Saturday, November 29, 2014

The Eurozone’s Agenda in 2013

PARIS – European Union leaders concluded 2012 with a landmark agreement that places all eurozone banks under a single supervisor. But the difficult negotiations that led to the agreement eclipsed European Council President Herman Van Rompuy’s recent report, Towards a Genuine Economic and Monetary Union, which calls for unity far beyond a banking union. Although “no door was closed,” in the words of European Commission President José Manuel Barroso, EU leaders have clearly refused, at least for now, to hold a serious discussion about deeper integration.

Van Rompuy’s report raises a fundamental question: What factors are preventing the eurozone from functioning as everyone would wish? Answering this question requires, first and foremost, comparing the dynamics at play during the euro’s first decade, 1999-2009, when the eurozone ostensibly performed well, with those of the last three years, which have been marred by crisis.

At first, the eurozone seemed to function like a true currency union: capital-market integration was accelerated; cross-border activity increased; and the per capita income gap between member countries decreased. But, unlike in a complete currency union, such as that of the United States, eurozone members retained full financial sovereignty, meaning that they controlled all of the levers of macroeconomic policy.

Without external constraints, public and private expenditure grew precipitously in many countries on the eurozone periphery, while wages rose faster than productivity. As these countries posted current-account deficits, northern European countries accumulated current-account surpluses, exposing a widening competitiveness gap.

In a genuine currency union, wealth transfers and automatic stabilizers mean that such discrepancies do not pose a problem. With the eurozone as a whole benefiting from a relatively solid balance-of-payments position, European leaders initially failed to foresee the risk incurred by letting competitiveness differentials grow, and underestimated the threat posed by some countries’ accumulation of significant external debt.

Indeed, for ten years, north-to-south income transfers and lending financed excessive aggregate demand, making the eurozone seem stable. As markets underpriced risk in order to lend to increasingly indebted countries, pressure on interest rates diminished. (Over the course of the euro’s first decade, interest-rate spreads between ten-year government bonds nearly disappeared.)

The global financial crisis exposed the eurozone’s underlying flaw. Meanwhile, international bodies, including the International Monetary Fund and the G-20, encouraged struggling countries to implement loose fiscal policies, claiming that they were needed to overcome the crisis. But fiscal stimulus merely aggravated the problem.

Financial investors soon recognized that risk had been underestimated in some countries, causing interest rates to rise, sometimes to unsustainable levels, as in Greece, Portugal, and Ireland. While the decline in aggregate demand led to reduced imports, the combination of higher interest rates, lower public expenditure, tax increases, and wage deflation boosted unemployment and triggered recession.

Normally, by decreasing prices relative to their more fiscally sound neighbors, struggling countries can boost exports, thereby reducing their current-account deficits. But, in the case of the euro crisis, price stickiness caused inflation to increase more in debtor countries than in creditor countries, making adjustment even more painful.

In this context, Van Rompuy’s report is crucial. It maps out the architecture needed to “guarantee the minimum level of convergence required for the EMU to function effectively,” and calls for a more integrated financial, budgetary, and economic policy framework. Specifically, the report highlights the need for the eurozone to make two fundamental commitments.

First, eurozone countries must implement reforms aimed at boosting wage and price flexibility through enhanced competition and improved labor and capital mobility within and between member countries. Second, wealth transfers to peripheral countries, while controversial, are necessary.

To surmount the associated political hurdles, eurozone leaders must create a limited “fiscal capacity,” which should act as a “common but limited shock-absorption function” that would “contribute to cushioning the impact of country-specific shocks and help to prevent contagion across the euro area and beyond.” This mechanism should also provide financial support for structural reforms through “limited, temporary, flexible, and targeted financial incentives.”

But Van Rompuy’s minimal proposal may be insufficient. Currency unions require a mechanism for permanent transfers to poorer regions. The EU budget should facilitate such transfers in the eurozone, using structural funds. Tax transfers should also act as an automatic stabilizer in the case of asymmetric shocks.

Such reforms undoubtedly require a much more politically integrated, or federalized, eurozone. Facing up to that reality will be the main challenge for Europe’s leaders in 2013.

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    1. CommentedRoman Bleifer

      It is considered that the main problems of the EU in the field of finance, sovereign debt in the EU's structural shortcomings as an economic union. In my view, the main problem of Europe in a catastrophic shortage of politicians who can rise to the level of the challenges and problems posed to the world global crisis. Too little of politicians for whom the future of Europe and their countries are at pervos place, but the interests of personal political career on the second. Politicians do not have the courage to take responsibility for the possible and not popular decisions. You could even say that the political will of political impotence.
      Europe is at a key turning point in its history. Defined place in the world to Europe train stations for decades. If Europe is to deepen integration, will go to the creation of the Confederate structure, then it will keep itself as one of the leading centers of global politics and economics. If the political impotence of politicians prevent deeper integration, it is waiting for the disintegration and transformation of Europe into a third-world province. Accordingly, the standard of living of Europeans will meet its provincial status.
      Laws of development can not be deceived, or ignored. The global crisis is a tool to change the world to a new level ( ). Only time will show how to solve Europe dilemu facing her.

