.
Another argument
regarding the rationale of the crisis is attributed to European conservatives,
especially the Germans. Their argument goes as follow: Countries that are in
financial crisis are run by irresponsible governments who did not heed balance
of payments and borrowed heavily, disregarding corresponding income or the
capacity to produce wealth. But a closer look at the reality does not verify
this rationale, with the exception of Greece.
The rest of the
European countries that are mentioned here for being in economic crisis either
did not have big deficits or had deficits long before the crisis broke out.
What about the number of Western countries that borrowed extensively and
carried enormous debt for a long time, namely the US and Britain?
Indeed these countries
evaded a crisis despite negative values on both their debt stock and the volume
of borrowing just because they remained outside the eurozone. In Asia, one of
the biggest trade partners of the West, Japan is in the same situation. It has
more debt than any of the troubled countries in Europe.
Given these facts, we
ought to ask once again what the real causes of the European economic crisis
are. According to Paul Krugman, the problem lies with “introducing a single
currency without the institutions needed to make that currency work.” He
continues, saying that “the creation of the Euro fostered a false sense of
security among private investors, unleashing huge, unsustainable flows of
capital into nations all around Europe’s periphery. As a consequence of these
inflows, costs and prices rose, manufacturing became uncompetitive.”
The tremors on this
fault line caused insurmountable trade deficits and mountains of debt that
could not be paid.
What about the
panacea? Well, this is where the rub is. Being interconnected to the eurozone
and being required to take collective action does not allow countries in fiscal
trouble to resort to devaluation and replace loss. This is because they have no
national currency to play around with. They cannot take individual (national)
action and regain competitiveness. In the end, such countries fall into large
debt and run large budget deficits.
Since European
countries cannot take the chance of dropping the Euro because that would mark
the end of the European Union, austerity measures to reduce spending and the
generosity of richer European countries, such as Germany and France, would
eventually help finance the debt of the troubled EU members. Since these two
countries like the role of the big brother and sister of Europe, they cannot
refrain from playing the role of the savior, no matter how reluctantly. This is
the tradeoff. European countries, especially the weaker ones, have to accept
the leadership of Germany and France in order to sustain one of history’s
biggest political and economic schemes that human kind has ever created.
*Amanda Paul is Policy Analyst and
Programme Executive at EPC
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