The sovereign debt crisis, a further stage in the global financial and economic crisis that started in 2008, hit the EU hard for two reasons. First, it brought to the surface structural weaknesses in some EU Member States (inside and outside the euro), such as unsustainable levels of public or private debt, vulnerable banks, or declining competitiveness. Second, it revealed some systemic shortcomings in the Monetary Union itself.
Efforts to cope with the situation in 2010 and 2011 addressed both the short term and long term. Short-term measures included the loans to Greece, Ireland and Portugal; agreement on the future ESM (European Stability Mechanism) to provide such rescue loans on a longer term basis; difficult fiscal consolidation in a number of countries; and the limited but significant intervention in markets by the European Central Bank. Long-term measures include a substantial reform to economic governance in the Eurozone, with strengthened rules and greater peer pressure, in a context where market pressure will unavoidably play a bigger role than in the past.
In the second half of 2011, however, the crisis took a turn for the worse. In July, conditions in Greece, and fears of contagion, meant that, from a series of national debt crises, the situation was evolving into a systemic concern, threatening the stability of the Eurozone as a whole. President Van Rompuy convened a crucial meeting of euro area leaders on 21 July. It agreed on a second assistance programme for Greece, exceptionally including a voluntary private sector involvement, and measures to stop contagion, in particular by making the EFSF rescue fund more effective.
The immediate reaction, both in political circles and in the markets, was positive; however, over the summer the crisis intensified. Doubts crept in about the implementation of the package (which in the end proved unfounded, as all 17 Eurozone national parliaments duly approved it within three months). There was a fear in the markets that the private sector involvement for Greece might set a precedent for other euro countries, even if the agreement had explicitly ruled that out. Brinkmanship in the US Congress about a potential US default fuelled market uncertainty. The latest worldwide economic growth figures were lower than expected. Market volatility began to grow; interest rates for Italian sovereign debt began to rise dramatically. All these problems fed each other. Market volatility rose dramatically.
In a series of meetings in October the European Council had to take further decisions on the by now familiar fronts: Greek debt sustainability, the firewall against contagion, the banking sector, economic growth. Moreover, individual member states such as Italy committed to major efforts to consolidate their budgets and improve competitiveness.
In December, the European Council further developed and refined short-term stabilisation tools, notably agreeing to bring forward the start of the ESM, and providing additional resources to the IMF. It also decided that, in order to demonstrate and secure improvements in the longer term, certain reforms should be entrenched in the treaties. These reforms included stricter fiscal discipline for Eurozone countries; however, as one non-Eurozone country refused to allow this to be done within the context of the EU treaties, this will be done through a separate treaty that will stand alongside the EU treaties. It envisages notably that Eurozone countries commit to a maximum structural deficit of 0.5 percent, and that they transpose this new fiscal rule into their national legislation before the end of 2012, preferably at constitutional or equivalent level.
Even if sound budgets are a necessary condition to prevent a crisis, they are not sufficient. Some of the hardest hit Member States had their deficits and debt levels in perfect order. This is why as of 2012 the Union will closely monitor not only public debt and deficits, as foreseen in the Stability and Growth Pact, but also risks of asset bubbles or trade imbalances. Moreover, all major economic policy reforms which have a potential impact on other members of the euro area will be examined jointly and Member States will work on the Europe 2020 programme to address the structural long-term weaknesses in Europe’s economic performance, looking beyond the debt crisis.
Many have argued that all this has been done too slowly. It is a fair criticism, until one remembers that the EU is not a dictatorship, but brings together 27 democratic countries whose agreement was necessary for most of the measures taken, many of which required national parliamentary approval. Markets move at the click of a mouse, but democratic procedures, even at their fastest, inevitably take longer. That is no reason to give up on democracy! Nonetheless, the need for unanimous consent has made it difficult to take some decisions, such as increasing the firepower of the EFSF, where a number of different possibilities were each blocked by a single member state. The impression of muddling through can all too easily take hold. Yet, if one adds together all the measures that have been taken over the last 20 months, they amount to a significant change in the governance of the Eurozone.
|Richard Corbett is a former Labour MEP and currently a member of President Van Rompuy’s cabinet at the European Council. He writes in a personal capacity.|