(Revised) Growth in Europe

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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, 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 it 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 the variance of the economic performance in most countries could be less and less.

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 because of the rounds of bailout for Greece leaded by Germany, which effectively prevented the even worse situation. However, 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.