Underpinning European integration is the belief that unity between nations should bring shared prosperity instead of social, political and economic turmoil. However, today’s debt crisis has exposed a fundamental weakness in the eurozone’s architecture: insufficient integration.
This adds another layer of complexity, compared to the US or Japan, to the economic challenges that the EU faces. To paraphrase Leo Tolstoy, the European family is unhappy in its own way.
The European Monetary Union acted as a powerful catalyst for European integration, rapidly bringing together 17 diverse economies in a single monetary union — but without fiscal solidarity, a way to enforce fiscal discipline, or an established lender of last resort. This facilitated massive capital inflows and unsustainable borrowing in the peripheral countries — most notably Greece, but also Portugal, Spain and Italy — shrouding and thereby accelerating their increasing loss of competitiveness. When the global financial crisis hit, the house of cards collapsed.
Now, troubled countries do not have the option of reducing their debt burdens and increasing external competitiveness by devaluing their currencies. Integration is thus incomplete with eurozone countries having abrogated monetary sovereignty, while rejecting the stabilizing mechanisms of shared fiscal and economic policy.
With the single currency on the precipice, the necessity of greater fiscal and economic coordination is clear. However, such a move would require profound treaty changes and thus would take time. Still, more can be done to smooth the fiscal and economic adjustments taking place in the eurozone’s troubled periphery.
The current focus on austerity and structural reform carries severe social and economic risks, in part because disenchanted electorates are fertile ground for extremist parties. Indeed, in Greece’s recent elections, after five years of recession and 20 percent unemployment, extremist parties from both ends of the political spectrum made substantial electoral gains. Likewise, in the first round of France’s presidential elections last month, extremist parties from the right and left won more than 30 percent of the vote.
Europe needs a new plan to ensure sustainable and shared prosperity, based in part on rebalancing growth and competitiveness within the eurozone. Although Germany’s recent indication that it may consider wage increases for its workers is an encouraging start, a consumption-based recovery is clearly not sustainable.
Peripheral countries must undertake structural reforms, while recognizing that such changes will not bear fruit overnight and that internal economic rebalancing will be painful. To facilitate this economic rebalancing and ameliorate its social consequences, they also need targeted public investments, cofinanced at the European level.
The green sector provides a key opportunity for European investment, owing to its scale and long-term growth potential. After all, real resource prices have reached record levels and, on average, the oil intensity of GDP in Spain, Greece and Portugal is 60 percent higher than the European average. Investing in the green sector would contribute to Europe’s long-term productivity, while providing productive cross-border capital flows to complement structural rebalancing within peripheral countries.