Growth in European

Euro zone still suffers growing pains. “Industrial output across the euro zone fell in the final month of 2013, disappointing expectations and suggesting that while the economy likely expanded for a third straight quarter between October and December, it did so at a muted pace”. According to Eurostat data, industrial output in Germany fell 0.7% in December; Italy posted a 0.9% monthly fall while French factory output was 0.3% weaker in December than in November. “The data were weaker than expectations for a 0.3% monthly drop and 2.0% annual increase” as per the author.

“There is still some way to go before a sustainable and even recovery is achieved”, as the article argues. But a switched focus on austerity and exports, coupled with zero interest rate and low inflation, imposes questions on the ability of the euro-zone governments to boost domestic demand, making it hard to see how most euro-zone countries can generate the economic growth they need to repair the finances of banks, consumers and governments. However, besides economic performance, with a growing far right concern of Euroscepticism, a more institutional question arises: How will the euro crisis end? Is the European Union (EU) the solution, or actually, the problem?

EU, as a customs union, is beneficial since it brings more trade creation than trade diversion at aggregate level, as well as the growth of intra-industry trade inside EU. As always, integration takes steps. In 1999, a monetary union was formed. The single currency scheme eliminated the exchange risk and exchange related costs, but seemed to cause more trouble in the case of sovereign debt crisis, which later developed into the euro crisis. In my opinion, the creation of euro zone was based on a bet that European economies would converge to each other, which, unfortunately, did not happen, and Europe is still far from an “optimal currency area”. Moreover, there is barely a supporting fiscal structure of a treasury that performs spending and tax-raising functions at EU level. The European Central Bank (ECB) seems to be the only responsive actor to do “whatever it takes” to save the euro. But undoubtedly, monetary measures have already reached their limits and the euro crisis requires fiscal cooperation. Thus, the failure of euro is predicted unless troubled countries can change their economic behaviors.

Dictated changes of economic behaviors bring up new issues. It is commonly contend that power should be pushed down as far as possible unless significant economies of scale and externalities can be realized. However, after the euro crisis, Brussels now takes authority over national budgets and dictates national economic policies such as austerity in Greece and Germany’s low wage level and high trade surplus. Initially, EU was created as an amplifier of national power, to exert a bigger clout in world politics, but now it seems to become a menace to that. Governments elected need to answer for policies they do not fully control, and unsatisfied voters could not bring their anger to Brussels.

The problem here, I think, is the optimal degree of integration. From a customs union to a monetary union, what’s next? What’s the end point? A fiscal union? A United States of Europe? The optimal degree of integration is left deliberately ambiguous in both TEU and TFEU, maybe even for Jean Monnet, EU’s godfather. I think EU is stepping towards a fiscal union now with Germany paying for Greece (similar to social transfers), but is further integration the desired solution for the euro crisis even if it implies a further loss of national sovereignty?

Different countries, as separate political entities, put their own national interests first. Pure economic cooperation inevitably runs into political conflicts. The defective designation of euro zone caused the problem, and the choice is simple—either much deeper macroeconomic integration such as a fiscal/political union, or its collapse. Since each country has its own economic condition and growth strategy, maybe EU works best if remains at customs level.

6 thoughts on “Growth in European

  1. davus@umich.edu'davus

    I think that if the Eurozone is going to stay together, then other countries using the euro are going to need to have a voice in fiscal policy as well as monetary policy. The nations are going to have to decide if they want to come together or not. A any sort of union is bound to fail unless the members are accountable to each other for their actions.

  2. mdbold

    I think that the creation of the eurozone had a lot of causes, not all economic. There’s something politically powerful about having the countries united, too.

  3. lippmanb

    I agree with Davus. The problem with the Eurozone is that the countries are all in different economic situations, so one monetary policy would not necessarily be helpful to every country.

  4. enjar

    I think if the EU can cope with its today’s problem soon enough, they might direct to more integrated union.

  5. dslavin

    I agree with Enjar. We also should not forget about the clear benefit of a monetary union in spite of the current crisis: a monetary union allows for a lack of exchange rates between participating members. This creates lower prices, increased competition (leading to higher quality goods), and more international trade and investment. This is seen throughout the European Union. As a result of the change to a single currency in the early 21st century, businesses have been able to expand due to the smaller cost of doing business across borders and investors are more confident in lending their money due to greater price transparency and the lack of exchange rate uncertainty. Further, it can be argued that the European Central Bank (ECB) provides a more credible and organized operation than the central banks of some of the EU member countries.

  6. pranavrk

    I think I wrote something on the Eurozone a few months back about getting smaller countries involved, and the growth numbers continue to substantiate that claim. The way things are with the amount of banking failure and fiscal crises that have emerged means that the ECB has little it actually wants to do when a lot of the discussion is turned towards what Germany will do next and how they’re pushing forward a lot of their own solutions at the European Commission level. Not enough economies have that kind of leverage and in some cases they often tend to compete with each other rather than solving a larger problem.

    In addition to a fiscal and potential banking union, there might also need to be a union that can represent the economic interests of multiple countries. Say if Slovenia and Slovakia are both looking to increase exports but can’t do so under a strong Euro, they can group interests and create a more solid voice for these issues at a Commission level.

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