tag:theconversation.com,2011:/uk/topics/eurozone-1212/articlesEurozone – The Conversation2024-01-31T18:29:04Ztag:theconversation.com,2011:article/2209122024-01-31T18:29:04Z2024-01-31T18:29:04ZSome EU countries use the eurozone as a credit card, with Germany picking up the tab – new research<figure><img src="https://images.theconversation.com/files/572293/original/file-20240130-25-mfonz6.jpg?ixlib=rb-1.1.0&rect=98%2C73%2C5365%2C3563&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Mapped out.</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/euro-banknotes-on-europe-map-concept-1924905488">Oleg Elkov/Shutterstock</a></span></figcaption></figure><p>Europe is home to many languages, varied geography and different cultures. And until fairly recently, it was also a place where almost every country had its own currency.</p>
<p>The <a href="https://www.researchgate.net/publication/5038955_The_Launch_of_the_Euro">arrival of a common currency</a> in 1999 changed all that. Now <a href="https://european-union.europa.eu/institutions-law-budget/euro/countries-using-euro_uk">344 million citizens</a> in 20 of the 27 EU member states use the euro, making it the world’s second most used international currency after the US dollar. </p>
<p>One purpose of the euro is to simplify cross-border payment transfers between eurozone member states. This is achieved <a href="https://www.ecb.europa.eu/paym/target/target2/html/index.en.html">using a system</a> called “Target 2” (T2) which settles private sector bank-to-bank and commercial transactions between EU countries. </p>
<p>However, <a href="https://doi.org/10.3390/jrfm16120506">my research</a> shows that this apparently innocuous settlement system is effectively being used to save the eurozone from imploding. </p>
<p>The problem is that some eurozone members – Italy and Spain, for example – import much more from other members than they export, particularly from Germany, the economic engine that has kept the eurozone economies going since 1999. </p>
<p>This results in a trade deficit, also known as a negative balance of trade. And this in turn creates a debt owed by Italy and Spain to Germany. </p>
<p>Luckily for them though, T2 converts this potentially risky debt into an apparently risk-free loan owed by the central banks of Italy and Spain to the central bank of Germany. The trouble is that there is no legal requirement in T2 to ever pay ot back. </p>
<h2>United in debt?</h2>
<p>Part of the reason for this imbalance is that the eurozone <a href="https://www.eurrec.org/ijoes-article-117074">does not satisfy</a> the economic conditions for being an “optimal currency area” (OCA) – that is, a geographical area over which a single currency and monetary policy can operate on a long term basis (in contrast to the UK and US, for example).</p>
<p>The different business cycles within the eurozone (with some countries booming economically, while others are in a slump) mean that trade surpluses and deficits will build up because inter-regional exchange rates can no longer be changed. </p>
<p>The normal way for a country to deal with a trade deficit is to devalue its currency, but this is not possible in the eurozone, since exchange rates between members were fixed in perpetuity in 1999. The most economically efficient countries, like Germany, accrue surpluses, while the more inefficient countries, like Italy and Spain, build up deficits. </p>
<p>To rectify this, surplus regions would have to recycle their surpluses back into deficit regions via transfers to keep the eurozone economies in balance. This is what happens in OCAs like the UK when the national government transfers tax revenues collected in England to Scotland, Wales and Northern Ireland to correct regional imbalances. </p>
<p>But the largest surplus country in the eurozone, Germany, <a href="https://www.tandfonline.com/doi/full/10.1080/07036337.2021.1877690">refuses to accept</a> that the EU is a “transfer union”. This is because the eurozone was set up on the explicit basis that market forces, not fiscal transfers, would be used to remove productivity differences between member states – and Germany was determined that it would not cross-subsidise inefficient members. </p>
<p>Yet deficit countries, including Italy and Spain, are using T2 for this very purpose. For them, T2 has effectively become a giant credit card. But unlike a regular credit card, neither the debt nor the interest that accrues on the debt ever needs to be repaid. </p>
<h2>Silent European debt mountain</h2>
<p>My research also shows that the size of the deficits being built up is causing citizens in those countries to lose confidence in their banking systems, leading them to transfer their funds to banks in surplus countries. T2 is being used to <a href="https://www.bis.org/publ/work393.pdf">facilitate this capital flight</a> to Germany, the Netherlands and Luxembourg.</p>
<figure class="align-center ">
<img alt="Large blue euro sign in front of skyscraper." src="https://images.theconversation.com/files/572301/original/file-20240130-19-vbdy3h.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/572301/original/file-20240130-19-vbdy3h.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/572301/original/file-20240130-19-vbdy3h.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/572301/original/file-20240130-19-vbdy3h.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/572301/original/file-20240130-19-vbdy3h.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/572301/original/file-20240130-19-vbdy3h.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/572301/original/file-20240130-19-vbdy3h.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">European Central Bank HQ is in Frankfurt, Germany.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/european-central-bank-euro-administers-monetary-1269309565">Yavuz Meyveci/Shutterstock</a></span>
</figcaption>
</figure>
<p>Then there is the fact that no member state individually controls the European Central Bank. This implies that they do not (and cannot) stand behind their government debts or currency in the way genuine sovereign nations do – by printing more money to repay their debts when their tax base proves to be insufficient. Eurozone member states are therefore “sub-sovereign” states, since they are effectively using a “foreign currency”. </p>
<p>The present situation is not viable in the long term. And my research suggests only two realistic outcomes. </p>
<p>The first is a full fiscal and political union, with Brussels determining the levels of tax and public spending in each member state. The second is that the eurozone breaks up. Either way, it will cost German taxpayers well over €1 trillion (£854 billion). </p>
<p>The current <a href="https://theconversation.com/germanys-economy-must-be-fixed-here-are-three-top-priorities-221464">faltering of the German economy</a> – in part, due to the massive increase in energy costs following the Russian invasion of Ukraine and, in part, due to China <a href="https://www.dw.com/en/german-engineers-under-pressure-from-china/a-48173351">no longer needing</a> German machine tools for its factories – could mean that Germany does eventually capitulate to <a href="https://link.springer.com/article/10.1057/s41253-022-00203-y">French demands</a> for fiscal and political union. </p>
<p>But if it does, it will be a union based on the protectionist model favoured by France, with much greater state intervention and regulation in the economy and with large state subsidies for favoured sectors and firms. </p>
<p>This is very different from the “ordoliberal” (or “ordered liberal”) model preferred by Germany which supports free markets but seeks to prevent powerful private interests from undermining competition. </p>
<p>However, there are no examples in history where a country – let alone a continent – has regulated its way to economic success. For now, T2 is the silent bailout system that people rarely talk about – but upon which the very survival of the euro depends.</p><img src="https://counter.theconversation.com/content/220912/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>David Blake does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>German economic power is propping up the euro. But this cannot continue indefinitely.David Blake, Professor of Finance & Director of Pensions Institute, City, University of LondonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1890762022-08-19T14:52:48Z2022-08-19T14:52:48ZInflation: why it’s very unlikely to get back below 2% for years to come<figure><img src="https://images.theconversation.com/files/480113/original/file-20220819-3561-aayy38.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Only going up. </span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/red-balloons-on-sky-111102284">Oleg Golovnev</a></span></figcaption></figure><p>Inflation in the UK and eurozone is still getting worse. <a href="https://www.telegraph.co.uk/business/2022/08/17/bank-england-expected-double-interest-rates-inflation-soars/">UK prices</a> rose a whopping 10.1% in July compared to a year earlier, while those <a href="https://www.reuters.com/markets/rates-bonds/euro-zone-july-inflation-confirmed-89-yy-core-measure-sharply-up-2022-08-18/">in the eurozone</a> went up 8.9% – breaking longstanding records in both places. Contrast this with the equivalent data from the US a few days earlier, where the 8.5% rate was lower than the previous month and below market expectations. </p>
<p>While <a href="https://www.kiplinger.com/personal-finance/inflation/605064/has-inflation-peaked-heres-what-the-experts-are-saying">some analysts believe</a> that <a href="https://www.aljazeera.com/economy/2022/8/10/is-global-inflation-nearing-a-peak">US prices</a> have now peaked, most think that the UK and eurozone, which are <a href="https://theconversation.com/why-are-gas-prices-still-high-despite-oil-getting-cheaper-and-what-will-happen-next-energy-expert-qanda-188767">much more exposed</a> to the effects of the Ukraine war, have a way to go yet. Even the Bank of England <a href="https://www.bankofengland.co.uk/-/media/boe/files/monetary-policy-report/2022/august/monetary-policy-report-august-2022.pdf">is saying that</a> UK inflation will peak at over 13% later in 2022, before gradually returning to the 2% target level within two years. </p>
<p><strong>UK inflation vs US and Europe</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/480056/original/file-20220819-1459-gtzzkg.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Graph comparing UK, US and eurozone inflation" src="https://images.theconversation.com/files/480056/original/file-20220819-1459-gtzzkg.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/480056/original/file-20220819-1459-gtzzkg.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=296&fit=crop&dpr=1 600w, https://images.theconversation.com/files/480056/original/file-20220819-1459-gtzzkg.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=296&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/480056/original/file-20220819-1459-gtzzkg.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=296&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/480056/original/file-20220819-1459-gtzzkg.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=372&fit=crop&dpr=1 754w, https://images.theconversation.com/files/480056/original/file-20220819-1459-gtzzkg.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=372&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/480056/original/file-20220819-1459-gtzzkg.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=372&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><span class="source">Trading Economics</span></span>
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</figure>
<p>The prospect of more inflation is very bad news, since it reduces people’s real incomes and might also reduce investment, trade and economic growth. On top of that, the “cure” of raising interest rates can be harmful in its own right by making borrowing less attractive and driving down the value of everything from houses to shares. </p>
<p>But we also think it’s too optimistic to expect inflation to drop to 2% any time soon. More likely, we have entered a phase where various structural factors will keep it elevated for years to come. </p>
<h2>Transitory inflation?</h2>
<p>Until recently, central banks and the majority of economists and commentators <a href="https://www.ft.com/content/144460b0-887a-408f-89b6-e629cadd617f">attributed rising prices</a> to temporary factors and claimed this would stop without much intervention. They mainly blamed logistic bottlenecks and production constraints due to the COVID-19 lockdowns. They also argued that as the cost of many products had been abnormally subdued during the lockdowns, it was inevitable that inflation would temporarily spike when prices returned to previous levels. </p>
<p>When prices started rising more widely and violently – which <a href="https://theconversation.com/rising-inflation-unless-we-act-now-it-will-not-be-temporary-168106">we predicted</a> in a previous article a year ago – central banks and many economists <a href="https://obr.uk/box/how-does-the-russian-invasion-of-ukraine-affect-the-uk-economy/">started blaming</a> the war in Ukraine and the elevated energy and food prices that came with it. But while all these factors have helped to drive inflation, they are not the whole story. </p>
<p><strong>UK inflation 1997-2022</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/480057/original/file-20220819-1373-67fm5m.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Graph showing UK inflation since 1997" src="https://images.theconversation.com/files/480057/original/file-20220819-1373-67fm5m.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/480057/original/file-20220819-1373-67fm5m.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=262&fit=crop&dpr=1 600w, https://images.theconversation.com/files/480057/original/file-20220819-1373-67fm5m.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=262&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/480057/original/file-20220819-1373-67fm5m.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=262&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/480057/original/file-20220819-1373-67fm5m.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=329&fit=crop&dpr=1 754w, https://images.theconversation.com/files/480057/original/file-20220819-1373-67fm5m.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=329&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/480057/original/file-20220819-1373-67fm5m.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=329&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="https://tradingeconomics.com/united-kingdom/inflation-cpi">Trading Economics</a></span>
