Abstract
Regardless of where the financial crisis originated, its effect on European economies stems from internal imbalances, excessive debt and a lack of regulation. The causes and consequences of global economic turmoil have been different in each Member State, but in order for the common currency to survive, European financial institutions will have to be reformed so that they can safeguard us from future shocks even as they strive to overcome current problems. Debt levels are often unsustainable, and fiscal consolidation will have to play a key role in economic policymaking in the future, something that has not been the case in several eurozone countries. The economic union will transfer increasing powers to European institutions in a way that will change economic policymaking in Member States and improve economic convergence between them, but the ultimate objective must always be sustainable and balanced growth for the Union.
Introduction
The global economic crisis affected Europe because Europe has internal vulnerabilities: excessive private and public debt, insufficiently regulated financial markets, unsustainable economic imbalances among Member States of the eurozone and insufficient economic governance for a monetary union. No single cause led to the escalation of the crisis; it was the combination of these elements, together with crisis management considered insufficient by the financial markets, that was responsible for its lengthening and deepening. But the accumulation of high levels of debt, in the end, is also a systemic feature of our financial system and the way wealth is created.
A new economic framework for sustainable growth
It is obvious that states which had high levels of private or public debt were hit first. It is also true that high levels of private and public debt increase market dependence and create constraints on government action when a financial crisis or other unexpected developments occur. But the causes are even more diverse, as the expansion of the crisis to stronger economies demonstrates. These developments affected the credibility of our common currency as a whole.
Analysing the causes correctly is the essential prerequisite for proposing viable solutions. So far, we have primarily engaged in policies to reduce private-and public-debt levels, but we have not yet managed to reduce the vulnerability created by the correlation between these two types of debt. Under the current framework, indebted banking systems affect the public finances of the states in which these banks operate, as the states are perceived to be the lender of last resort to their banking systems. It is true that mismanagement and abuses in the banking system contributed to the crisis. Further steps should be taken to regulate the sector to make it more resilient to future shocks. However, European decision-makers need to manage the crisis in such a way that the overall risks for citizens are minimised, rather than tackle only particular aspects of the crisis. Under these circumstances, providing a stable financial sector and a predictable investment climate might be the best way to secure the functioning of our economy and the predictability of jobs. In this respect, a banking union provides some of the right answers. Besides functional and comprehensive European banking supervision that can detect and prevent unhealthy developments, we need a common European banking resolution mechanism. Under such a system, if a European bank did not respect European rules, it would have to be restructured.
Concerning the management of public finances and the overall levels of public debt, fiscal discipline is an important objective. Fiscal policies need to have market confidence. But one essential question remains: how can fiscal discipline be achieved without endangering overall economic development? Without doubt, fundamental economic reforms need to be pursued in many EU Member States to increase competitiveness. We need to create healthy economic structures in Europe which are worth investing in. We should resist the call for unsustainable economic development and not spend public money to create artificial growth. In the long term, only healthy and dynamic economies can deliver the desired results: more jobs and growth. Structural reforms can generate sustainable growth. For those countries which are competitive and those which have already pursued economic reforms, economic stimulus is an option. By stimulating internal demand in some of the competitive economies, we will contribute to reducing imbalances, one of the underlying causes of the crisis. As global economic growth slows down and most of the eurozone countries face a recession, it is imperative to find ways to increase growth. Reducing sovereign debt levels without growth is an almost impossible task.
Short- and long-term tools
We have undoubtedly made steps in improving economic governance in the eurozone, but much remains to be agreed on and implemented. The EPP believes that monetary union needs to be completed with an economic union. It is our strong belief that the advantages of the euro outweigh the costs by far, but more economic and fiscal integration, as well as stabilising measures, are needed. Some of the steps required can be implemented only in the very long term. These will prevent future crises, but cannot contribute to managing the current situation. This crisis needs to be overcome with tools that are within our reach now.
However, we should not underestimate the tools which EU institutions have at their disposal. The competences of the Union's institutions and the relations between institutions are clearly set. This also includes the European Central Bank (ECB). It is within this framework that the ECB has in the past taken specific measures to respond to extraordinary circumstances and overcome severe market dysfunctions. Monetary policy in a monetary union cannot be conducted by the rules used by individual Member States in the past. Overcoming this paradigm is a key prerequisite for preventing escalations of the crisis and finding the right solutions. Of course, the primary objective of the ECB is price stability, but currently the risk for deflationary tendencies is much higher than inflationary risk. This makes solving the crisis infinitely more difficult. Deflation reduces incentives for investments and lending, and significantly increases the risk of economic decline with negative consequences for companies and jobs.
When analysing the parameters of the ECB Outright Monetary Transactions, we understand that ECB support improves the position of countries in the short run and helps create conditions for positive economic development in the long run as well. The objective of the ECB interventions should be to provide confidence in the single currency, not to increase insecurity. Confidence is an indispensable prerequisite for price stability in the medium and long term. Because of the parameters of the OMT programme, once the ECB decides to intervene in support of one country, this should not be seen as a signal of crisis escalation, but of sharing the efforts to return to sound macroeconomic parameters. Therefore, it is important that ECB interventions are conditional to safeguarded efforts by respective countries to improve their competitiveness in favour of long-term growth and more healthy public finances.
Given the legal obligation which most EU Member States have to join the single currency once they fulfil the criteria, any initiative to increase the convergence and cooperation of the eurozone with non-eurozone Member States is welcomed. Decisions taken at eurozone level affect the economies and currencies of all members of the EU, and for this reason non-eurozone Member States should be given the opportunity to participate in any future form of economic integration.
Conclusion
All of these shortcomings need to be tackled to preserve the prosperity of our citizens and to prevent the decline of our role in the world. Further integration remains the only way forward for Europe in a global world. Europe's strength at global level depends on our credibility and the capacity to overcome domestic challenges and divisions. The euro is our single currency and the move towards more European integration is desirable, necessary and irreversible. This has to be proven by our actions in the near future. It is crucial that European political leaders prevent this systemic crisis from becoming an existential one for any part of Europe.
Footnotes