A decade after the
creation of the eurozone, an economic and monetary union of 17 European Union
member states, it is facing its biggest crisis yet.
The euro is used
daily by 350 million people. It has become the second-largest reserve currency
as well as the most traded currency in the world after the US dollar, and the
eurozone is now the second-largest economy in the world. Therefore the
implications of the euro crisis reach well beyond Europe’s borders.
this election year, the stakes for President Barack Obama are huge as the
European situation could threaten the US’s economic recovery and consequently
Obama’s chances at reelection.
Governor of the Bank of Israel Stanley
Fischer has warned that despite the strength of the Israeli economy, the effect
of the debt crisis in Europe could cause serious problems. “Our exports will be
affected by the situation in Europe. If there is a financial crisis and weakness
in European banks, it will affect us too – and it’s on the way,” he said.
“Exactly how it will affect us is not clear.”
Since its establishment,
the biggest difficulty for the eurozone has been the adoption of common fiscal
policies, as the economic conditions of the countries differ significantly.
There has been fear that with a single currency, irresponsible financial
behavior by one member country could cause suffering to all the others by
raising the cost of borrowing. This fear led to the introduction of budget
deficit caps. However, strict budget deficit regulations can deny a country the
option to borrow when borrowing could boost its economic growth.
HAVING adopted strict criteria regarding budget deficit and public debt, the
European Union has always been tolerant of deviations. The German magazine Der
Spiegel recently revealed documents from German state archives that prove that
“Italy should never have been accepted” into the common currency zone and the
decision “was based almost exclusively on political considerations at the
expense of economic criteria.”
The same lack of fiscal discipline that
was already present before the introduction of the euro continued to be present
during the entire decade. It was the eurozone’s largest economies, France and
Germany, which continuously violated these requirements, starting in 2003 by
breaching the 3 percent annual budget deficit ceiling, claiming that flexibility
is necessary in order to boost economic growth.
In Greece, irresponsible
government spending led to a large increase of the government’s debt level. This
caused concerns among investors concerning Greece’s ability to meet its debt
obligations and led to a crisis of confidence and danger of default. In May
2010, the eurozone countries and the International Monetary Fund agreed on a 110
billion euro bailout loan for Greece, conditional on the implementation of
austerity measures. In October 2011, Greece received a second 130b. euro bailout
In addition to the difficult economic situation, Greece has
suffered from political instability and street riots. The coalition talks after
the May elections fell apart and elections will be held again in June, where the
far-left Syriza party, which came in second in May, has good chances of
Syriza refuses to continue with the austerity terms of the Greek
bailout, which has led to strong speculations about whether Greece will have to
leave the eurozone. There is a European consensus about maintaining the
country’s membership, but European countries have said that Greece must accept
the terms of the bailout package. It is uncertain what a Greek exit, or
“Grexit,” would mean for the economies of Europe and the world.
this, public debt has risen substantially in only three eurozone countries:
Greece, Ireland and Portugal. There is a misperception that a high increase of
government debt characterizes all of the eurozone, whereas these countries
collectively account only for 6% of the eurozone’s GDP. The euro has also
remained stable throughout the crisis.
It’s true that public debt is
often high elsewhere in the eurozone, however it hasn’t increased as sharply,
and a bigger challenge is how to tackle the lack of economic growth and the
In Spain, the eurozone’s fourth largest economy,
unemployment has reached 25%, while the economy shrank by 0.3% in the first
quarter. Italy, the eurozone’s third largest economy, slid further into
recession in the first quarter of this year, as data show a 0.8% contraction,
while unemployment rose to a 12-year high.
Several countries do not
suffer from high public debt and are desperate to generate more growth. Despite
these differences between eurozone countries, German Chancellor Angela Merkel
strongly believes, perhaps due to past violations, that priority should be given
to the reduction of public debt. Merkel’s efforts led to the adoption of a
fiscal agreement that would force European countries to have national budgets
that are in balance or in surplus.
However, since the signing of the
fiscal treaty, parties opposing the measures gained considerably in elections
throughout Europe. The biggest challenge to the fiscal treaty came from France.
With François Hollande’s victory against Nicolas Sarkozy, Merkel lost her
closest supporter in Europe. Hollande is interested in reviewing the agreement,
and if his party succeeds in the parliamentary elections in June, French
ratification may be jeopardized.
The latest declaration at the G8 summit
in Camp David could be indicative of the future direction of fiscal policies.
“We commit to fiscal responsibility and, in this context, we support sound and
sustainable fiscal consolidation policies that take into account countries’
evolving economic conditions and underpin confidence and economic
Obama’s closing statement at the G8 indicates that he sides
with Hollande and those who are interested in pursuing a different approach to
the German one: “But the direction the debate has taken recently should give us
confidence,” Obama said. “Europe has taken significant steps to manage the
crisis. Individual countries and the European Union as a whole have engaged in
significant reforms that will increase the prospects of long-term growth. And
there’s now an emerging consensus that more must be done to promote growth and
job creation right now in the context of these fiscal and structural reforms.
That consensus for progress was strengthened here at Camp David.”
has until now been categorically against opening up the fiscal agreement, and
claimed that “growth through debt would throw us back to the beginning of the
crisis.” However, due to changing political circumstances and her increasing
isolation, she might consider accepting some of Hollande’s proposals.
any case, there is an inherent structural difficulty in applying common
financial policies to 17 different countries. Nevertheless, in such a globalized
economy, the restoration of confidence in Europe is important for us
The writer is project coordinator at the Jerusalem Center for Public