The Eurozone's Challenges Beyond the Currency Union
Video Transcript:
The debate about growth, competitiveness and economic reforms in the European Union was reignited this week after the European Commission granted several countries longer deadlines to reduce their deficits. While nations such as France and Spain were given softer targets for the next two years, the Commission said that EU members should use the extra time to apply necessary economic reforms, which include change in the labor and pension sectors. This generated a strong response from France on Thursday, when President Francois Hollande said that Brussels cannot dictate policy to Paris.
These events highlight several trends within the European Union. The first is the tacit admission by the EU Commission that tight deficit deadlines and goals were not working. Some countries were repeatedly failing to meet their targets, and the EU was already losing credibility in trying to uphold the targets. Moreover, the EU is not prepared to risk confrontation with any states by imposing fines for non-compliance with these targets.
At the same time, Hollande’s reaction to the EU guidelines is a reminder of the constant tension between regional integration and national sovereignty that defines the European Union. A few weeks ago, Hollande called for an economic government for the eurozone, with its own budget, the right to borrow and a harmonized tax system. But after hearing the Commission’s proposals for economic reforms, he said that France will need to find French solutions for French problems.
Though the pace and scale will greatly vary, EU members will be pressured to apply reforms independently of what the Commission says. Long before the current crisis, some European countries were dealing with macroeconomic imbalances, low productivity, anemic growth, aging populations and difficulties to adapt to competition from East Asian countries. The currency union has certainly made all these problems more complex, but most of the factors that explain the current crisis would be there even if the euro did not exist.
The Europeans often debate about austerity and growth measures. But most policies will deliver only modest results if governments fail to apply structural reforms that could be unpopular in the short term. The European Union is still the largest exporter in the world and is well positioned in the global value chain. But Europe is losing the race on productivity, and there are significant disparities among member states. This means that structural reforms will need to be applied, not only in the labor sector but also in the public sector as well as in education and research and development. The question is whether or not these countries will have the political will to apply reforms.
The recent promise of intervention in sovereign markets by the European Central Bank has bought Eurozone nations some time, as pressure from financial markets is not as strong as it used to be. But rising rates of unemployment and very weak growth are threatening some European nations, with the accompanying decline of social and political conditions. The EU has somewhat relaxed its pressure over member states, but their challenges remain as great as ever.
