Amplifications

Outside opinion and commentary

A centralized Europe is a globalized Europe

Jean-Claude Trichet
Dec 27, 2011 17:00 UTC

By Jean-Claude Trichet

The views expressed are his own.

PARIS – Whenever people seek a justification for European integration, they are always tempted to look backwards. They stress that European integration banished the specter of war from the old continent. And European integration has, indeed, delivered the longest period of peace and prosperity that Europe has known for many centuries.

But this perspective, while entirely correct, is also incomplete. There are as many reasons to strive towards “ever closer union” in Europe today as there were back in 1945, and they are entirely forward-looking.

Sixty-five years ago, the distribution of global GDP was such that Europe had only one role model for its single market: the United States. Today, however, Europe is faced with a new global economy, reconfigured by globalization and by the emerging economies of Asia and Latin America.

It is a world where economies of scale and networks of innovation matter more than ever. By 2016 – that is, very soon – we can expect eurozone GDP in terms of purchasing power parity to be below that of China. Together, the economies of China and India could be around twice the size of the eurozone economy. Over a longer time horizon, the entire GDP of the G-7 countries will be dwarfed by the major emerging economies’ rapid growth.

So Europe must cope with a new geopolitical landscape that is being profoundly reshaped by these emerging economies. In this new global constellation, European integration – both economic and political – is central to achieving ongoing prosperity and influence.

Like individuals in a society, eurozone countries are both independent and interdependent. They can affect each other both positively and negatively. Good governance requires that both individual member states and EU institutions fulfill their responsibilities.

First and foremost, every eurozone country needs to keep its own house in order. This means responsible economic policies on the part of governments, as well as rigorous mutual surveillance of those policies – not just fiscal policies, but also measures affecting all aspects of the economy – by the Commission and member states.

In a society, law-enforcement institutions can ultimately compel a citizen to abide by the rules. In the eurozone, a framework based on surveillance and sanctions has, until the most recent decisions, depended on offending states’ willingness to comply.

But what can be done if a member state cannot deliver on its promises? For countries that lose market access, the approach of providing aid on the basis of strong conditionality is justified. Countries deserve an opportunity to correct the situation themselves and to restore stability.

This approach nonetheless has clearly defined limits. So a second stage is now envisaged for countries that persistently fail to meet their policy targets. During this second stage, eurozone authorities would play a much deeper and more authoritative role in the formulation of countries’ budgetary policies.

This moves us away from the current framework, which leaves all decisions in the hands of the country concerned. Instead, it would be not only possible, but in some cases compulsory, for the European authorities to take direct decisions.

Implementing this idea also implies embracing a new concept of sovereignty, given the complex interdependence that exists between eurozone countries. But it is ultimately in the interests of all eurozone citizens that these changes be made.

It is my firm conviction that the Europe of the future will embody a new type of institutional framework. What might it look like? Would it be too bold to envisage there being an EU finance ministry one day?

Any future European finance ministry would oversee the surveillance of both fiscal policies and competitiveness policies, and, when necessary, impose the “second stage.” Moreover, it would carry out the usual executive responsibilities regarding supervision and regulation of the EU financial sector. Finally, the ministry would represent the eurozone in international financial institutions.

Recent events have only strengthened the case for pursuing this approach. Europe’s leaders are discussing a Treaty change to create stronger economic governance at the EU level, and eurozone citizens are themselves calling for better supervision of the financial sector. And I know that our partners in the G-20 look to Europe as a whole, rather than to individual member states, for solutions. So, increasingly, it seems that it would be too bold not to consider creating a European finance ministry at some point in the future.

But an EU finance ministry would be only one component of Europe’s future institutional framework. One can imagine that, as various elements of sovereignty come to be shared, the European Council might evolve into the EU Senate, with the European Parliament becoming the lower house. Similarly, the European Commission could become the executive, while the European Court of Justice takes on the role of an EU judiciary. And, given European countries’ long and proud history, I have no doubt that “subsidiarity” will play a major role in the future Europe – significantly greater than in current models of federation.