</figcaption>
</figure>
<p>There is one clear cause of inflation that central bankers are not eager to advertise, namely the record low interest rates and expansion of the money supply through quantitative easing that they have been implementing since the 2008 financial crisis. In centuries of capitalism, we’ve never seen such low interest rates before.</p>
<p><strong>UK benchmark interest rate 1997-2022</strong> </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/480072/original/file-20220819-2895-67fm5m.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Graph showing UK base rate since 1997" src="https://images.theconversation.com/files/480072/original/file-20220819-2895-67fm5m.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/480072/original/file-20220819-2895-67fm5m.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=255&fit=crop&dpr=1 600w, https://images.theconversation.com/files/480072/original/file-20220819-2895-67fm5m.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=255&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/480072/original/file-20220819-2895-67fm5m.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=255&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/480072/original/file-20220819-2895-67fm5m.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=321&fit=crop&dpr=1 754w, https://images.theconversation.com/files/480072/original/file-20220819-2895-67fm5m.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=321&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/480072/original/file-20220819-2895-67fm5m.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=321&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="https://tradingeconomics.com/united-kingdom/interest-rate">Trading Economics/Bank of England</a></span>
</figcaption>
</figure>
<p>This ultra-loose monetary policy has created a backdrop of high demand at a time when production capabilities and the supply of cheap energy and imports have been disrupted. It has also pushed all asset classes – property, shares, precious metals, cryptocurrencies and so on – into bubble territory. </p>
<p>This has created <a href="https://positivemoney.org/2018/04/bank-england-working-paper-considers-monetary-policys-effect-inequality/">record levels</a> of inequality across our societies, while also further inflating demand by making people who hold these assets feel <a href="https://www.investopedia.com/terms/w/wealtheffect.asp">they can afford</a> to spend more. Households as well as businesses have taken on cheap debt to finance properties and investments, or just to stay afloat. </p>
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Read more:
<a href="https://theconversation.com/tinkering-with-the-mortgage-market-wont-solve-the-uk-housing-affordability-crisis-186146">Tinkering with the mortgage market won't solve the UK housing affordability crisis</a>
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<p>Thanks to these high debt levels and high asset prices, central banks will need to tread very carefully when it comes to raising interest rates to combat inflation. Yet if they only hike interest rates a little, inflation will stay higher for longer. </p>
<h2>Currencies, Brexit and globalisation</h2>
<p>As far as the UK is concerned, the pound sterling is another factor likely to stoke inflation for years to come. It has already been weakening in comparison to other international currencies for a number of years, causing imports such as food, energy, cars and clothes to become more expensive. </p>
<p>There are numerous reasons to assume that this trend continues. <a href="https://www.weforum.org/agenda/2022/06/rates-inflation-federal-reserve-united-states/">Very aggressive</a> interest rate rises in the US are making the <a href="https://www.bloomberg.com/news/articles/2022-06-22/uk-should-worry-about-sterling-s-10-decline-senior-mp-says">dollar more appealing</a>, which lowers the value of other international currencies. The chronic under-investment and consequent <a href="https://theconversation.com/inflation-theres-a-vital-way-to-reduce-it-that-everyone-overlooks-raise-productivity-183938">productivity gap</a> in the UK compared to other G7 countries is another issue. </p>
<p>The pound also faces growing separatist sentiment in Northern Ireland and a looming second independence referendum in Scotland. Then there is Brexit. It is <a href="https://obr.uk/box/the-latest-evidence-on-the-impact-of-brexit-on-uk-trade/">weakening trade</a> with the EU and <a href="https://www.investmentmonitor.ai/analysis/two-years-brexit-uk-eu">reducing business investment</a>, <a href="https://economy2030.resolutionfoundation.org/wp-content/uploads/2022/06/The_Big-Brexit.pdf">both of which</a> weigh on the currency. </p>
<p>There is also the looming prospect of a trade war with the EU. And incidentally, the loss of hundreds of thousands of EU professionals from the UK workforce is aggravating the nation’s <a href="https://www.ft.com/content/96e43c16-f592-11e9-bbe1-4db3476c5ff0">longstanding skills gap</a>. This is helping to make <a href="https://www.theweek.co.uk/business/economy/956951/labour-shortages-urgent-problem-economy">wages more expensive</a> and <a href="https://www.resolutionfoundation.org/press-releases/brexit-has-damaged-britains-competitiveness-and-will-make-us-poorer-in-the-decade-ahead/">reducing production</a>, which will also lead to higher prices. </p>
<p>It should be said that the eurozone is also suffering from a weak currency. Alongside the Federal Reserve’s interest rate policy in the US, the EU also has to bear the brunt of the Russian gas crisis and structural economic problems in countries such as Italy and Spain that have never been resolved. Although the pound’s weakness is worse overall, the euro is nudging US dollar parity for the first time in two decades. </p>
<p><strong>Pound and euro values 2008-2022</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/480082/original/file-20220819-20-gtzzkg.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Graph showing the value of the pound and euro since 2008" src="https://images.theconversation.com/files/480082/original/file-20220819-20-gtzzkg.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/480082/original/file-20220819-20-gtzzkg.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=337&fit=crop&dpr=1 600w, https://images.theconversation.com/files/480082/original/file-20220819-20-gtzzkg.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=337&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/480082/original/file-20220819-20-gtzzkg.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=337&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/480082/original/file-20220819-20-gtzzkg.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=424&fit=crop&dpr=1 754w, https://images.theconversation.com/files/480082/original/file-20220819-20-gtzzkg.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=424&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/480082/original/file-20220819-20-gtzzkg.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=424&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">This chart shows the value of the euro and pound against a basket of international currencies. The pound is in orange and the euro in blue.</span>
<span class="attribution"><a class="source" href="https://www.tradingview.com">TradingView</a></span>
</figcaption>
</figure>
<p>Across the world, a final critical factor is the <a href="https://theconversation.com/china-us-tensions-how-global-trade-began-splitting-into-two-blocs-188380">partial reversal of globalisation</a>. <a href="https://www.ft.com/content/e17f3abf-b0c0-4855-8b0f-8d0fa5a26872">According to</a> Agustín Carstens, the head of the Bank for International Settlements (often described as the central bank of the central banks), <a href="https://www.ft.com/content/e17f3abf-b0c0-4855-8b0f-8d0fa5a26872">this will</a> increase product prices and keep inflation higher than it would have been for years to come. </p>
<p>There will be other factors that will counteract inflation. One is the retiral of the baby boomers, the largest generation ever seen, who will consume less as they stop working. Another is that technological advances continually increase productivity, which makes it cheaper to produce each unit. But with so many pressures driving prices up in the coming years, the overall likelihood is that inflation will remain stubbornly above central banks’ mandates of about 2%. This will have repercussions for consumption, profits, insolvencies and the stock market – not to mention economic growth overall.</p><img src="https://counter.theconversation.com/content/189076/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Many central bankers and economists are forecasting a return to low inflation within a couple of years, but that’s wishful thinking.Alexander Tziamalis, Senior Lecturer in Economics, Sheffield Hallam UniversityYuan Wang, Seinor Lecturer in Economics, Sheffield Hallam UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1866542022-07-08T13:27:19Z2022-07-08T13:27:19ZFive ways that the super-strong US dollar could hurt the world economy<figure><img src="https://images.theconversation.com/files/473192/original/file-20220708-22-ig5zsq.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Look out below!</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-vector/continuous-line-drawing-superhero-business-man-2060993075">cupuuu25</a></span></figcaption></figure><p>The US dollar has been on a <a href="https://www.exchangerates.org.uk/Dollars-to-Yen-currency-conversion-page.html">major surge</a> against major global currencies in the past year, recently hitting levels not seen in 20 years. It has gained 15% against the British pound, 16% against the euro and 23% against the Japanese yen. </p>
<p>The dollar is the world’s reserve currency, which means it is used in most international transactions. As a result, changes in its value have implications for the entire global economy. Below are five of the main ones. </p>
<p><strong>US dollar strength 1977-2022</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/473186/original/file-20220708-23-jofxsq.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Chart showing the strength of the dollar since 1980" src="https://images.theconversation.com/files/473186/original/file-20220708-23-jofxsq.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/473186/original/file-20220708-23-jofxsq.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=335&fit=crop&dpr=1 600w, https://images.theconversation.com/files/473186/original/file-20220708-23-jofxsq.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=335&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/473186/original/file-20220708-23-jofxsq.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=335&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/473186/original/file-20220708-23-jofxsq.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=422&fit=crop&dpr=1 754w, https://images.theconversation.com/files/473186/original/file-20220708-23-jofxsq.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=422&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/473186/original/file-20220708-23-jofxsq.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=422&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">The US dollar index or DXY is the US dollar measured against a basket of world currencies.</span>
<span class="attribution"><a class="source" href="https://www.tradingview.com">Trading View</a></span>
</figcaption>
</figure>
<h2>1. Even more inflation</h2>
<p>Petrol and most commodities such as metals or timber are usually traded in US dollars (though <a href="https://oilprice.com/Energy/Coal/China-Calls-Out-US-Dollar-Dominance-As-It-Buys-Russian-Coal-With-Yuan.html">with exceptions</a>). So when the dollar gets stronger, these items cost more in local currency. For example in British pounds, the cost of US$100-worth of petrol has risen over the past year from £72 to £84. And since the price per litre of petrol in <em>US dollars</em> has risen steeply as well, it is creating a double whammy. </p>
<p>When energy and raw materials cost more, the prices of many products go up for consumers and businesses, causing inflation around the world. The only exception is the US, where a stronger dollar makes it cheaper to import consumer products and therefore could help to tame inflation. </p>
<h2>2. Low-income countries under threat</h2>
<p>Most developing countries owe their debt in US dollars, so many owe much more now than a year ago. As a result, many will struggle to find an ever increasing amount of local currency to service their debts. </p>
<p>We are already seeing this in <a href="https://www.bbc.co.uk/news/business-61505842">Sri Lanka</a>, and other countries may soon <a href="https://blogs.worldbank.org/voices/are-we-ready-coming-spate-debt-crises">follow suit</a>. They will either have to tax their economies more, issue inflationary local money or simply borrow more. The results could be deep recession, hyper-inflation, a sovereign debt crisis or all three together, depending on the path chosen. Developing countries which fall into sovereign debt crises <a href="https://www.reuters.com/business/argentinas-economic-crisis-whack-a-mole-goes-into-overdrive-2022-06-28/">can take years</a> or even decades to recover, causing severe hardship to their people. </p>
<h2>3. A bigger US trade deficit</h2>
<p>Other countries will buy fewer US products as a result of the strong dollar.
