“One who puts one’s hand on a plough, should not be looking back,” is the traditional wisdom of Slovak grandparents. “Paths are made by walking,” wrote Prague-born Franz Kafka. These should be the philosophical backbones of the EU’s position with regards to the mounting attacks it is now facing, even from across the channel.
The solution to the problem of strengthening the credibility of our eurozone consists of four essential parts: one which is needed to avoid damaging turbulence in the markets; one which is important to strengthen the resilience of the club in the future, which will cyclically bring periods of both expansion and recession; and two most important parts that involve homework that each and every member country must carry out, for the benefit of itself and hence of the whole union.
An enlarged and more flexible European Financial Stability Facility (EFSF)/ European Stability Mechanism (ESM) is pivotal to bridging any of the potential liquidity issues that member states might face when refinancing their public debt. Its capacity and ability to act in a decisive manner must send a clear message to the speculative sharks of the markets. On this point, we have seen that moving too little and too slowly only spurs the appetite of these sharks. A strong and credible ESM is, however, not a panacea, merely a necessary prerequisite to ensure the credibility of the euro as a reserve currency able to compete with the US dollar, and to avoid dangerous waves in financial markets, that could overshadow those that quadrupled the monthly loss of jobs in the US in September 2008.
At the same time, the Wall of Credibility creates a more stable environment and creates a window of time in which to carry out deep-reaching solutions to the eurozone sovereign debt crisis.
Fiscal and structural economic reforms within each and every member state are the only sustainable way out of the current precarious situation. As we have seen in the case of the US after World War II, or in that of Slovakia in 2000-2008, creating an environment conducive to growth driven by the innovative work of private entrepreneurs has the potential to push down a country’s relative debt burden. Only an environment of economic growth driven by private entrepreneurship is able to generate sufficient budget revenues in order to generate surpluses in state coffers, which can then be used to gradually pay off public debt. Structural economic reforms which improve the investment climate and create favorable conditions for private entrepreneurs are a crucial engine that will, in the long term, pull Europe out of the current situation. In this respect, the current crisis is only a catalyst for what the EU has been talking about for way too long. It’s time to walk the talk.
In terms of fiscal reforms, it is time to be honest to ourselves, and to recognize that economic globalization has changed the economic landscape of the world in a way which is no longer capable of supporting the post-war welfare state arrangements that Europe is now used to. Clearly, the non-sense situation of state budgets that run deficits in times of economic growth must not be repeated.
To put public finances in a situation that narrows current deficits and builds necessary resilience into the future is not a matter of one-off austerity measures, but a task of reforming all the major expenditure categories within Europe, from social systems through agricultural subsidies. Given the key priority of entrepreneurship-driven economic growth, balancing state books can hardly be done by increasing the tax burden on those who feed the economy. Only the private sector can create the wealth that the state then redistributes. At this point we simply need less discouraging redistribution and more encouragement for wealth generation through entrepreneurship. Hanging on to the current status quo is like sticking to the proverbial millstone tied to one’s leg.
Then, looking into the future, qualitative change in the current setup of relationships within the eurozone is unavoidable. It must be carried out not only to strengthen the adherence to the agreed set of fiscal policy rules, but also to make the eurozone more able to act and be flexible when making crucial economic decisions.
Discussion of further fiscal integration in the most suitable form should not be conducted by manipulating useless xenophobic emotion. We are together on a single ship. We have seen that indecisiveness and lethargic response can be too costly for everyone, not only when it comes to public debt refinancing. The purpose of tighter fiscal consolidation is not political, but more importantly economic: it is carried out chiefly to create a eurozone that is more stable and resilient against further cyclical downturns.
This is not a story of national or EU politicians, or their egos. A more resilient and empowered union is crucial for the benefit of both private companies, as well as employees feeding households throughout Europe. And let’s be frank: in terms of corporate ownership and employers, as well as the consumer basket of households, haven’t we, for a long time, been deeply and thoroughly integrated regardless of political borders? Growth driven by the private sector, which is much more international than it is national, is needed in order to create jobs which are earned by skills and abilities chosen regardless of nationality. If we want to remain competitive on a global scale, we must keep this in mind.
Joint monetary union has brought a long list of undeniable benefits to each and every member, not only in terms of the increased stability that’s paramount for business investment decisions, but also for mutual trade which is especially crucial for those smaller members around the periphery of the block. Many of the disadvantages quoted by critics are not to be blamed on the legal tender used within the EMU, or on our European Central Bank, but are a consequence of a lukewarm attitude to structural economic reforms. Both fiscal and structural reforms inflict pain, there is no doubt about it, but it is this inevitable pain of the valley of tears that reforms initially bring which argues for maintaining at least some of the stability that the existence of joint monetary union provides.
Last but not least, the euro is too precious a project for its future to be discussed so frivolously and myopically. In the geopolitical context one should remember that, after all, the euro is not an elitist project of its members, but a flagship project of the EU. Americans, as well as BRIC countries, are watching its fate not only for economic reasons.
The rigorous and credible safety net of the EFSF/ESM, providing the conditions and time necessary to carry out structural and fiscal reforms within each and every one of the member states and qualitative upgrade of fiscal relations within the eurozone in order to make it more resilient against further cyclical downturns, are four interrelated ingredients of the sustainable solution to the current precarious state. Eurozone sovereign debt crisis is not only an opportunity, but also a catalyst to earn this flagship EU project both economic and political credibility on the global stage.
The euro might just be a coin, but it is not just any coin like those which our fragmented and ever-quarreling continent has minted through millennia. One side of the euro coin brings undeniable advantages; the other one requires commensurate sacrifices in terms of erecting the empowered EFSF/ESM, carrying out painful structural and fiscal reforms and qualitatively upgrading the fiscal relationships within the union.
As complicated as it might seem, the current situation in the eurozone and EU seems rather clear-cut: united we stand, divided we fall. Or as musketeers used to say: one for all, and all for one. There is no other feasible option. It is as easy and at the same time as challenging as that.
Vladimír Vaňo is the chief analyst with Volksbank Slovensko.
12. Dec 2011 at 18:00 | Vladimír Vaňo