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The reaction of the EU to the economic crisis has been ineffective. The risk of contagion from the fiscally challenged member-states of the euro to the rest is increasing. Italy is gradually but rapidly sucked into the crisis, while other member-states might possibly follow if things stay as they are.
The main reason behind this failure is that the very nature of the crisis has not been evaluated in full. The crisis has multiple dimensions and is systemic. In fact it is three crises that occur simultaneously. It is the debt crisis, the banking sector crisis and the under-investment crisis. European actions have so far failed because they do not address the crisis in all its dimensions and do not treat it as a systemic issue that requires a system-wide solution.
The EU has reacted only to one of the three crises. It has been limited in addressing the sovereign debt crisis. It has completely omitted the other two. This is done through the narrow bailout packages to individual member-states (Greece, Ireland, Portugal) that are accompanied by a fallacious strict austerity regime that plunges those countries into a deeper recession, it shrinks their economy, it increases their unemployment and it thus makes them more vulnerable to the volatility of the market forces and more dependent on the community’s assistance. The need to issue a second bailout to Greece is a clear indication of the above.
The bailout regimes are permeated by this inability (or unwillingness) to appreciate the degree of the crisis. In fact all that this is, is big loans (from taxpayer money) to practically insolvent countries. Insolvent because the terms of the bailouts are burdensome, unfair and counter-productive. Interest rates are very high and coupled with the massive reduction in revenues, employment and income make it practically impossible to pay them back.
In other words the bailouts, in the way that are structured create a vicious cycle that leads with certainty to a far worse situation of extended underdevelopment. The bailouts are constructed in a way that dooms the countries that receive them, at the expense of indirectly financing certain major private banks, who are exposed to the economies of these countries.
The immediate effect of this narrow-sighted approach to the crisis, is that the other two crises, the banking sector crisis and the under-investment crisis are worsened. Banks are filled with worthless paper assets. The ECB supports them with liquidity, but only a small margin of that money ends up in the market in the form of loans since the banks use most of it to recapitalize their activities.
Thus the available loanable funds are reduced which further hinders private investment, that already is far below the desired level, since capital is drawn out of the eurozone due to negative expectations, increases in taxation and reduction of market activity that make any investment highly risky.
The crisis can only be solved if its triple nature is addressed as one. If all crises are dealt with simultaneously. That would require a whole new strategy that would include the introduction of the euro bond, i.e. the ability of the ECB to issue bonds that would attract the surpluses of other major central banks, thus raising funds at low interest rates that would allow for healthy financing in dealing with the issue.
Moreover a restructuring of the private banks becomes an imperative and must be done in conjunction with a restructuring of national sovereign debt. Shareholders must accept to take their share of the crisis’ burdens. They cannot continue to expect depositors’ money to save them.
Additionally the bailout policies that have been practiced so far, need to be fundamentally redesigned. The EU can no longer afford to treat each state individually, while the current logic of retroactive, ad hoc measures needs to be replaced by a proactive, system-wide, permanent (or at least more stable and credible) solution. This implies that EU mechanisms such as the EFSF (European Financial Stability Facility) be revised, their powers be expanded and their funds be bolstered with considerably more money. The idea of allowing the EFSF to buy back bonds from the secondary market is clearly a step forward in making European action more effective.
The crisis is grand. The solution can only be of the same magnitude, otherwise the amoral forces of the markets that are driven by speculation will continue to attack the seemingly fragile euro.
Towards that end there needs to be political willingness to share the burdens of the crisis. Audacious choices need to be made by all European leaders. If narrow political agendas are not left aside all of the above will only remain in the sphere of theory.
If such agendas continue to remain on the forefront of current EU politics then the only reality will be the collapse of the single currency and the unpleasant implications this will have on the community’s everyday life (and on the global economy).
The EU needs to adapt to the new order of the crisis. Adaptation requires vision and comes with a political cost. Both of which seem to be absent in the current political environment.