    2. CommentedJoshua Ioji Konov

      The Deindustrialization of Many Markets/Economies
      By Joshua Konov, 2012

      The ongoing advances in high technologies that simplify manufacturing, the Internet, and the expanding worldwide intellectualization, which are supported by market globalization and rising productivity, make the process of economic deindustrialization in many markets/economies irreversible. It is not just about Marx’s imperialistic overproduction that prompts such processes, but mostly about the enhancing openness of the global marketplace for direct investment by Transnationals and the enhancing intellectualization of the labor-force that have given immense acceleration of industrial production of China, India and now Vietnam. The role of the Chinese government in promoting and prompting such industrialization by subsidies, tax breaks and technological assistance is very high too. The speed with which production lines were setup, the enhanced infrastructure for shipping goods, the lifted trade barriers, have established market conditions for “limitless” expansion of industrial production in China land; not the least is the internal consumption growth in there too, that makes the conditions there perfect for long term moving and outsourcing of such production, indeed.

      These processes of flawless industrialization growth particularly of China affects straightforward the rest of the world advanced and developing economies by prompting high deficit and national debt. With the exception of Germany, Japan and the US’s highly industrialized economies that still hold lead in some industrial spheres all of the rest are struggling to keep up with lowering productivity and harmful fiscal shortages, however even the most advanced economies are not immune from high national debt too.

      If the markets/economies are reviewed from the prospective of deindustrialization, it is clear that the process of shortening industrial employment is irreversible too. The whole world of high interest rates Capitalism and trickle-down economics of Transnationals and Large Investors superiority is to crumble into constant austerity measures to reducing the middle class and to expanding poverty.

      Then it comes the possible alternative of socialization of markets/economies and the expanding governmental role in managing businesses and wealth distribution that brings not very positive prospective for the Future, having in mind their inept inflexible managerial abilities.

      Therefore, “Market Economics using Quantum Factor” argues for changing the role of Small and Medium Enterprises and Investors in the markets/economies through a mostly natural enhanced market/economy security by using micro and macroeconomic changes. From generally unfair market competition of the trickle-down capitalism that promote Transnationals and Large Investors to a relatively fair market competition of enhanced “Rule of Law in Business” and by establishing a regulated fair market exchanges that allow more secure access to foreign markets/economies. The unnatural/artificial market/economic agent/tools such as social and infrastructural expanses are well taken in consideration under these new market conditions for balancing market’s Demand-to-Supply, however the natural for the markets market/economic agents/tools are preferred to the unnatural/artificial market/economic tools.

      What the Quantum Factor represents are the random ways market/economic agents/tools are used, instead of the “predictable” cyclical ways of the trickle-down market/economic agents/tools have been used.

      The deindustrialization of many markets/economies brings the issues of reducing Fiscal reserves on the front, whereas industrial employment is paid higher, and the lack of it brings the question of the possibilities to maintain and expand an adequate market consumption going along with the ever-rising prices of natural resources and national debt. Under such conditions the suggested impact of “productivity” (noise) in economics that brings the less developed markets/economies to closing the frontiers (most developed markets/economies) also should change into more general diversified business activities that could be brought mostly by the small and medium enterprises and social and infrastructural expenses, the productivity could not be anymore politicized as an excuse for government’s inaction, the neo-liberalism should well be taken off for their poor economic results of the last 20-25 years.

      The industrialization of China, India, Vietnam, and e.g. should not be considered as negative occurrences for prompting deindustrialization of many other markets, but the system of international business should well take in account the irreversibility of this process and establish a relatively fair market competition as mentioned above by raising market security and thus promoting business diversification.

      In such a context, the global worming and Earth reassures exhaustion should be dealt as additional market/economic agents/tools for business diversification, additional “noise” into the “1/f noise” formula.

      Inflation is the main and fundamental problem in such economics, whereas the market balance of Demand-to-Supply is paramount, therefore international cooperation and the same rules play is necessary.

      The scientific detailed exposition of Market Economics using Quantum Factor follows at:

      Konov, Joshua Ioji / JK, 2011. "2001 & 2007 Recessions prompted remaking of the international organizations," MPRA Paper 34588, University Library of Munich, Germany.