The US trade deficit, which is the difference between the amount of exports and imports, already runs close to a mammoth <a href="https://www.thebalance.com/u-s-trade-deficit-causes-effects-trade-partners-3306276#:%7E:text=The%20annual%20trade%20deficit%20for,%24394%20billion%20increase%20from%202020">one trillion dollars</a> per year. <a href="https://www.independent.co.uk/news/world/americas/us-politics/under-biden-china-faces-renewed-trade-pressure-china-us-joe-biden-economy-donald-trump-b1792607.html">President Joe Biden</a> and <a href="https://observer.com/2017/03/protectionism-could-it-benefit-us-economy-free-trade-wto-useconomy/">Donald Trump</a> before him vowed to reduce it, particularly against China. <a href="https://www.cfr.org/backgrounder/us-trade-deficit-how-much-does-it-matter">Some economists worry</a> that the trade deficit drives up US borrowing and reflects the fact that many manufacturing jobs have moved overseas. </p>
<p><strong>US trade deficit as a % GDP</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/473197/original/file-20220708-15-vdmjaf.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Chart showing US trade deficit as a percentage of GDP" src="https://images.theconversation.com/files/473197/original/file-20220708-15-vdmjaf.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/473197/original/file-20220708-15-vdmjaf.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=272&fit=crop&dpr=1 600w, https://images.theconversation.com/files/473197/original/file-20220708-15-vdmjaf.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=272&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/473197/original/file-20220708-15-vdmjaf.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=272&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/473197/original/file-20220708-15-vdmjaf.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=342&fit=crop&dpr=1 754w, https://images.theconversation.com/files/473197/original/file-20220708-15-vdmjaf.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=342&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/473197/original/file-20220708-15-vdmjaf.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=342&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="https://tradingeconomics.com/united-states/balance-of-trade">Trading Economics</a></span>
</figcaption>
</figure>
<h2>4. De-globalisation to get worse</h2>
<p>The most obvious economic policy to prevent a trade deficit from growing is the old game of imposing tariffs, quotas or other barriers on imports. Other countries <a href="https://observer.com/2017/03/protectionism-could-it-benefit-us-economy-free-trade-wto-useconomy/">tend to retaliate</a> against such protectionism, adding their own taxes and other barriers to US products. In an era when <a href="https://theconversation.com/africa-faces-hard-knocks-as-rich-countries-take-manufacturing-back-home-181490">“de-globalisation” has already begun</a> thanks to worsening western relations with Russia and China, a stronger dollar adds to the political momentum for protectionism and threatens global trade. </p>
<h2>5. Eurozone fears</h2>
<p>Weaker EU member states such as Portugal, Ireland, <a href="https://www.esm.europa.eu/blog/euronomics-fresh-look-greek-debt-sustainability#:%7E:text=The%20ESM%20holds%20around%2055,of%20the%20remaining%20debt%20stock">Greece</a> and Cyprus have become somewhat less vulnerable to investors driving up their borrowing costs to crisis levels than during the darkest days of the eurozone crisis. This is because much of their national debt is <a href="https://www.ceps.eu/wp-content/uploads/2019/06/PI2019_11_Italian-public-debt-holdings.pdf">now in the hands</a> of the the European Stability Mechanism (ESM), which was set up to help rescue them, as well as friendlier investment banks within the eurozone. </p>
<p>However, the stronger dollar is <a href="https://www.ft.com/content/2eca224f-7923-4f9b-ba11-6c8832768edf">creating pressure</a> for the European Central Bank to raise its own interest rates to prop up the euro and subdue the cost of imports, including energy. This will put more pressure on eurozone countries with high levels of debt. Italy, which is the ninth largest economy in the world and has government debts at a whopping 150% of GDP, would be <a href="https://www.ft.com/content/581255ab-c2aa-4df9-bf87-80ade371a4bb">particularly hard</a> to bail out if the situation got out of control. </p>
<p>Bringing these five points together, the ultra-strong dollar is <a href="https://www.reuters.com/markets/europe/global-economy-us-recession-fears-darken-outlook-japan-global-factories-2022-06-23/">yet another reason</a> to fear a global recession in the coming period. Higher inflation erodes consumer incomes and reduces consumption. Protectionism can reduce international trade and investment. Sovereign debt crises mean serious trouble for many developing countries and possibly even the eurozone. </p>
<h2>Will the dollar keep rising?</h2>
<p>The dollar has been rising for both economic and geopolitical reasons. The central bank of the US – the Federal Reserve – has been hiking interest rates aggressively and also reversing its policy of creating money via <a href="https://www.forbes.com/advisor/investing/quantitative-easing-qe/">quantitative easing (QE)</a>. This is with a view to curbing inflation caused by COVID supply issues, the war in Ukraine and also QE. </p>
<p>The stronger US dollar is a side effect of these higher interest rates. Because the dollar now offers a higher yield when deposited in a US bank, it encourages foreign investors to sell their local currency and buy US dollars. </p>
<p>Of course, central banks in other jurisdictions such as the UK have also been raising interest rates, and the eurozone is planning to do likewise. But they are not acting as aggressively as the US. Meanwhile Japan is not tightening at all, so the net result is still greater overseas demand for greenbacks. </p>
<p>The other reason for the surging US dollar is because it is a classic safe haven when the world is worried about a recession – and the current geopolitical situation is arguably making it still more appealing. The euro has suffered from the EU’s proximity to the war in Ukraine, its exposure to Russian energy and the prospect of <a href="https://theconversation.com/why-a-new-eurozone-crisis-now-looks-a-distinct-possibility-184765">another eurozone crisis</a>. It is close to dollar parity for the first time since its early years. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/473209/original/file-20220708-27-c7d4ia.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Euro symbol outside the ECB" src="https://images.theconversation.com/files/473209/original/file-20220708-27-c7d4ia.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/473209/original/file-20220708-27-c7d4ia.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=450&fit=crop&dpr=1 600w, https://images.theconversation.com/files/473209/original/file-20220708-27-c7d4ia.jpeg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=450&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/473209/original/file-20220708-27-c7d4ia.jpeg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=450&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/473209/original/file-20220708-27-c7d4ia.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=566&fit=crop&dpr=1 754w, https://images.theconversation.com/files/473209/original/file-20220708-27-c7d4ia.jpeg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=566&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/473209/original/file-20220708-27-c7d4ia.jpeg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=566&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">The euro is in trouble.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/frankfurt-germany-january-22-2019-euro-1397385803">Ilolab</a></span>
</figcaption>
</figure>
<p>The British pound has been hit by Brexit and is also facing the prospect of a second Scottish independence referendum and a <a href="https://www.politicshome.com/thehouse/article/northern-ireland-protocol-bill-eu-uk-trade-war-scotland">potential trade war</a> with the EU over the Northern Ireland protocol. Finally, the yen belongs to an economy that seems to be slowly losing ground. Japan is ageing and is <a href="https://thediplomat.com/2022/01/japans-self-destructive-immigration-policy/">still not comfortable</a> with migration to boost its production capabilities. A weaker yen is also the price that <a href="https://www.reuters.com/markets/currencies/govt-panel-member-says-bojs-yield-cap-causing-negative-spiral-yen-falls-2022-06-23/">Japan pays</a> for continuing QE to keep the interest rates low on its government debt. </p>
<p>It is difficult to predict the future direction of the US dollar when there are so many moving parts in the world economy. But we suspect that persistent inflation will force US interest rates to keep rising, and that together with geopolitical shocks from war and sovereign debt defaults, it will probably keep the dollar high. A strong US dollar is a response to troubled times.</p><img src="https://counter.theconversation.com/content/186654/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The greenback is at its heftiest since 2002 and still rising fast.Alexander Tziamalis, Senior Lecturer in Economics, Sheffield Hallam UniversityYuan Wang, Seinor Lecturer in Economics, Sheffield Hallam UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1847652022-06-09T14:22:01Z2022-06-09T14:22:01ZWhy a new eurozone crisis now looks a distinct possibility<p>The European Central Bank (ECB) has confirmed speculation that it will become the latest central bank to start raising headline interest rates to try to ward off inflation. The bank is to raise rates by 0.25 points to 0.25% for lending and -0.25% for deposits, with plans for another rise at the next meeting in September. It will also curtail its programme for buying the government bonds of countries like Italy and Greece by not increasing purchases every month overall. </p>
<p>All major economies are struggling with the difficulties of trying to deal with inflation by raising interest rates in the knowledge that it will drive up borrowing costs for consumers and businesses and potentially bring about a recession. </p>
<p>But for the eurozone, the situation is complicated by the fact that it has been propping up indebted countries who can’t deflate their currencies to get through economic turbulence. If the ECB now gets too tough on inflation, it could create a market panic that might revive the eurozone crisis of the 2010s. </p>
<h2>Stagflation is back</h2>
<p>The global outlook for inflation and global economic stability has <a href="https://www.ft.com/content/088d3368-bb8b-4ff3-9df7-a7680d4d81b2">significantly deteriorated</a> in the last few months. In 2021 inflation <a href="https://www.cnbc.com/2021/10/05/feds-evans-sees-inflation-falling-below-2percent-target-after-current-rise-subsides.html">headed upwards</a> as global demand recovered after the pandemic but <a href="https://obr.uk/box/the-economic-effects-of-supply-bottlenecks/">supply chains</a> couldn’t keep up – not least because of <a href="https://www.bbc.co.uk/news/59882774">China’s zero COVID policy</a>. Rising energy prices were a major part of the problem. </p>
<p>Many central bankers thought this <a href="https://theconversation.com/inflation-why-its-temporary-and-raising-interest-rates-will-do-more-harm-than-good-172329">was temporary</a>, and indeed when inflation <a href="https://data.oecd.org/price/inflation-cpi.htm">started to ease</a> in most developed economies in the second half of 2021, this seemed right. But the Russian invasion of Ukraine has both broken the decades-long peace in Europe, and brought three decades of a “<a href="https://www.federalreservehistory.org/essays/great-moderation">great moderation</a>” in prices to an end. Thanks to the extra pressure on oil and energy prices, inflation is many countries is now rising ahead of economic growth.</p>
