As the depressing economic and unemployment picture from the European Commission's growth forecasts makes clear, we at Re-Define have been right to be heavily sceptical of the current strategy being pursued by EU policy-makers.
As we warned in July 2012 in our analysis on Spain, the fiscal multipliers being used were highly underestimated. We warned that on the path being pursued, the Spanish economy and employment would be pulled downwards by a combination of fiscal adjustment and related emergent banking problems. This is exactly what has happened. Our analysis was later confirmed by the IMF, when it issued a Mea culpa on having underestimated fiscal multipliers.
Note: This is the first part of my Essay \'For Europe, High Stakes in Greece\' that has just been published by the American Prospect this week. The recent decision on the Greek referendum adds a special relevance to this article.
The problems of the Euro turned critical when the Greek government nearly defaulted in May 2010 and the International Monetary Fund and European Union agreed to a bailout. In truth, the 17-nation Euro area had deep troubles long before that. Its oversized and undercapitalized banks, its common monetary policy but diverse and fragmented fiscal policies, the persistent economic imbalances among its members, and a cumbersome decision-making structure all made the Euro area economy vulnerable. The crisis, which still unmistakably bears the mark of the Greek tragedy that first set it off, has now spread far beyond Greece.
The Euro was created for normal times, but the EU had no good mechanisms for crisis management. At every step of the Greek drama, policymaker responses have remained behind the curve of economic deterioration. Slowly but surely, this erosion of confidence ensnared other countries, such as Ireland and Portugal, then spread to Spain and Italy, both widely perceived to be fiscally vulnerable. If European leaders cannot resolve Greece’s problems, they can hardly save the much larger economies of Spain and Italy.
This is an excerpt from Building a Crisis Management Framework for the EU that we wrote for the Crisis Committee of the European Parliament and then presented at the European Commission. Much of the discussion in this paper remains highly relavent and provides a useful guidance to policy makers about what they need to do after stemming the panic in the markets so you would want to read it.
Despite the fact that the discussion of the euro area crisis has focused primarily on issues in the sovereign debt market, it is instructive to remember at the outset that this crisis is not primarily a sovereign crisis but one that originated in the private financial sector. As often happens in credit crises, private sector debt is taken on to public balance sheets which makes them fragile and can, as in this case, result in serious dislocations of the sovereign debt market.
Note: This is the english text of an invited Op-Ed that appeared in El-Mundo, one of Spain\'s leading newspapers on Sunday the 11th of September
With Spanish and Italian borrowing costs staying stubbornly high, an increasing possibility of the collapse of the new Greek debt deal agreed just in July and the collapse of growth in Germany and France the Euro area is now in the grip of a serious systemic crisis.
How we got from what started out as a fiscal problem in one of the smaller economies in the Euro area, Greece, to this systemic crisis is a tale of bad politics and bad economics. EU leaders and institutions have failed its citizens repeatedly in the past three years. Sensible policies such as reducing the stock of Greek debt, forcing a greater and faster recapitalization of EU banks and designing a bigger and more flexible European Financial Stability Fund from the outset were rejected by the European Council, Commission or Central Bank, sometimes by all institutions at once.