Mine are the personal views of a European citizen. The future of Europe is in the hands of its democracies, in the hands of Europe’s people. Our fellow citizens will decide the direction Europe is to take. They are the masters. But, however Europe’s institutions take shape, a truly pan-European public debate is essential.

As Europeans, we identify deeply with our nations, traditions, and histories. These are Europe’s roots. But we also need to extend our branches more widely.

So, today, we should not look back. We must look forward – to opportunities of collective betterment, and to every country’s potential to be stronger and more prosperous in a well-functioning union.

Copyright: Project Syndicate, 2011.

COMMENT

Dear Mr. Trichet,
I am an Indian, India is a union of 28 states and seven union territories, India became an independent country in the year 1947 after gaining independence from England. India has one parliament & one central Bank. Each state has its own language, culture, history, dress code, yet we are together bonded by common DNA of Indianess, we fight amongst ourselves, riots break out between people of different faiths and states, we have endured bomb blast, terrorist attacks, a population of more than 1.2 billion people wherein nearly half the population is still in poverty, inspite of all this diversity Indians have grown together. I bet on my country thru thick and thin. Will you Mr. Trichet bet on Europe.

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Asia is no longer a safe bet

Stephen S. Roach
Nov 28, 2011 16:12 UTC

By Stephen S. Roach
The opinions expressed are his own.

For the second time in three years, global economic recovery is at risk. In 2008, it was all about the subprime crisis made in America. Today, it is the sovereign-debt crisis made in Europe. The alarm bells should be ringing loud and clear across Asia – an export-led region that cannot afford to ignore repeated shocks to its two largest sources of external demand.

Indeed, both of these shocks will have long-lasting repercussions. In the United States, the American consumer (who still accounts for 71% of US GDP) remains in the wrenching throes of a Japanese-like balance-sheet recession. In the 15 quarters since the beginning of 2008, real consumer spending has increased at an anemic 0.4% average annual rate.

Never before has America, the world’s biggest consumer, been so weak for so long. Until US households make greater progress in reducing excessive debt loads and rebuilding personal savings – a process that could take many more years if it continues at its recent snail-like pace – a balance-sheet-constrained US economy will remain hobbled by exceedingly slow growth.

A comparable outcome is likely in Europe. Even under the now seemingly heroic assumption that the eurozone will survive, the outlook for the European economy is bleak. The crisis-torn peripheral economies – Greece, Ireland, Portugal, Italy, and even Spain – are already in recession. And economic growth is threatened in the once-solid core of Germany and France, with leading indicators – especially sharply declining German orders data – flashing ominous signs of incipient weakness.

Moreover, with fiscal austerity likely to restrain aggregate demand in the years ahead, and with capital-short banks likely to curtail lending – a serious problem for Europe’s bank-centric system of credit intermediation – a pan-European recession seems inevitable. The European Commission recently slashed its 2012 GDP growth forecast to 0.5% – teetering on the brink of outright recession. The risks of further cuts to the official outlook are high and rising.

It is difficult to see how Asia can remain an oasis of prosperity in such a tough global climate. Yet denial is deep, and momentum is seductive. After all, Asia has been on such a roll in recent years that far too many believe that the region can shrug off almost anything that the rest of the world dishes out.

If only it were that easy. If anything, Asia’s vulnerability to external shocks has intensified. On the eve of the Great Recession of 2008-2009, exports had soared to a record 44% of combined GDP for Asia’s emerging markets – fully ten percentage points higher than the export share prevailing during Asia’s own crisis in 1997-1998. So, while post-crisis Asia focused in the 2000’s on repairing the financial vulnerabilities that had wreaked such havoc – namely, by amassing huge foreign-exchange reserves, turning current-account deficits into surpluses, and reducing its outsize exposure to short-term capital inflows – it failed to rebalance its economy’s macro structure. In fact, Asia became more reliant on exports and external demand for economic growth.