<p>Inflation is also starting to weigh on the global economy in various ways. People have less money, so they can’t buy as much. And investors are more worried about the outlook, so they are more reluctant to invest. The prospects for global economic growth have significantly slowed since February. For example, the World Bank has <a href="https://www.bloomberg.com/news/articles/2022-06-07/stagflation-danger-sees-world-bank-cut-global-growth-outlook">just downgraded</a> its forecast for the third time in six months, and currently predicts 2.9% growth in 2022. </p>
<h2>The effect on government bonds</h2>
<p>In view of this situation, investors have also been offloading corporate and government bonds. They fear that the prospects for debt defaults are higher than before, and the returns (yields) on bonds look even worse than before now that inflation is so high. Bond prices have duly been falling, which means that yields (interest rates) have been rising because they are inversely related. </p>
<p>The yields on eurozone countries’ debt have been <a href="https://www.ecb.europa.eu/stats/financial_markets_and_interest_rates/euro_area_yield_curves/html/index.en.html">rising sharply</a>, meaning it is becoming more expensive for them to borrow. Just like in the 2010s, the most pressure is on the countries whose public finances are the most unwieldy, such as Italy and Greece. But even Germany, which has been the bedrock of eurozone fiscal prudence and has enjoyed negative yields (also known as free borrowing) for most of the last three years, has also seen a <a href="https://www.investing.com/rates-bonds/germany-10-year-bond-yield-historical-data">significant rise</a>. </p>
<p><strong>Eurozone sovereign bond yields 2012-22</strong> </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/468026/original/file-20220609-22-w6iof2.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Chart showing yields of 10-year sovereign bonds" src="https://images.theconversation.com/files/468026/original/file-20220609-22-w6iof2.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/468026/original/file-20220609-22-w6iof2.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=312&fit=crop&dpr=1 600w, https://images.theconversation.com/files/468026/original/file-20220609-22-w6iof2.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=312&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/468026/original/file-20220609-22-w6iof2.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=312&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/468026/original/file-20220609-22-w6iof2.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=392&fit=crop&dpr=1 754w, https://images.theconversation.com/files/468026/original/file-20220609-22-w6iof2.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=392&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/468026/original/file-20220609-22-w6iof2.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=392&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">10-year bond yields: Germany = yellow; Greece = turquoise; Italy = blue; Portugal = indigo; France = purple; Spain = orange.</span>
<span class="attribution"><a class="source" href="https://www.tradingview.com">Trading View</a></span>
</figcaption>
</figure>
<p>The eurozone crisis was caused in the early 2010s when investor fears about the solvency of Greece, Spain, Portugal and Ireland drove their bond yields to levels where they needed ECB support – otherwise, their debts would have become unmanageable and they would likely have had to exit the euro. </p>
<p>This support came in the form of loans; bond-buying programmes from the European Central Bank (ECB) to prop up prices; negative interest rates; “creating” euros via quantitative easing (QE); and reassurances from then president Mario Draghi that the ECB would do “<a href="https://www.ecb.europa.eu/press/key/date/2012/html/sp120726.en.html">whatever it takes</a>” to prevent a collapse. </p>
<p>These measures are the <a href="https://www.ecb.europa.eu/press/key/date/2019/html/ecb.sp190612_1%7E1a3bede969.en.html">main reason</a> why bond yields have remained below ruinous levels since the 2010s, with bond-buying support and QE most recently provided early in the pandemic as countries had to borrow even more to cope. The ECB is currently sitting on government bonds from member states worth around €5 trillion (£4.3 trillion), and is currently making net purchases of over €30 billion a month. </p>
<p>Now that yields are surging again, one solution is for the ECB to <a href="https://www.reuters.com/business/finance/euro-zone-bond-yields-do-an-about-turn-after-us-inflation-data-2022-05-11/">buy even more bonds</a> from these countries. However, it is not that simple because bond-buying underpinned by QE is another reason for inflation rising. Indeed, one of the other arguments in favour of these moves in the 2010s was to ward off deflation, which is not a valid justification now that inflation is so high. Bond-buying now would be a violation of the ECB’s strategy aiming for <a href="https://www.ecb.europa.eu/press/pr/date/2021/html/ecb.pr210708%7Edc78cc4b0d.en.html">2% inflation</a>. </p>
<p>Were it to drive up inflation, that would make the economic outlook even worse. This could cause further sell-offs in bonds that would push yields higher. </p>
<p>Instead, the ECB is following the likes of the US Federal Reserve and Bank of England and doing the opposite. The danger with increasing interest rates and ending bond-buying is that it will hurt the economy, which could make investors more worried about the outlook and force bond yields even higher. Indeed, yields have just surged after the <a href="https://www.ft.com/content/bf9820b2-f65b-4d22-b72d-e5a4f56f9c4e">ECB signalled</a> that it was potentially open to doing a 0.5 percentage points hike in rates in September, in a sign of how precarious this situation is. </p>
<p>In sum, the ECB is facing a strange dilemma, where every policy choice will potentially raise the risks of a repeat of the eurozone crisis of the 2010s. Inflation is a delicate business, which is why the Austrian economist Fridrich von Hayek <a href="https://www.bankofengland.co.uk/-/media/boe/files/speech/2021/february/inflation-a-tiger-by-the-tail-speech-by-andy-haldane.pdf?la=en&hash=78C0DB3A631A7B9E2DF6EFBCFE9B3D138D87C449">compared it</a> to trying to “catch a tiger by its tail”. </p>
<p>If inflation starts to fall as growth deteriorates, the eurozone may somehow avoid another crisis because it will then be easier to do more QE and buy more bonds. But in the meantime, all eyes will be on the bond yields of countries like Italy and Greece to see how high they rise.</p><img src="https://counter.theconversation.com/content/184765/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Muhammad Ali Nasir does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>As the European Central Bank announces its first increase in interest rates, investors are getting very nervous.Muhammad Ali Nasir, Associate Professor in Economics, University of LeedsLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1830582022-05-17T12:48:57Z2022-05-17T12:48:57ZA central bank digital euro could save the eurozone – here’s how<figure><img src="https://images.theconversation.com/files/463610/original/file-20220517-16-38nhq8.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Blockchain bailout?</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-illustration/central-bank-digital-currency-euro-on-1857106741">4K_Heaven</a></span></figcaption></figure><p>The <a href="https://www.ecb.europa.eu/home/search/html/central_bank_digital_currencies_cbdc.en.html">European Central Bank</a> and its counterparts in the <a href="https://www.bankofengland.co.uk/research/digital-currencies">UK</a>, <a href="https://www.federalreserve.gov/central-bank-digital-currency.htm">US</a>, <a href="https://www.csis.org/blogs/new-perspectives-asia/chinas-progress-towards-central-bank-digital-currency">China</a> and <a href="https://indianexpress.com/article/business/banking-and-finance/cbdc-launch-in-calibrated-nuanced-manner-7858891/#:%7E:text=The%20RBI%20plans%20to%20come,and%20make%20transactions%20real%20time.">India</a> are exploring a new form of state-backed money built on similar online ledger technology to cryptocurrencies such as bitcoin and ethereum. So-called central bank digital currencies (CBDCs) envision a future where we’ll all have our own digital wallets and transfer money between them at the touch of a button, with no need for high-street banks to be involved because it all happens <a href="https://www.euromoney.com/learning/blockchain-explained/what-is-blockchain#:%7E:text=Blockchain%20is%20a%20system%20of,computer%20systems%20on%20the%20blockchain.">on a blockchain</a>. </p>
<p>But CBDCs also present an opportunity that has gone unnoticed – to vastly reduce the exorbitant levels of public debt weighing down many countries. Let us explain. </p>
<p>The idea behind CBDCs is that individuals and firms would be issued with digital wallets by their central bank with which to make payments, pay taxes and buy shares or other securities. Whereas with today’s bank accounts, there is always the outside possibility that customers are unable to withdraw money because of a <a href="https://www.investopedia.com/terms/b/bankrun.asp">bank run</a>, that can’t happen with CBDCs because all deposits would be 100% backed by reserves. </p>
<p>Today’s retail banks are required to keep little or no deposits in reserve, <a href="https://www.bankofengland.co.uk/statistics/details/further-details-about-banking-sector-regulatory-capital-data">though they</a> do have <a href="https://www.bankingsupervision.europa.eu/press/pr/date/2022/html/ssm.pr220210%7E6455538b07.en.html">to hold</a> a proportion of their capital (meaning easily sold assets) as protection in case their lending books run into trouble. For example, eurozone banks’ minimum requirement is 15.1%, meaning if they have capital of €1 billion (£852 million), their lending book cannot exceed €6.6 billion (that’s 6.6 times deposits). </p>
<p>In an era of CBDCs, we assume that people will still have bank accounts – to have their money invested by a fund manager, for instance, or to make a return by having it loaned out to someone else on the first person’s behalf. Our idea is that the 100% reserve protection in central bank wallets should extend to these retail bank accounts. </p>
<p>That would mean that if a person put 1,000 digital euros into a retail bank account, the bank could not multiply that deposit by opening more accounts than they could pay upon request. The bank would have to make money from its other services instead. </p>
<p>At present, the ECB holds about 25% of EU members’ government debt. Imagine that after transitioning to a digital euro, it decided to increase this holding to 30% by buying new sovereign bonds issued by member states. </p>
<p>To pay for this, it would create new digital euros – just like what happens today when <a href="https://theconversation.com/quantitative-easing-now-looks-permanent-and-has-turned-central-banks-into-pseudo-governments-130098">quantitative easing (QE)</a> is used to prop up the economy. Crucially, for each unit of central bank money created in this way, the money circulating in the wider economy increases by a lot more: in the eurozone, <a href="https://www.ecb.europa.eu/pub/pdf/other/ebbox201706_07_1.en.pdf?f307ee1c10fc673686926c27caa18c7a">it roughly triples</a>. This is essentially because QE drives up the value of bonds and other assets, and as a result, retail banks are more willing to lend to people and firms. This increase in the money supply is why QE can cause inflation. </p>
<p>If there was a 100% reserve requirement on retail banks, however, you wouldn’t get this multiplication effect. The money created by the ECB would be that amount and nothing more. Consequently, QE would be much less inflationary than today. </p>
