Size is not proving to be Europe’s strength – a terrible miscalculation by the founders of the EU: Germany, France, Belgium, the Netherlands, Luxembourg and Italy. The UK, that does not share the same feelings as their Continental cousins in being ‚European‘ or belonging to Europe, is right this time. Fixing problems on the fiscal side is mandatory in order to address monetary or growth issues in the EU. But is there the will to do it?
IMF projects the global economy to grow at 4.5% in 2012 of which advanced economies and emerging econmomies are projected to clock an economic growth rate of 2.5% and 6.5%, respectively. For the EU to achieve a minimal growth rate of 2.5%, much needs to be done. Facilitating growth, effective crises management and incentive creations for the optimal working of supranational institutions are just few to begin with.
Crisis roots and management
The EU needs reform, not at the supranational level but at the individual member state level. Reform in making EU member states tighten up their spending belts, kick-start growth engines, loosen up labour markets, and open up to integration. Integration of the internal and financial markets, and also the integration of the peoples of Europe that includes migrant short and long-term labour. Simultaneously, the EU must make it clear to potential member states that getting on to the Euro-cart is no more a solution to national woes. Performance-based expansion should become EU‘s mantra in order to maintain its competitive edge in the global economy.
It is about time that the EU realised, like the Asian economies during economic crises in the 90s, that the best pacts and programmes are made at home and not by the IMF, and that their sheer and timely implementation could solve most problems. A sincere effort at the pursuance of the EU Stability and Growth Pact (SGP) and a political non-interventionist approach could have curtailed the impacts of the European debt crisis. As we see, the so-called preventive and dissuasive arms of the SGP were out of action following a flouting of the SGP rules by the biggest powers in the EU Germany and France in 2003. Instead of issuing penalties, as required by the SGP and the Maastricht Treaty of 1992, the European Commission (EC) simply waived these which encouraged fiscally lenient member states such as Greece, Ireland, Portugal and Italy, lax on fiscal austerity.
The EU as a whole, especially its Western parts, faced recessionary trends since 2000. France and Germany struggle on a yearly basis to achieve a growth rate of atleast 1.5%. Besides internal growth deficits due to high costs of production and falling levels of innovation, trade-driven EU growth is increasingly being challenged by rapid economic growth in the emerging markets such as China and India. Unlike the USA, not as many European businesses have outsourced their production houses to China and India. Business, language and cultural barriers continue to hinder partnerships between Europe and South Asia. However, the South Asian emerging markets continue to prosper from adversities abroad.
No other country has profited as much as China from the crises in Europe. Acquisitions of big and medium-sized enterprises in several member states: a 10% share in Italian Ferreti, a global yacht company, the purchase of Europe’s third largest electric motor manufacturer in Austria, the proposal to buy Swedish Saab and the purchase of 10% of Thame’s Water, Britains biggest water company, are just few examples. Germany‘s leadership in renewable energies is slowly but steadily being replaced by Chinese technologies. The EU is thus turning into a shopper’s paradise for Chinese businessmen.
The EU is left with little choice but sell its businesses at low prices. Europe’s financial crisis of 2008 laid bare the core of the crisis which was inefficient public and private debt management. Timely corrective measures need to be undertaken so that this crisis does not develop into a trade deficit or a balance-of-payments crisis given the steady loss of trade and capital flows. Such a turn could devastatingly undermine Europe’s long-term economic security.
Igniting growth
Sustaining economic growth and distributing it‘s benefits across all nations in the EU is a task that the bigger EU powers are working at. The Keynesian approach of pumping money into weaker parts of the EU to avoid a credit crunch and provide a platform for production and investment has been the first step so far. However, the loss of creditworthiness at international capital markets, falling purchasing power, inflation and a general distrust in political and economic systems is slowing down the effects of an economic recovery.
As EU discusses the European Stablitity Mechanism (ESM), a fiscal pact that would allow recovery monies only to those member states that adhere to stringent debt reduction measures and those which do not, face sanctions. This is old wine in a new bottle and again shows the lack of political committment and will to tackle crises on a long-term, sustainable and solid basis.
Greece by itself requires a big portion of the recovery monies, around € 40 billion, as quoted by their Finance Minister Evangelos Venizelos. Stockholders in Greece lost massive amounts since the crisis and the share values of major banks have fallen to historical lows. The stock value of the National Bank of Greece fell by 75% by the end of FY 2010. Shares of the Eurobank EFG, the second biggest in the banking industry, fell by 85% since the start of the crisis in 2008. Banks are threatened with losses of over € 30 billion in a stagflationary environment. 15% of their current debts, a value of € 37 billion, are already suspected to be write-offs. Debt buffers are a meagre € 18 billion.
Additionally, Greek banks are facing a domestic credit crunch with Greek households and businesses withdrawing deposits in fear of a national insolvency. Since 2009 deposits have fallen from € 237 billion to € 173 billion. Most of these have taken refuge in other countries. One such example is the increasing Greek investments in Berlin real estate. Economic growth in Greece is possible only with normal banking activity for which the EU has to fill in the credit crunch before Greece drags in other weaker member states into the crevass of insolvency.
Stabilising Western Europe
Sporadic signs of EU’s return to banking stability could be evinced from EU‘s largest member state Germany. One of Germany’s four largest commercial banks Commerzbank that required a bail-out of €18 billion, following the crisis in 2008, is now able to repay € 6.3 billion towards debt servicing. Commerzbank, with € 124 billion, is the biggest creditor to German companies. A strong reduction in risky assets including commercial paper, real estate assets in Japan, Russia and the USA, and ship financing has helped improve the bank’s profit forecasts of about € 1,2 billion. Russian interests in buying out debts of German banks has to be to the latter’s advantage. Overall, Commerzbank seems to be in better shape with core capital ratio of 11% as against the EBA requirement of 9%. Hence, risk management practices, a cost-savings based profit strategy, and an overall efficient capital management are putting German banks back on track.
S&P`s grading down of EU member states including France is changing the network of financial flows in the EU. There are indeed winners from the crisis! Germany is evolving as the safest haven for savings and investments from across the world. So all is not lost in terms of creditworthiness. Additionally, the EU seems to be winning back some level of confidence of global investors following the entrance of the ‚Super Marios‘ – Mario Monti, ECB President and Mario Draghi, the new Italian Premier.
EU’s intermittent and hurried flushing of funds are bearing fruit. Interest rates in the EU are at an all-time low – perfect for new entrepreneurs to enter and flourish, but business pessimisn continues to be high. Europe is being forced to save. The problems of an aging population paralleled with a falling population growth rate, poor levels of investment in education, shrinking labour capacity and serious social problems are challenging the political, economic, and social fabric of member states. But all hope is not lost. Faith in institutions, conviction in political and business practices, and an unhindered functioning of economic markets could reverse current trends in the EU.
Prof. Dr. Cordelia Friesendorf, International School of Management, Hamburg, Germany.
cordelia.friesendorf@gmail.com