As a result, when the shock of 2008-2009 hit, every economy in the region either experienced a sharp slowdown or fell into outright recession. A similar outcome cannot be ruled out in the months ahead. After tumbling sharply in 2008-2009, the export share of emerging Asia is back up to its earlier high of around 44% of GDP – leaving the region just as exposed to an external-demand shock today as it was heading into the subprime crisis three years ago.

China – long the engine of the all-powerful Asian growth machine – typifies Asia’s potential vulnerability to such shocks from the developed economies. Indeed, Europe and the US, combined, accounted for fully 38% of total Chinese exports in 2010 – easily its two largest foreign markets.

The recent data leave little doubt that Asia is now starting to feel the impact of the latest global shock. As was the case three years ago, China is leading the way, with annual export growth plummeting in October 2011, to 16%, from 31% in October 2010 – and likely to slow further in coming months.

In Hong Kong, exports actually contracted by 3% in September – the first year-on-year decline in 23 months. Similar trends are evident in sharply decelerating exports in Korea and Taiwan. Even in India – long thought to be among Asia’s most shock-resistant economies – annual export growth plunged from 44% in August 2011 to just 11% in October.

As was true three years ago, many hope for an Asian “decoupling” – that this high-flying region will be immune to global shocks. But, with GDP growth now slowing across Asia, that hope appears to be wishful thinking.

The good news is that a powerful investment-led impetus should partly offset declining export growth and allow Asia’s landing to be soft rather than hard. All bets would be off, however, in the event of a eurozone breakup and a full-blown European implosion.

This is Asia’s second wake-up call in three years, and this time the region needs to take the warning seriously. With the US, and now Europe, facing long roads to recovery, Asia’s emerging economies can no longer afford to count on solid growth in external demand from the advanced countries to sustain economic development. Unless they want to settle for slower growth, lagging labor absorption, and heightened risk of social instability, they must move aggressively to shift focus to the region’s own 3.5 billion consumers. The need for a consumer-led Asian rebalancing has never been greater.

This piece comes from Project Syndicate.

Photo: Guest attend the presentation of the new Qoros car in Shanghai November 28, 2011. Chery Quantum Auto Co., a joint venture between Chery Automobile and investment firm Israel Corp, on Monday unveiled the design of its first car, which it hopes will allow it to reverse a trend and export made-in-China cars to Western Europe. REUTERS/Carlos Barria

Down with the Eurozone

Nouriel Roubini
Nov 11, 2011 18:51 UTC

By Nouriel Roubini
The opinions expressed are his own.

The eurozone crisis seems to be reaching its climax, with Greece on the verge of default and an inglorious exit from the monetary union, and now Italy on the verge of losing market access. But the eurozone’s problems are much deeper. They are structural, and they severely affect at least four other economies: Ireland, Portugal, Cyprus, and Spain.

For the last decade, the PIIGS (Portugal, Ireland, Italy, Greece, and Spain) were the eurozone’s consumers of first and last resort, spending more than their income and running ever-larger current-account deficits. Meanwhile, the eurozone core (Germany, the Netherlands, Austria, and France) comprised the producers of first and last resort, spending below their incomes and running ever-larger current-account surpluses.

These external imbalances were also driven by the euro’s strength since 2002, and by the divergence in real exchange rates and competitiveness within the eurozone. Unit labor costs fell in Germany and other parts of the core (as wage growth lagged that of productivity), leading to a real depreciation and rising current-account surpluses, while the reverse occurred in the PIIGS (and Cyprus), leading to real appreciation and widening current-account deficits. In Ireland and Spain, private savings collapsed, and a housing bubble fueled excessive consumption, while in Greece, Portugal, Cyprus, and Italy, it was excessive fiscal deficits that exacerbated external imbalances.