<h2>The debt benefit</h2>
<p>So where does national debt fit in? The high national debt levels in many countries are predominantly the result of the global financial crisis of 2007-09, the eurozone crisis of the 2010s and the COVID pandemic. In the eurozone, <a href="https://worldpopulationreview.com/countries/countries-by-national-debt">countries with very high debt</a> as a proportion of GDP include Belgium (100%), France (99%), Spain (96%), Portugal (119%), Italy (133%) and Greece (174%). </p>
<p>One way to deal with high debt is to create a lot of inflation to make the value of the debt smaller, but that also makes citizens poorer and is liable to eventually cause unrest. But by taking advantage of the shift to CBDCs to change the rules around retail bank reserves, governments can go a different route. </p>
<p>The opportunity is during the transition phase, by reversing the process in which creating money to buy bonds adds three times as much money to the real economy. By selling bonds in exchange for today’s euros, every one euro removed by the central bank leads to three disappearing from the economy. </p>
<p>Indeed, this is how digital euros would be introduced into the economy. The ECB would gradually sell sovereign bonds to take the old euros out of circulation, while creating new digital euros to buy bonds back again. Because the 100% reserve requirement only applies to the new euros, selling bonds worth €5 million euros takes €15 million out of the economy but buying bonds for the same amount only adds €5 million to the economy. </p>
<p>However, you wouldn’t just buy the same amount of bonds as you sold. Because the multiplier doesn’t apply to the bonds being bought, you can triple the amount of purchases and the total amount of money in the economy stays the same – in other words, there’s no extra inflation. </p>
<p>For example, the ECB could increase its holdings of sovereign debt of EU member states from 25% to 75%. Unlike the sovereign bonds in private hands, member states don’t have to pay interest to the ECB on such bonds. So EU taxpayers would now only need to pay interest on 25% of their bonds rather than the 75% on which they are paying interest now. </p>
<h2>Interest rates and other questions</h2>
<p>An added reason for doing this is interest rates. While interest rates payable on bonds have been meagre for years, they could hugely increase on future issuances due to inflationary pressures and central banks beginning to raise short-term interest rates in response. The chart below shows how the yields (meaning rates of interest) on the closely watched 10-year sovereign bonds for Spain, Greece, Italy and Portugal have already increased between three and fivefold in the past few months. </p>
<p><strong>Mediterranean 10-year bond yields</strong></p>
<p>Following several years of immense shocks from the pandemic, the energy crisis and war emergency, there’s a risk that the markets start to think that Europe’s most indebted countries can’t cover their debts. This could lead to widespread bond selling and push interest rates up to unmanageable levels. In other words, our approach might even save the eurozone. </p>
<p>The ECB could indeed achieve all this without introducing a digital euro, simply by imposing a tougher reserve requirement within the current system. But by moving to a CBDC, there is a strong argument that because it’s safer than bank deposits, retail banks should have to guarantee that safety by following a 100% reserve rule. </p>
<p>Note that we can only take this medicine once, however. As a result, EU states will still have to be disciplined about their budgets. </p>
<p>Instead of completely ending fractional reserve banking in this way, there’s also a halfway house where you make reserve requirements more stringent (say a 50% rule) and enjoy a reduced version of the benefits from our proposed system. Alternatively, after the CBDC transition ends, the reserve requirement could be progressively relaxed to stimulate the economy, subject to GDP growth, inflation and so on. </p>
<p>What if other central banks do not take the same approach? Certainly, some coordination would help to minimise disruption, but reserve requirements do differ between countries today without significant problems. Also, many countries would probably be tempted to take the same approach. For example, the Bank of England holds over one-third of British government debt, and UK public debt as a proportion of GDP currently <a href="https://www.statista.com/statistics/282841/debt-as-gdp-uk/">stands at 95%</a>.</p><img src="https://counter.theconversation.com/content/183058/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>By changing the rules around bank lending, you can make a huge cut to national debt.Guido Cozzi, Professor of Macroeconomics, University of St.GallenLeonardo Becchetti, Professor of Political Economy, University of Rome Tor VergataLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1760702022-02-01T10:37:35Z2022-02-01T10:37:35ZThree reasons why Mattarella’s reappointment as Italy’s president is a huge relief for the west<p>After a tumultuous week of secret votes and intense negotiations between political parties, Italy <a href="https://www.theguardian.com/world/2022/jan/29/for-the-stability-of-italy-sergio-mattarella-could-be-reelected-president">has reconfirmed</a> Sergio Mattarella as head of state for a second seven-year term. The decision implies that <a href="https://theconversation.com/why-mario-draghi-taking-charge-of-italy-is-great-news-for-the-eu-and-also-america-155779">Mario Draghi</a>, the Italian prime minister for nearly a year who was <a href="https://www.theguardian.com/world/2022/jan/23/italy-secret-ballot-president-berlusconi-drops-out">seen as</a> a contender to replace Mattarella, will continue in his current role until the natural end of his administration in 2023.</p>
<p>Parties didn’t initially agree on the re-election of Mattarella, whose role is broadly ceremonial but includes important powers such as the <a href="https://www.thelocal.it/20210204/explained-how-are-italys-prime-ministers-chosen/">ability to</a> choose the prime minister. It was, in fact, only after eight ballots that consensus was reached on his name, more out of the political stalemate that emerged and the related lack of feasible alternatives than out of a clear-cut political strategy by the leading parties.</p>
<p>Notwithstanding the disenchanting process that Italians had to witness, Mattarella’s re-election is one of the best possible outcomes from this presidential election, especially when looking at what is expected to come next beyond Italian borders. Mattarella’s renewed presidency is in fact great news not only for Italy, but also for the EU and the US. Here are three reasons why.</p>
<h2>1. Getting the EU recovery plan right</h2>
<p>Over the last year, former European Central Bank President Draghi has had a key role in defining Italy’s recovery plan to revive its coronavirus-battered economy. This uses some national money along with <a href="https://www.reuters.com/world/europe/draghi-says-deal-reached-with-eu-italys-recovery-plan-officials-2021-04-25/">more than €220 billion</a> (£183 billion) of EU money, and Draghi also had to reach a crucial agreement with the European Commission to start releasing the funds. </p>
<p>The success of the EU recovery plan is critical for the future of the entire bloc, and Italy has a key role as <a href="https://www.bruegel.org/publications/datasets/european-union-countries-recovery-and-resilience-plans/">the largest recipient</a> of funding. Failing to spend this money well would have dramatic consequences on the nation’s competitiveness and, in turn, that of the EU as a whole. The Mattarella-Draghi duo continuing until 2023 is the best reassurance their EU counterparts could have that Italy’s recovery plan will continue to move forward as hoped.</p>
<h2>2. Stabilising financial markets</h2>
<p>Italy was in desperate need of both an internationally respected head of state and a stable government for the upcoming months to avoid sending dangerous signals to markets that are already very unstable. In a world of rising <a href="https://www.ft.com/content/088d3368-bb8b-4ff3-9df7-a7680d4d81b2">inflationary pressures</a> and uncertainty about how aggressively central bankers will raise interest rates and scrap quantitative easing programmes that create money to prop up economies, we have recently been seeing sell-offs in global stock markets and other financial assets. </p>
<p>This has already prompted a steep rise in what it costs investors to <a href="https://www.ft.com/content/b10a3082-adb4-42af-a015-c3f2d768c21d">hedge against</a> junk-rated European companies defaulting on their debt. It also raises questions about the borrowing costs of heavily indebted eurozone countries such as Italy. </p>
<p>Italy’s public finances, importantly, depend on the country’s ability to borrow money at attractive rates. On Draghi’s appointment as prime minister, the closely watched gap (or spread) between the rates at which Germany and Italy can borrow via ten-year government bonds shrank to around 0.9 percentage points, the lowest in over a decade. The spread is now around 1.3 percentage points and it is fundamental that it does not increase further, meaning investors must continue to look with confidence at Italy’s plans to revive its economy post-pandemic.</p>
<p><strong>Italian v German borrowing costs 2012-22</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/443441/original/file-20220131-13-187mkrb.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Comparison of Italian and German 10-year bond yields" src="https://images.theconversation.com/files/443441/original/file-20220131-13-187mkrb.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/443441/original/file-20220131-13-187mkrb.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=259&fit=crop&dpr=1 600w, https://images.theconversation.com/files/443441/original/file-20220131-13-187mkrb.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=259&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/443441/original/file-20220131-13-187mkrb.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=259&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/443441/original/file-20220131-13-187mkrb.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=325&fit=crop&dpr=1 754w, https://images.theconversation.com/files/443441/original/file-20220131-13-187mkrb.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=325&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/443441/original/file-20220131-13-187mkrb.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=325&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Orange = Italian ten-year bond yield; blue = German ten-year bond yield.</span>
<span class="attribution"><span class="source">Trading View</span></span>
</figcaption>
</figure>
<p>To this end, Mattarella is a critical pro-Europe stabilising force for Italy, ensuring that Draghi will remain prime minister until 2023. Beyond that and looking at the Italian political elections to take place in 2023, we should not forget that, not only does the head of state have the authority to choose the prime minister, he can approve (or reject) the appointment of all the other government ministers, and even dissolve the parliament. Quite a critical role in the tumultuous period that is likely ahead of us in the international markets. </p>
<h2>3. Russia and China</h2>
<p>With the French presidential election coming up in April and <a href="https://theconversation.com/germany-the-three-biggest-issues-facing-chancellor-olaf-scholz-173034">Germany’s recent choice</a> of Olaf Scholz as chancellor, Italy’s leadership will play a key role in defining the EU position’s in a treacherous geopolitical landscape – not least, relations with Russia and China. </p>
