OPINION:Structural and competitiveness issues would have had to be addressed eventually, writes JOHN BRUTON
THE EUROPEAN Union has many lessons to learn from the Greek crisis. But it also provides the opportunity to deal with problems that might otherwise be put on the long finger. The problems the crisis has revealed are not currency problems as such. They are structural economic problems that we were going to have to deal with sooner or later, no matter what currency we used.
These problems are caused by a loss of competitiveness vis-a-vis Asia, which had been concealed by the credit expansion of the past 10 years. Now that it has to compete directly with India and China, Europe’s economic position will never be the same again.
Credit expansion was a sort of anaesthetic that dulled the pain of this underlying loss of competitiveness. Now that the anaesthetic has been abruptly withdrawn, the pain is real. But that pain is a spur to action and without it the problem would have been allowed to get even worse before anything would have been done.
European countries will have to restore competitiveness by shifting resources into education and infrastructure and away from consumption of all kinds, including government consumption, and by cutting service and wage costs through greater competition and productivity.
The European Union will have to take on the powers necessary to prevent a recurrence of a Greek-style crisis, powers it should have been given when the currency union was formed. The EU should have insisted that Greece’s pension and tax collection problems, problems that are now being tackled in the midst of a crisis, were dealt with before Greece was allowed to join the euro. This would have involved much greater EU interference in matters that Greeks might then have regarded as national questions. But if, as now appears to be the case, states within the euro are not to be allowed to default and are to be backed up by the credit of their neighbours, then there is little choice but have this sort of interference.
This same sort of EU involvement with domestic economic policy-making will continue to be necessary after a country has joined the euro. While the problems of Greece predated its entry to the euro, those of Spain and Ireland arose after they had joined, and were able to enjoy interest rates that were lower than they would have had to pay if they still had their own currencies.
The EU needs to be able to supervise the volume and direction of credit expansion in member states of the euro to ensure that it does not lead to an unsustainable private sector credit situation that eventually puts government credit at risk too.
The EU also needs to be able to supervise developments in the relative competitiveness of different countries within the euro zone. If a country is losing competitiveness because its costs are rising faster than those of its neighbours, it will lose business, and that in turn will mean that its government revenues will fall. That could eventually lead to solvency questions for the government. A major loss in competitiveness of an individual euro zone country is a matter of legitimate concern for all euro zone countries.
It was both fair and reasonable for Germany and others to insist on a long-term austerity programme from Greece. It is true that these measures will depress the Greek economy in the short term, but that had to happen sooner or later anyway, and the sooner it is done the sooner Greece will get back on a sustainable path. Those asking for these measures to be adopted by Greece should recognise that the obligation to follow a common economic policy within the euro zone applies to them too. All EU countries already have an obligation under EU treaties to treat economic policy-making as a matter of common interest. Germany and France have an obligation to open up their energy and service markets to other EU countries, to give other euro zone countries an opportunity to trade their way out of their difficulties.
Germany has benefited from being in the euro by having a more competitive exchange rate. If Germany was still using the mark, and had the big trade surpluses and high savings rate it now has, the mark would have risen dramatically against all other currencies in Europe, and German exports would have become too expensive. Being in the euro has also helped German savings. Much of these savings were invested in Greek bonds partly because Greece was using the euro and there was none of the exchange risk that might have applied if the German banks had bought (say) Turkish bonds. It is thus in Germany’s interest that Greece should neither default, nor leave the euro.
Other countries also benefit from being in the euro in promoting their exports, because the euro zone provides an enlarged home market in which their exporters face no extra costs associated with having to be paid in different and volatile currencies.
For these reasons, the help being given to Greece should not be portrayed as some sort of charity, but as a loan that is being extended in rational self interest.
But will it be enough? If it is not and if Greece, or some other euro zone country, needs to come back again for more loans because it has difficulty borrowing commercially, will the remaining euro zone countries then be prepared to use their credit a second or a third time to help out?
A mechanism has now been put in place to do just that. It will be accompanied by strong and enforceable arrangements at EU level to ensure that all euro zone members run their economies properly and that deep-seated structural and competitiveness issues are tackled vigorously by all members.
One of the difficulties in selling the present plan to lend money to Greece to electorates was that the existing EU arrangements to ensure each euro zone country ran its economy properly had visibly failed. By the time any other country might need help, that has to be put right by the proposals the European Commission put forward yesterday.
Giving more powers to the EU will not be agreed easily. The German constitutional court has questioned whether elections to the European Parliament create a sufficient democratic mandate to allow more policy-making at European level.
If the German court adheres to this interpretation and is not overruled by the European Court, and if keeping the euro requires more power to be exercised at EU level over the economic policies of euro zone states, then more democracy will be necessary at EU level. One way of doing this would be to have one of the EU’s many presidents who deal with economic matters directly elected by the people of the euro zone. Such a course should meet the democratic requirements of the German constitutional court in that it would create a Europe-wide election in which economic policy would be debated.
Europe has a single currency and that is unlikely to change any time soon. The disciplines imposed by the present crisis may be a help in giving governments the courage and the space to deal with long-term financial problems at the same time as they deal with the short-term cash-flow problem. Action on the one will help with the other. For example, raising the pension age saves money in both the short term and in the long term. And it is easier to make unpopular decisions in a crisis.
The present crisis can be turned into an opportunity to put our economy on a sound footing, a footing that will enable Europe to prosper in a 21st-century world where it will be only one of many players, not the dominant player as it was in the 19th century.
John Bruton is a former EU ambassador to Washington and a former taoiseach