The resulting build-up of private and public debt in over-spending countries became unmanageable when housing bubbles burst (Ireland and Spain) and current-account deficits, fiscal gaps, or both became unsustainable throughout the eurozone’s periphery. Moreover, the peripheral countries’ large current-account deficits, fueled as they were by excessive consumption, were accompanied by economic stagnation and loss of competitiveness.

So, now what?

Symmetrical reflation is the best option for restoring growth and competitiveness on the eurozone’s periphery while undertaking necessary austerity measures and structural reforms. This implies significant easing of monetary policy by the European Central Bank; provision of unlimited lender-of-last-resort support to illiquid but potentially solvent economies; a sharp depreciation of the euro, which would turn current-account deficits into surpluses; and fiscal stimulus in the core if the periphery is forced into austerity.

Unfortunately, Germany and the ECB oppose this option, owing to the prospect of a temporary dose of modestly higher inflation in the core relative to the periphery.

The bitter medicine that Germany and the ECB want to impose on the periphery – the second option – is recessionary deflation: fiscal austerity, structural reforms to boost productivity growth and reduce unit labor costs, and real depreciation via price adjustment, as opposed to nominal exchange-rate adjustment.

The problems with this option are many. Fiscal austerity, while necessary, means a deeper recession in the short term. Even structural reform reduces output in the short run, because it requires firing workers, shutting down money-losing firms, and gradually reallocating labor and capital to emerging new industries. So, to prevent a spiral of ever-deepening recession, the periphery needs real depreciation to improve its external deficit. But even if prices and wages were to fall by 30% over the next few years (which would most likely be socially and politically unsustainable), the real value of debt would increase sharply, worsening the insolvency of governments and private debtors.

In short, the eurozone’s periphery is now subject to the paradox of thrift: increasing savings too much, too fast leads to renewed recession and makes debts even more unsustainable. And that paradox is now affecting even the core.

If the peripheral countries remain mired in a deflationary trap of high debt, falling output, weak competitiveness, and structural external deficits, eventually they will be tempted by a third option: default and exit from the eurozone. This would enable them to revive economic growth and competitiveness through a depreciation of new national currencies.

Of course, such a disorderly eurozone break-up would be as severe a shock as the collapse of Lehman Brothers in 2008, if not worse. Avoiding it would compel the eurozone’s core economies to embrace the fourth and final option: bribing the periphery to remain in a low-growth uncompetitive state. This would require accepting massive losses on public and private debt, as well as enormous transfer payments that boost the periphery’s income while its output stagnates.

Italy has done something similar for decades, with its northern regions subsidizing the poorer Mezzogiorno. But such permanent fiscal transfers are politically impossible in the eurozone, where Germans are Germans and Greeks are Greeks.

That also means that Germany and the ECB have less power than they seem to believe. Unless they abandon asymmetric adjustment (recessionary deflation), which concentrates all of the pain in the periphery, in favor of a more symmetrical approach (austerity and structural reforms on the periphery, combined with eurozone-wide reflation), the monetary union’s slow-developing train wreck will accelerate as peripheral countries default and exit.

The recent chaos in Greece and Italy may be the first step in this process. Clearly, the eurozone’s muddle-through approach no longer works. Unless the eurozone moves toward greater economic, fiscal, and political integration (on a path consistent with short-term restoration of growth, competitiveness, and debt sustainability, which are needed to resolve unsustainable debt and reduce chronic fiscal and external deficits), recessionary deflation will certainly lead to a disorderly break-up.

With Italy too big to fail, too big to save, and now at the point of no return, the endgame for the eurozone has begun. Sequential, coercive restructurings of debt will come first, and then exits from the monetary union that will eventually lead to the eurozone’s disintegration.

This piece comes form Project Syndicate.

COMMENT

Tony B Liar – and his ilk + Basel II = mass corruption. An opportunity grabbed with both hands by a very small band of opportunists who engineered their own opportunity.
His children’s generation will have to pay, possibly in blood, for their greed.

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