<p>On the Russian front, the US and other Nato allies are increasingly concerned that hostilities between Russia and Ukraine <a href="https://news.sky.com/story/he-absolutely-will-do-it-why-putin-seems-poised-to-attack-ukraine-after-one-of-surest-signs-yet-12527871">are more likely</a> than a negotiated solution to the crisis. Faced with this potential disaster on its eastern flank, the EU desperately needs strong leadership in the coming few months. With Draghi leading Italy, backed by Mattarella who, as head of state, technically acts also as commander in chief, they will be closely involved in deciding the EU’s stance should a conflict materialise. </p>
<p>As for China, there is a <a href="https://www.ft.com/content/cb42163b-b3e3-4ace-817e-ce909fd72ad1">widespread growing worry</a> that a war in Ukraine would make an already assertive Beijing even stronger than before. If the US and Europe move forward to impose tough sanctions on Moscow, the Russian dependence on China will grow even further. </p>
<p>A parallel danger is that the US could end up isolated if the largest EU economies were to obstruct President Biden’s actions by continuing to be more conciliatory towards Russia. An Italian government led by Draghi and under Mattarella’s presidency can be seen as a high-profile, internationally respected and trustworthy Nato ally. Something the US really needs these days.</p><img src="https://counter.theconversation.com/content/176070/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Niccolò Pisani does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>With the markets turning and the Russia-China axis looking ever more worrying, Rome could not risk destabilising the government.Niccolò Pisani, Professor of Strategy and International Business, International Institute for Management Development (IMD)Licensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1724372021-11-23T16:01:23Z2021-11-23T16:01:23ZThe euro is plunging – and probably won’t bounce back soon<figure><img src="https://images.theconversation.com/files/433475/original/file-20211123-15-17ld12v.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">E as in ebbing. </span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-illustration/weak-euro-currency-weakening-finances-man-341844767">kentoh/Shutterstock</a></span></figcaption></figure><p>The euro has weakened against the US dollar since the beginning of 2021, from around US$1.23 to its current exchange rate of US$1.13. That’s a fall of about 9%, which is significant, especially since these are the two major currencies of the world. The drop has also intensified in November, falling 3% since the turn of a month, which has seen violence in European capitals over COVID restrictions, migrant problems at the Belarus-Poland border and Russian troops amassing on the border of Ukraine. </p>
<p>The decline should be seen in a broader context, though. The euro is still stronger than a couple of years ago, when it was about US$1.10. It also went through some heavy weekly volatility from February to April 2020 in the early part of the COVID pandemic, bouncing between about US$1.07 and US$1.13 at a time when lots of investors were fleeing to the US dollar for safety and there was much uncertainty about what lockdowns would mean. </p>
<p><strong>Euro vs US dollar chart</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/433519/original/file-20211123-13-cymxib.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Euro vs dollar chart" src="https://images.theconversation.com/files/433519/original/file-20211123-13-cymxib.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/433519/original/file-20211123-13-cymxib.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=307&fit=crop&dpr=1 600w, https://images.theconversation.com/files/433519/original/file-20211123-13-cymxib.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=307&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/433519/original/file-20211123-13-cymxib.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=307&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/433519/original/file-20211123-13-cymxib.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=386&fit=crop&dpr=1 754w, https://images.theconversation.com/files/433519/original/file-20211123-13-cymxib.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=386&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/433519/original/file-20211123-13-cymxib.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=386&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="https://www.tradingview.com/symbols/EURUSD/">Trading View</a></span>
</figcaption>
</figure>
<p>Explaining currency movements on a weekly or even monthly basis is well known to be extremely difficult, especially when it comes to major economies like the US and the countries in the eurozone. But certainly we need to look at what is happening in both regions and not just one or the other. Using this simple idea, there are several explanations for the recent euro depreciation. </p>
<h2>Inflation differences</h2>
<p>The first explanation relates to the Federal Reserve and the European Central Bank (ECB) stimulating their economies using quantitative easing (QE), which is essentially creating money to buy financial assets such as government bonds from banks and other major investors. Both central banks have been doing this extensively since the start of the pandemic. </p>
<p>However, with annual inflation in the US now reaching a serious level <a href="https://news.sky.com/story/us-inflation-hits-highest-level-since-1990-at-6-2-as-food-and-fuel-prices-surge-12465340">of 6.2%</a>, compared with a <a href="https://www.reuters.com/world/europe/euro-zone-oct-inflation-confirmed-41-yy-energy-spike-2021-11-17/">less troublesome 4.1%</a> in the eurozone, the feeling is that the Fed will end its asset purchases sooner. This is because increasing the money supply has the potential to stoke inflation. Indeed, the Fed <a href="https://www.reuters.com/business/cop/dollar-hovers-near-peaks-fed-heads-taper-2021-11-03/">has recently</a> already started “tapering” or slowing down the rate of QE with a view to stopping it in the second half of 2022. On the other hand, the ECB <a href="https://www.bloomberg.com/news/articles/2021-10-06/ecb-said-to-study-new-bond-buying-plan-for-when-crisis-tool-ends">has been discussing</a> a replacement for its US$2.2 trillion (£1.7 trillion) QE programme when it ends in March 2022. </p>
<p>Connected to this is an <a href="https://www.bloomberg.com/news/articles/2021-11-18/jpmorgan-economists-now-predict-fed-to-raise-rates-in-september">increasing expectation</a> that the US may also have to begin a series of rises to interest rates from the middle of 2022 to curb inflation, while ECB president Christine Lagarde has just <a href="https://www.cnbc.com/2021/11/19/ecbs-lagarde-says-a-rate-hike-unlikely-for-2022.html">made it clear</a> that the ECB is unlikely to start raising rates until at least 2023. These emerging differences in the monetary-policy stances of the US and eurozone have clearly favoured a strengthening of the dollar (since QE and lower interest rates tend to make a currency depreciate). </p>
<h2>COVID and politics</h2>
<p>A second pivotal factor has been the recent relative strength of the US economy in its recovery from the pandemic compared with the eurozone. In 2021, the US <a href="https://www.imf.org/en/Publications/WEO/Issues/2021/10/12/world-economic-outlook-october-2021">is forecast</a> by the International Monetary Fund to grow 6% compared to 5% in the eurozone, while in 2022 they are respectively expected to grow 5.2% and 4.3%. Again, this points to dollar strength. </p>
<p>More COVID lockdowns in the US seem unlikely (even though cases are <a href="https://www.nytimes.com/2021/11/22/us/us-covid-cases-rising-thanksgiving.html?mc_cid=6d76cfd520&mc_eid=c825ac9090">rising again</a>), though not in the eurozone area, where the rate of infections has been picking up sharply in recent weeks in countries like Germany, France, the Netherlands, Austria and Belgium. Austria is <a href="https://www.bbc.com/news/world-europe-59369488">now back</a> in lockdown, <a href="https://news.sky.com/story/covid-19-germany-may-follow-austria-into-full-lockdown-as-coronavirus-cases-hit-new-high-12472233">and other</a> eurozone countries could follow suit. </p>
<p>A final driver of the recent strength of the dollar is greater political stability. The Biden administration still has three years in office and has recently succeeded in passing its US$1.7 trillion <a href="https://www.theguardian.com/us-news/2021/nov/19/house-democrats-pass-biden-expansive-build-back-better-policy-plan">Build Back Better</a> stimulus package. </p>
<p>By contrast, countries in the eurozone face a period of greater political instability. Germany is seeing the 16 years of relative stability under Angela Merkel coming to an end. <a href="https://www.thetimes.co.uk/article/french-election-2022-macron-is-sitting-pretty-but-sitting-presidents-often-tumble-fqfb6t5g0">The question</a> of whether Emmanuel Macron will succeed in the French elections in April 2022 against Marine Le Pen is also weighing on investors’ minds, as are the continued trade frictions between the EU and the UK over Brexit.</p>
<p>It is happening at a time when <a href="https://www.businessinsider.com/russian-invasion-of-ukraine-a-real-possibility-russia-watchers-warn-2021-11?r=US&IR=T">Russia’s build-up</a> of forces close to Ukraine raises the prospect of military conflict on the edge of Europe – not to mention that Russia <a href="https://www.reuters.com/markets/europe/living-hand-mouth-europes-gas-crunch-shows-little-sign-easing-2021-11-22/">has already</a> been limiting the region’s gas supply and one of its main pipelines runs through Ukraine. In addition, there have been significant <a href="https://www.buzzfeednews.com/article/skbaer/antivax-europe-covid-mandates">anti-vaccine protests</a> in France, the Netherlands, Germany and Italy, and European governments are now under <a href="https://thehill.com/opinion/finance/580976-is-europe-headed-toward-another-debt-crisis">intense pressure</a> to bring their spending under control. </p>
<p>So while short-term currency movements are very difficult to predict, there are many reasons to believe that the recent period of euro weakness will continue. This is making imports to the eurozone more expensive – not least energy – and while it has some benefits for a major exporter like Germany, it also undermines the credibility of the eurozone as a global economic force. </p>
<p>The gamechanger might be if the ECB acknowledged that there is an inflation problem that needs to be tackled, by ending its experiment with QE and beginning the process of raising interest rates. That, however, does not look likely any time soon.</p><img src="https://counter.theconversation.com/content/172437/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Keith Pilbeam does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>To understand the euro’s weakness, you have to look at the US as well as Europe.Keith Pilbeam, Professor of Economics, City, University of LondonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1655092021-08-03T13:33:23Z2021-08-03T13:33:23ZFour reasons why EU is staring down the barrel of a second lost decade<figure><img src="https://images.theconversation.com/files/414326/original/file-20210803-13-16cys9.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Rolling the dix. </span> <span class="attribution"><a class="source" href="https://unsplash.com/photos/p-ER1gHMTYY">Imelda</a>, <a class="license" href="http://creativecommons.org/licenses/by-sa/4.0/">CC BY-SA</a></span></figcaption></figure><p>The eurozone’s latest <a href="https://www.reuters.com/world/europe/euro-zone-rebounds-strongly-inflation-above-ecb-target-2021-07-30/">economic growth figures</a> are a little better than expected. This group of 19 EU nations grew 2.2% in the second quarter of 2021 compared to the first quarter, partly thanks to decent performances from Spain and Italy. </p>
