EU at a crossroads
December 02, 2011
The governments in Greece and Italy have preferred to step down and given way to technocrats rather than undertaking austerity measures to bring down their fiscal deficits, which have so far been financed by the banks at high interest rates. The banks are facing solvency and are of little help to fund the fiscal deficits. The European Union (EU), formed in 1993, intervened to pull these countries back from the brink of default but the rescue plan is accompanied by stringent austerity measures that parties in power found hard to implement, fearing popular unrest.
The austerity measures the EU has suggested to pull the countries back from the brink of bankruptcy demand cutting down expenses on health, pensions and other welfare projects. Imposing new taxes is also an unpopular idea. High fiscal deficits, around 10%, have been the only method available to make economy afloat. This arrangement has so far guaranteed the survival of governments as well as the private commercial banks particularly based in Germany.
The problem with deficit economies, which are stagnant as well, is that they are prone to high inflation which ultimately burdens the purse of the commoners in the midst of low growth and high unemployment rate. While it becomes costly to maintain high standards of life, the tendency in political parties not to support taxation measures to increase revenues does mean a growing gap between income and expenditure. A point has reached where loans are not available at all or the cost of borrowing has become too high.
European debt crisis has made expression in the unbalanced sheet of the commercial banks that had extended loans, guaranteed by European Central Bank, which they have not paid back. The stagnant economies need more funds to revive but these funds are not available in the market. Countries like Germany have provided bail-outs in the past but they have refused to finance fiscal deficits any further. The countries passing through debt crisis will either default or they will have to be thrown out of the Eurozone. In both cases, the fallout will have a telling effect on the whole of European Union.
German Chancellor, Angela Merkel, is leading the move to transform the regional body into a fiscal union with a long term goal to make it a political union. She put her weight behind the European leaders’ summit in October which other than establishing a bailout fund for banks got written off 50% debt owed by Eurozone countries in crisis other than arranging funds for Greece.
The European CouncilPresident Herman van Rompuy has been tasked with presenting a roadmap to pull Europe out of crisis. The idea that the nature of problem is less monetary and more political is being opposed by England which is one of the 10 EU members which opted to stay out of the Eurozone since its formation in 1998.
David Cameron while commenting on the prospects of the EU treaties being revised has said that England will agree to the proposal only on the condition that it rethinks the logic of its membership in the regional body. He aired his apprehension that lest the Eurozone leaders go far further integration of the region the EU will become a rigid bloc rather than a loosely-knit association of the regional states.
Niall Ferguson, a professor of history at Harvard University, recently opined that the disintegration of EU has become overdue since the launching of euro whereby 10 countries did not join it. The only question is when this development takes place. Given the position which the two sides of the divide have stuck to, is certainly fraught with the risk of EU falling apart. But at the same time, there exist a strong tendency to not only reach a consensus on reforms, but also to add 10 more countries aspiring for its membership.