Overcoming the Euro Crisis
On Tuesday, June 19, 2012, the American Institute for Contemporary German Studies (AICGS) hosted a conversation on “Overcoming the Euro Crisis” with Prof. Dr. Paul J.J. Welfens.
Identifying some of the many events that led up to Europe’s current situation, Prof. Dr. Welfens pointed not only to the collapse of Lehman Brothers Holdings, Inc in 2008, but also to faults in the European Parliament (EP) and European Union’s (EU) reaction to the actions of member states. Tolerating Greece’s false reports of government deficit-GDP ratio and Ireland’s refusal to apply EU prudential supervision rules, the EU and more specifically the European Commission’s president responded only with “elegant silence.” Furthermore, Prof. Dr. Welfens marshaled 2006 and 2008 International Monetary Fund reports on Ireland and Greece that mischaracterized economic stability to argue that inadequate reporting from existing international organizations is a problem. In this sense, Prof. Dr. Welfens complicated prevailing thought on the causes of this crisis by identifying further failures in our political and economic governance structures. Inconsistent national euro policy strategies adopted by Berlin and Paris in combination with IMF efficiency problems have compounded stabilization of the euro area.
Building on this characterization, Prof. Dr. Welfens spoke to the current problems that Europe as a whole and members states individually must overcome. First, the level of foreign direct investment at a percentage of GDP is a large problem in many of the struggling euro zone countries, including most notably Italy, Greece, and Portugal. Additionally, the latter two countries are noteworthy for their disappointing progress in developing information and communications technology (ICT). Their stagnation in not only patent applications, but also job growth in this sector, particularly in contrast to the rest of Europe, is further substandard in the context of the Lisbon agenda’s emphasis on ICT.
Further addressing Greek problems, Dr. Welfens noted that, despite the fact that the Greek government holds enough assets to pay back its debts, they have failed to privatize. Contrasting Greece with Poland’s privatization efforts, however, he anticipated that Greek privatization would mean considerable lay-offs of workers, who would be largely unable to find new jobs unless many new firms could be created and investment would resume. Furthermore, he excluded the notion that Greece may leave the euro zone in the short run; refuting the argument that Greece leaving the euro zone would have no effect, he instead asserted that not only would there be serious negative consequences for the euro (and several countries, including Cyprus), but this action would also set a dangerous precedent, which may then be used to remove other member states in the future. In this sense, Prof. Dr. Welfens’ characterization of the existing challenges implicitly poses the question: what can Europe do?
There are a number of policy options. Adopting an approach that shifts increased power to Brussels, Prof. Dr. Welfens advocated that some EU countries, including the UK, should recapitalize Spanish banks, create true euro bonds, and increase expenditures at the EU level to between 4 and 5 percent of GDP. Furthermore, he claimed that besides risks associated with euro rescue funds Germany benefits from the safe haven effect: capital leaves Greece and other unstable or collapsing economies in favor of more stable economies, which benefit from very low interest rates. To remedy this, in addition to the ineffectiveness of regional funds, Prof. Dr. Welfens suggested that project bonds for infrastructure development or a Marshall Plan-like scheme of investment would be more appropriate to keep rescue funds inside a struggling economy. Asserting that European crisis management mechanisms are too slow, too confusing, and unable to create an effective policy mix, he pointed to the disagreement among member states on the future of the EU and euro zone as an underlying source of problems. European politicians should improve and accelerate crisis management while taking first steps toward the introduction of supranational euro bonds which would reduce interest rate payments of governments and reinforce financial integration in the euro area. To this end, Prof. Dr. Welfens’ analysis quite adeptly outlined the path forward and the challenges to these solutions. Germany could not expect sustained growth if stability in EU partner countries should not be restored and better transatlantic cooperation in government budget consolidation could be useful for both Germany—and the EU—and the U.S.