<p>But while the US and Chinese economies are both now bigger than their 2019 peaks, the eurozone is 3% off that achievement. And when you look more broadly at the state of the eurozone, this turns out to be only the tip of the iceberg. </p>
<iframe id="noa-web-audio-player" style="border: none" src="https://embed-player.newsoveraudio.com/v4?key=x84olp&id=https://theconversation.com/four-reasons-why-eu-is-staring-down-the-barrel-of-a-second-lost-decade-165509&bgColor=F5F5F5&color=D8352A&playColor=D8352A" width="100%" height="110px"></iframe>
<p>COVID-19 still overshadows everything around the world, but countries are likely to recover at <a href="https://theconversation.com/covid-19-recovery-some-economies-will-take-longer-to-rebound-this-is-bad-for-everyone-162023?utm_source=linkedin&utm_medium=bylinelinkedinbutton">different speeds</a> once we get back to some sort of normality. This will depend on the structure of their economies, the effectiveness of their recovery policies, and how they <a href="https://www.project-syndicate.org/commentary/stagflation-debt-crisis-2020s-by-nouriel-roubini-2021-06?utm_source=Project+Syndicate+Newsletter&utm_campaign=579926b478-covid_newsletter_07_01_2021&utm_medium=email&utm_term=0_73bad5b7d8-579926b478-105568073&mc_cid=579926b478&mc_eid=14a09c8529">deal with</a> high sovereign debts and a foreseeable mix of weakish growth and inflation. But for several reasons, the eurozone particularly worries me. </p>
<h2>Ghosts of the past</h2>
<p>The first is the eurozone’s bleak performance since the global financial crisis of 2007-09. It took six years to regain its 2008 GDP level, and some members did even worse: Spain and Portugal took almost a decade, and Italy and Greece have yet to get there.</p>
<p>When COVID broke out, the eurozone growth rate remained well below its long-term trajectory. It was behind the US and UK, both of whom were hit harder by the global financial crisis, and even worse compared to the leading emerging economies. Neither was this a one-off. Looking at the <a href="https://eabcn.org/sites/default/files/eabcdc_findings_29_march_2021.pdf">past five</a> recessions, the eurozone nations have been successively slower to recover from each one. </p>
<p><strong>GDP by nation since 2008</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/414307/original/file-20210803-17-vo2ofo.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/414307/original/file-20210803-17-vo2ofo.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/414307/original/file-20210803-17-vo2ofo.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=296&fit=crop&dpr=1 600w, https://images.theconversation.com/files/414307/original/file-20210803-17-vo2ofo.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=296&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/414307/original/file-20210803-17-vo2ofo.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=296&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/414307/original/file-20210803-17-vo2ofo.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=372&fit=crop&dpr=1 754w, https://images.theconversation.com/files/414307/original/file-20210803-17-vo2ofo.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=372&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/414307/original/file-20210803-17-vo2ofo.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=372&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Based on GDP (constant 2010 US$): Source: Authors’ calculations using World Bank data.</span>
<span class="attribution"><span class="source">Muhammad Ali Nasir</span></span>
</figcaption>
</figure>
<p>Since 2008, the ECB has tried numerous measures to improve growth. Like most major powers, it has done a lot of <a href="https://www.ecb.europa.eu/explainers/show-me/html/app_infographic.en.html#:%7E:text=These%20asset%20purchases%2C%20also%20known,but%20close%20to%2C%202%25.&text=The%20European%20Central%20Bank%20buys%20bonds%20from%20banks.&text=This%20increases%20the%20price%20of,money%20in%20the%20banking%20system.">quantitative easing</a> (QE), which involves creating money to buy sovereign bonds and other financial assets. <a href="https://www.ecb.europa.eu/mopo/ela/html/index.en.html">It has</a> sought to <a href="https://www.ceps.eu/whats-the-ecb-doing-in-response-to-the-covid-19-crisis/">prop up</a> its <a href="https://www.ecb.europa.eu/mopo/implement/omo/tltro/html/index.en.html#:%7E:text=The%20targeted%20longer%2Dterm%20refinancing,lending%20to%20the%20real%20economy.">retail banks</a> in <a href="https://www.federalreserve.gov/monetarypolicy/files/FOMC20100805memo02.pdf">various ways</a>, while also pioneering <a href="https://www.reuters.com/world/europe/how-do-negative-interest-rates-work-2021-02-04/#:%7E:text=The%20ECB%20introduced%20negative%20rates,term%20rate%20to%20about%20zero.">negative interest rates</a> and giving the markets more <a href="https://www.ecb.europa.eu/explainers/tell-me/html/what-is-forward_guidance.en.html">forward guidance</a> about monetary policy. </p>
<p>Famously in 2012, then ECB president <a href="https://www.politico.eu/article/ecb-will-do-whatever-it-takes-to-save-the-euro/">Mario Draghi said</a> he would do “whatever it takes” to save the euro. This forward guidance kept the euro stable, but the same cannot be said of growth. </p>
<h2>Poor policy and low ammunition</h2>
<p>Policy errors are partly to blame for this. With the benefit of hindsight, the eurozone went into the global financial crisis with lending rates on the low side, so had less room to cut than other regions. It was also more reluctant than central banks like the Bank of England and US Federal Reserve to start QE, preferring to focus on curbing inflation and making the euro “<em>stabil wie die mark</em>” (stable like the German mark). The ECB did not unveil a QE programme <a href="https://www.bbc.co.uk/news/business-30933515">until 2015</a>.</p>
<p>Countries with the capacity to spend to stimulate their economies, such as Germany, France and the Netherlands, also did too little. Spain’s stimulus was poorly designed, while Italy was more interested in balancing its books at the time. Too soon after the crisis struck, <a href="https://www.ncbi.nlm.nih.gov/pmc/articles/PMC4952125/">austerity then became</a> the priority for the whole eurozone. </p>
<p>A related problem has been public and private investment. In middle-income EU regions, investment rates <a href="https://www.eib.org/attachments/efs/economic_investment_report_2019_en.pdf">fell by</a> about 14% between 2002 and 2018. <a href="https://www.bruegel.org/2018/06/understanding-the-lack-of-german-public-investment/">In thrifty Germany</a>, public and private fixed investments declined as a percentage of GDP for decades, despite a huge surplus in public spending. </p>
<p>Before COVID hit, EU infrastructure investment was at <a href="https://www.eib.org/attachments/efs/economic_investment_report_2019_en.pdf">a 15-year low</a>, with the greatest declines in regions that were already lagging. Initiatives intended to help, such as the <a href="https://ec.europa.eu/economy_finance/publications/pages/publication13504_en.pdf">European Economic Recovery Plan</a> of 2008 and the <a href="https://ec.europa.eu/info/investment-plan_en">European Commission Investment Plan</a> in 2014, were too little.</p>
<p>The overall result was that weakness: Germany and the eurozone as a whole were showing 0% growth at the time of the COVID outbreak, while Austria, France and Italy were all contracting slightly. In response, the <a href="https://www.ecb.europa.eu/press/pressconf/2019/html/ecb.is190912%7E658eb51d68.en.html">ECB had cut</a> its main interest rate by 0.1 percentage points to -0.5% in September 2019, and restarted monthly QE to the tune of €20 billion (£17 billion) from November 1 of that year – the date Christine Lagarde became ECB president. </p>
<p>The eurozone economy was therefore needing life support even before the pandemic – indeed, many of the ECB’s other unconventional support measures were in place throughout. Tellingly, the ECB’s only new measure during the pandemic has been a <a href="https://www.ecb.europa.eu/press/pr/date/2020/html/ecb.pr200430_1%7E477f400e39.en.html">new form</a> of cheaper refinancing for banks. It raises the prospect of the ECB <a href="https://www.piie.com/publications/policy-briefs/are-central-banks-out-ammunition-fight-recession-not-quite">running out</a> of the ammunition needed to keep stimulating the eurozone’s sickly economy. </p>
<h2>Discipline <em>über alles</em></h2>
<p>Finally, some eurozone members are obsessed with the EU’s <a href="https://voxeu.org/article/fiscal-rules-european-monetary-union#:%7E:text=Mauro%2C%20Jeromin%20Zettelmeyer-,Fiscal%20rules%20were%20enshrined%20in%20the%20founding%20documents%20of%20the,deficits%20below%203%25%20of%20GDP.">fiscal rules</a> around low national debt and low deficits. The Financial Times <a href="https://www.ft.com/content/dacd2ac6-6b5f-11ea-89df-41bea055720b">may have reported</a> in March 2020 that “Germany tears up fiscal rule book to counter coronavirus pandemic”, but there are <a href="https://www.ft.com/content/640d084b-7b13-4555-ba00-734f6daed078">already calls</a> by influential figures such as Bundestag president Wolfgang Schäuble to return to fiscal discipline. </p>
<p>A rush to austerity 2.0 is a luxury that the EU cannot afford. To quote something <a href="https://quoteinvestigator.com/2017/03/23/same/#note-15768-1">often attributed</a> to Albert Einstein, insanity is doing the same thing over and over again and expecting different results. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/414322/original/file-20210803-16-1jz2v4k.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="German flag on top of the Reinchstag at dusk" src="https://images.theconversation.com/files/414322/original/file-20210803-16-1jz2v4k.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/414322/original/file-20210803-16-1jz2v4k.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/414322/original/file-20210803-16-1jz2v4k.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/414322/original/file-20210803-16-1jz2v4k.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/414322/original/file-20210803-16-1jz2v4k.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/414322/original/file-20210803-16-1jz2v4k.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/414322/original/file-20210803-16-1jz2v4k.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Germans don’t do inflation.</span>
<span class="attribution"><a class="source" href="https://unsplash.com/photos/G6RE_to6Lus">Christian Lue</a>, <a class="license" href="http://creativecommons.org/licenses/by-sa/4.0/">CC BY-SA</a></span>
</figcaption>
</figure>
<p>For different results, the ECB should stand its ground on monetary easing and, like the Fed, avoid giving in to inflationary pressures that are likely to be short term by raising rates or paring back QE. </p>
<p>Meanwhile, the fiscal rules need loosening to correspond to economic realities. The temptation must be avoided to throw the nations in the peripheries under the austerity bus again, one of the main causes of the eurozone crisis of the early 2010s. </p>
<p>Surplus nations, particularly Germany, should revive spending in infrastructure, education and technology. The EU’s €750 billion <a href="https://europa.eu/next-generation-eu/index_en">Next Generation EU</a> investment plan will belatedly kick in later this year, but just like the two previous EU recovery packages, will probably not be enough on its own. </p>
