Former Economics Editor of the NZ Herald

Euro's troubles help make it stronger

Jose Manuel Barroso. Photo / Greg Bowker
Jose Manuel Barroso. Photo / Greg Bowker

For the past 18 months Europe has rarely been mentioned on the business pages without the words "debt" and "'crisis" nearby.

Greece, Ireland and Portugal are on fiscal life support.

Investors have also been looking through narrow eyes at Italian and Spanish public debt, faltering economic growth and mounting evidence of bailout fatigue elsewhere in the eurozone, and wondering how badly this all ends.

But if it comes to a choice between fiscal integration and monetary disintegration, European Commission President Jose Manuel Barroso is adamant the forces of integration will prevail.

We need not fear another global financial crisis and recession triggered by European sovereign debt, Barroso, in Auckland this week for the Pacific Islands Forum, told the Weekend Herald.

"The member states of the eurozone and the wider European Union are determined to do whatever is necessary to assure the stability of the euro."

The problems have been latent in the design of European monetary union from the outset.

It delivered lower interest rates and a stronger currency than some of the weaker members of the euro area warranted or could handle.

But it deprived them of an important traditional adjustment mechanism when those chickens came home to roost - devaluation of the currency.

And the Stability and Growth Pact, the treaty intended to deliver convergence of fiscal policy among the member states, has been more honoured in the breach than the observance.

The global financial crisis turned those latent problems into actual ones and Europe's leaders, at least by the impatient standards of dealing rooms, have seemed perpetually slow and behind the curve in responding to them. "We understand the urgency," Barroso said.

But he pointed to the response so far: governments of the most vulnerable states have undertaken painful fiscal cuts.

"And we have agreed integration measures that were unthinkable, let's say two years ago. The very creation of the EFSF [European Financial Stability Facility] represents a high level of integration, pooling resources to help countries that are facing this crisis."

The €440 billion ($732 billion) fund is in the throes of being ratified by the eurozone's 17 member states.

In the meantime, the European Central Bank has been buying Italian and Spanish bonds on the secondary market to bring down their yields. Its initial success, however, is showing signs of wearing off.

Barroso also cited measures in the final stages of adoption by the European Parliament which would strengthen governance of the euro area by imposing financial penalties on member states which exceed the deficit and debt levels allowed under the Stability and Growth Pact.

Such penalties would be dwarfed, however, by the cost the markets would impose on backsliding governments, by driving up their interest rates and crowding out spending on public services, Barroso said.

"Apart from that we are discussing other, more ambitious measures. I cannot yet anticipate what will be the result," he said.

But the effect would be to stiffen monetary union with a greater degree of economic union.

"One of the reasons is that today this is not just a political question. In the past it was a political question dividing the integrationists, sometimes we say the federalists, and the more eurosceptic," he said.

"Today the markets are demanding it. The markets are saying 'to keep the euro you need more integration. You need to act in a more coherent manner'. This is why a consensus is being built for greater levels of integration, at least in the euro area." Glib talk that "fiscal union is the price of monetary union, but are they prepared to pay it?" masks the political and constitutional sensitivity of the issues involved.

The prerogative of parliaments to say yea or nay on tax and spending lies at the heart of democracy and sovereignty.

So how do you balance the need for integration, more power at the centre, against the right of democratically elected legislatures to make the decisions that determine deficits and public debt levels?

"Of course the prerogatives of parliaments have to be respected but I believe the conditions are being met for them to support these higher levels of integration. The constitutional court of Germany has just endorsed the compatibility of measures taken for the so-called bailouts with the prerogatives of the Bundestag," he said.

"So it is quite important to understand there are legal and political ways, without giving away the prerogatives of parliament, to accept joint responsibility when it comes to the management of a common currency."

Germany and France have called for countries to enshrine a "debt brake" rule in their constitutions, and Spain has already obliged.

"In future it will be illegal for any government to come with a budget that does not respect these constitutional requirements."

Greater fiscal integration in the eurozone, whatever institutional form it finally takes, should not be seen as endorsing a two-tier, inner and outer Europe.

"But it is also fair to say that the countries which share a common currency are entitled to make a special effort for that currency."

EU countries that do not have the euro are also saying it is important the euro area works in a more integrated and coherent manner, Barroso said.

It is wrong to lay all the economic ills of Europe at the door of the common currency, he said.

Structural reforms, such as raising the retirement age and more flexible labour markets, were needed in any case to lift Europe's international competitiveness, and are being undertaken.

"The countries of Europe, whether or not they are in the euro area, will have to make those adjustments, sometimes painful adjustments, if they want to keep the social market economy - that is, an open economy with levels of social protection that are the most ambitious in the world."

To question the future of the euro itself is to misunderstand the dynamics of the European project.

"Every time Europe has faced a crisis we have moved towards deeper integration," Barroso said.

"It must be remembered that the euro is not only a monetary construction. It is also a political project which embodies the will of Europeans to share their political future."

Barroso does not believe that will is flagging.

It is his response to the proposition that if there is to be "more Europe" it will only be as much more Europe as the Germans are prepared to pay for.

"The German public remains absolutely committed to Europe and the euro. This is not wishful thinking on my part. We have empirical data that confirms it," he said.

"Of course the German people - and they are right to think like this - want to see countries which have very high levels of debt taking measures to correct it." And German businesspeople don't want fragmentation of the single market. "After all, it is the biggest in the world."

- NZ Herald

Get the news delivered straight to your inbox

Receive the day’s news, sport and entertainment in our daily email newsletter


© Copyright 2017, NZME. Publishing Limited

Assembled by: (static) on production bpcf04 at 27 May 2017 20:19:04 Processing Time: 600ms