It’s a tautological statement to say that the euro area is an economy which barely moves ahead, towards producing more jobs and incomes for the tens of millions of the unemployed and materially deprived. However, it seems that it’s worse than that. Mario Draghi, the President of the European Central Bank, said it plainly in his statement at the thirty-third meeting of the International Monetary and Financial Committee, in Washington DC some days ago.
New and old phantoms
On 15 April, Draghi in detail but tactfully explained what is wrong with the European economy. He said “…euro area growth remains faced with uncertainty, mainly as a result of downside risks to growth prospects in emerging market economies, a clouded outlook for oil prices and their economic implications, and also geopolitical risks”. He went on by stressing that the outlook for inflation is now depressed not only by those new risks but also because of “the materialization of some of the existing ones”.
He was quite right. Only the previous day, on 14 April, Eurostat, the EU statistical service, confirmed that inflation had leveled out in March at the zero line with a reading of 0.0%. Despite the fact that this was kind of better than the -0.2% of February, things are not at all favorable for Eurozone. The reason is that inflation and consequently growth are stuck for too long at too low levels, namely around zero. Draghi concluded that Europe needs a new economic policy mix. He described it as follows: “decisive implementation of structural reforms and greater progress towards sustainable and more growth-friendly public finances is necessary”.
Old structures and blocked public finances
Unfortunately, structural reforms are turned aside by governments, because of the political cost and the initial discomfort to many that they entail. Greece is a standard case of that. There are more countries though, Germany included, which feel sheltered with their existing but, to a certain extent, outdated economic and financial structures. The banking industry structures and the market services sector are characteristic cases of that. As for the growth-friendly public finances, those are blocked by Berlin and some other capitals who act like Eurozone’s guardians of fiscal orthodoxy.
In short, the policy mix that Eurozone follows during the past few years favors the existing structures in the financial sector (protecting the ‘systemic’ banks) and safeguarding the existing productive apparatus. Despite the unprecedented fall of the cost of money, investments in infrastructures and the industrial sector remain bearish. This practice had led to persistent fall of the industrial produce. During the past six years that is, from November 2010 till today, industrial production oscillates in a region between 15% and 10% below the levels of February 2008.
Counting on the rest of the world
As a result official unemployment remains in the double digit region, while the youths without a job are double that. Still, Eurozone’s foreign trade leaves a sizeable surplus that effectively supports the foreign value of the euro. According to Eurostat “The first estimate for euro area (EA19) exports of goods to the rest of the world in February 2016 was €163.5 billion, an increase of 1% compared with February 2015 (€161.4bn). Imports from the rest of the world stood at €144.4bn, a rise of 2% compared with February 2015 (€141.5bn)”. A monthly trade balance of €19.1bn is impressive, without counting the equally important surplus of services trade. This is tantamount though to counting on the rest of the world for growth at home. Everybody agrees that large trade and service surpluses ‘steal’ jobs from trade partners.
In any case, the euro area is a traditional a net exporter of goods and services to the rest of the world. As noted above, this fact effectively supports the relatively high levels of the foreign value of euro, making it an expensive currency. This is a double edged reality. For one thing, it nurtures a mentality of security that doesn’t favor renovation.
A double edged security
At the same time, the expensive and strong euro undermines the export prospects of the less competitive EU producers. For example, the German car industry and more generally the engineering industry of this country has a traditional advantage, making it strongly exports oriented. The result is that Germany in this way supports an expensive euro, which hinders the export efforts of the agricultural, food and other products that the EU’s south specializes in.
This reality may seem as a fact of life that cannot be changed. At the same time though, it constitutes a very strong impediment in the process of a closer Union. Exactly for this reason the southern EU countries have come at times to the point of questioning their participation in a monetary zone of such a strong currency. Greece and Italy are the first member states to have come close to that, while France and Spain also seem perplexed.
Contesting the euro
This reality has also darkened the political horizon in the above mentioned member states. The same is true but for different reasons for the Visegrad countries (Czech Republic, Hungary, Poland and Slovakia). The rise of eurosceptic extremist parties on both edges of the political spectrum in all those countries stands as an infallible witness of that.
The same mechanisms but ‘a contrario’ have fashioned and strengthened extreme rightwing parties in the north (Germany, Austria, Sweden, Finland, Holland and Belgium). The migration predicament proved that the connecting material of the EU has thinned to dangerous levels. No EU institution today has the ability to inspire respect and command Union authenticity in view of all the 28 countries and the even more numerous political parties.
What about ECB?
As it turns out, the only EU institution with true European motives and vision remains the European Central Bank of Mario Draghi. But then again this is restricted to the 19 euro area member states, with some of them questioning its role. The ECB tries, at times in vain, to unify the Eurozone financially, by adopting monetary measures aimed at the creation of a level playing field for all. However, Draghi recognizes that monetary policy alone cannot do that. So he insists that “In particular, reform efforts need to be stepped up to improve the business environment, which in turn will help increase productivity, employment and growth….Fiscal policies should (also) support the economic recovery”.
But this is the job of the politicians to accomplish and unfortunately there is very little action to this direction if any. Most political leaders are petrified with the political cost and with very few exceptions are following personal agendas. In short, there are no hard drivers to change the stagnating affairs of the EU.