<p>With an unimpressive track record on recovery, inherently weak economies, an obsession with fiscal rules and the prospect of the ECB running out of ammunition, the alternative could be a second lost decade. What that could do to the eurozone and the EU, it would be better not to find out.</p><img src="https://counter.theconversation.com/content/165509/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Muhammad Ali Nasir does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>If insanity is doing the same thing over and over and expecting different results, what does that say about the EU?Muhammad Ali Nasir, Associate Professor in Economics and Finance, University of HuddersfieldLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1421912020-07-09T12:12:31Z2020-07-09T12:12:31ZCoronavirus recovery – lessons from the eurozone crisis<figure><img src="https://images.theconversation.com/files/346576/original/file-20200709-58-2lj8xp.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/frankfurt-germany-december-29-2013-euro-545449783">MikeDotta / Shutterstock.com</a></span></figcaption></figure><p>As governments around the world grapple with the public health and economic effects of the COVID-19 pandemic, there are striking similarities with the eurozone crisis that followed the 2008 financial crisis. Having researched this crisis, it is clear to us that there are some important lessons to apply to today’s recovery. The early signs indicate that the EU is responding much more effectively to this crisis than it did in 2008.</p>
<p>Many European governments are increasing their spending to compensate for the economic losses of lockdowns, as they initially did in the wake of the 2008 financial crisis. This is necessary when an economy contracts but relies on a rise in public debt – and the figures are much higher this time around. According <a href="https://www.imf.org/en/Publications/WEO/Issues/2020/06/24/WEOUpdateJune2020">to IMF forecasts</a>, by the end of the year public debt will reach almost 100% of GDP in the eurozone on average. Italy, Greece, France, Spain and Portugal will exceed this. </p>
<p>We know from 2008 that a problem associated with rising debt is that investors can sell the bonds of a given country to buy those of a more credible country denominated in the same currency. Prolonged uncertainty over whether or not the European Central Bank would bail out struggling members (Greece, Ireland) led to the skyrocketing of borrowing costs in these member states and their rapid decline in others (Germany, France). This resulted in a liquidity crisis in the EU’s peripheral states. It wasn’t until the ECB president, Mario Draghi, made it clear in 2012 that the bank would do whatever it took to preserve the euro that crisis was averted.</p>
<hr>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/346582/original/file-20200709-62-2cbrpd.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/346582/original/file-20200709-62-2cbrpd.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=150&fit=crop&dpr=1 600w, https://images.theconversation.com/files/346582/original/file-20200709-62-2cbrpd.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=150&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/346582/original/file-20200709-62-2cbrpd.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=150&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/346582/original/file-20200709-62-2cbrpd.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=189&fit=crop&dpr=1 754w, https://images.theconversation.com/files/346582/original/file-20200709-62-2cbrpd.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=189&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/346582/original/file-20200709-62-2cbrpd.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=189&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<p><strong><em><a href="https://theconversation.com/uk/topics/the-anthill-podcast-27460">This article is part of our Recovery series – click here for more.</a></em></strong></p>
<hr>
<p>This time round the European Central Bank has acted a lot more quickly, which has kept borrowing costs low for all eurozone countries. In March, the ECB created a <a href="https://www.ecb.europa.eu/press/pr/date/2020/html/ecb.pr200318_1%7E3949d6f266.en.html">Pandemic Emergency Purchase Programme</a>, a temporary €750 billion scheme (£670 billion) involving both government and private debt. And another €750 billion fund <a href="https://www.ft.com/content/326aa210-09b0-4db7-b0e5-3026375ca4e8">has been proposed</a> to bankroll recovery efforts going forward.</p>
<p>The big difference this time compared to 2008 is that the Franco-German engine of the EU has led calls for financial assistance. But there remain the “<a href="https://www.ft.com/content/7c47fa9d-6d54-4bde-a1da-2c407a52e471">frugal four</a>” (Austria, Denmark, the Netherlands and Sweden) that oppose the idea of transfers and prefer an emergency fund financed mainly by loans. A decision will be attempted at the upcoming EU summit on July 17-18.</p>
<h2>Conditions of support</h2>
<p>One of the thorny issues, as with a decade ago, will be the conditions attached to EU support. The eurozone crisis was <a href="https://www.tandfonline.com/doi/abs/10.1080/07036337.2014.990137">portrayed as a morality tale</a> that pitted supposedly northern European values of hard work, prudent savings, moderate consumption and fiscal stability against perceived southern vices of low competitiveness, undeserved spending, inflated wages and profligacy. Financial support came with strict conditions, which took the form of austerity policies. This meant a reduction in public spending, wage cuts for government workers and tax rises.</p>
<p>Today this narrative has lost some of its strength. The north-south divide observed in 2009 is less clear since Germany seems to have changed camps. The last crisis also showed that austerity was not helpful in stopping the increase in public debt. GDP growth stalled and unemployment ballooned.</p>
<p>Above all, it is much harder (and obviously even more unfair) to blame individual countries for a pandemic. Although the crisis will be felt worse in the weakest countries that are still recovering from the previous crisis, the cause of coronavirus is the same for all member states. </p>
<p>Nonetheless, the details of how the EU’s recovery fund will be given to member states is up for debate. This includes whether or not the money will be given as loans or grants, what the terms of repayment will be and how it should be spent.</p>
<h2>Bailout negotiating tactics</h2>
<p>The new funds may not be enough to meet member state needs – and for governments to borrow extra it will be crucial to reassure investors that they will be reimbursed. Interest rates are still low, but – if investors panic or if the ECB cannot prevent this panic – then things could change. Then governments may be obliged to accept certain conditions, austerity for example, to remain credible in international markets. </p>
<p>But there is room for manoeuvre. In our forthcoming book we show that, when there was trust between the lenders and the bailed-out governments, conditions were not dictated. The EU and IMF lenders, collectively known as the troika, were open to solutions proposed by member states, as long as they reached certain objectives. </p>
<p>Thus, when for example, Portugal negotiated its bailout, it could insert specific policies or revisions and fought for others to be dropped. After the bailout negotiations, some governments such as Greece, Ireland and Cyprus successfully resisted the implementation of some policies they disliked; and lenders were sometimes willing to turn a blind eye and let this go unsanctioned. </p>
<p>So an important lesson for today is that conditions of lending will only be met if both sides agree to them. The preferences of different member states must also be taken into account. </p>
<p>Ultimately, the eurozone crisis showed that it was delayed collective action by the EU that empowered financial markets to exploit differences between the bond prices in different member states. The response to coronavirus so far suggests that the EU’s decision makers are aware of this. But the challenge for the 27-member bloc remains to act collectively, in agreement and for the good of all states.</p><img src="https://counter.theconversation.com/content/142191/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Stella Ladi received funding from the Portuguese Foundation for Science and Technology. She is affiliated with Panteion University, Athens. </span></em></p><p class="fine-print"><em><span>Angie Gago received funding from the Grant “Democracy in times of crisis: Power and Discourse in a three-level game”, funded by the Portuguese Foundation for Science and Technology, FCT, (Grant nr PTDC/IVC-CPO/2247/2014).</span></em></p><p class="fine-print"><em><span>Catherine Moury received funding from the Grant “Democracy in times of crisis: Power and Discourse in a three-level game”, funded by the Portuguese Foundation for Science and Technology, FCT, (Grant nr PTDC/IVC-CPO/2247/2014).</span></em></p><p class="fine-print"><em><span>Daniel Cardoso received funding from the Grant “Democracy in times of crisis: Power and Discourse in a three-level game”, funded by the Portuguese Foundation for Science and Technology, FCT, (Grant nr PTDC/IVC-CPO/2247/2014).</span></em></p>The early signs indicate that the EU is responding much more effectively than it did in 2008.Stella Ladi, Senior Lecturer in Public Management, Queen Mary University of LondonAngie Gago, Postdoctoral Researcher, Université de LausanneCatherine Moury, Associate Professor of Political Science, Universidade Nova de LisboaDaniel Cardoso, Assistant Professor, Autonomous University of LisbonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1307312020-02-26T15:05:38Z2020-02-26T15:05:38ZIs the time right for a single currency in West Africa?<figure><img src="https://images.theconversation.com/files/315047/original/file-20200212-61958-1ta2oyo.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">CFA franc countries will no longer have to keep 50% of their foreign exchange reserves at the French Treasury</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>The eight Francophone states that form the <a href="http://www.uemoa.int/en">West African Economic and Monetary Union</a> have agreed to drop the use of the <a href="https://www.diplomatie.gouv.fr/en/country-files/africa/franc-zone/">CFA Franc</a>. Benin, Burkina Faso, Guinea-Bissau, Ivory Coast, Mali, Niger, Senegal, and Togo will soon start using new currency, the ‘Eco’. The currency is scheduled for launch in June 2020.</p>
<p>These eight states are members of the Economic Community of West African States (ECOWAS), a wider regional economic community, which also has a plan to introduce a single currency in 2020. </p>
<p>The decision by the francophone countries marks a break with their colonial past. The CFA franc was <a href="https://www.imf.org/external/pubs/ft/fabric/backgrnd.htm">created</a> by France in 1945 as a single currency for its former West African colonies. Six other countries — Cameroon, Central African Republic, Chad, Republic of Congo, Equatorial Guinea, and Gabon — also use the CFA franc. The six comprise the <a href="https://www.wto.org/english/tratop_e/tpr_e/s285_sum_e.pdf">Central African Economic and Monetary Union</a>. Of the six, Guinea-Bissau and Equatorial Guinea weren’t French colonies.</p>
<p>Its value was originally pegged to the French franc which was subsumed into the Euro after France became a member of the <a href="https://ec.europa.eu/info/business-economy-euro/euro-area/what-euro-area_en">Eurozone</a>, a group of European countries belonging to a monetary union.</p>
<p>The CFA franc has since been pegged to the Euro, and underpinned by France. This requires that the Francophone countries keep 50% of their foreign exchange reserves with the French treasury. This is one of the reasons why the CFA franc has been <a href="https://ipr.blogs.ie.edu/2019/07/02/a-post-colonial-examination-of-the-cfa-franc/">criticised</a> as exploitative. </p>
<p>The peg of the CFA franc – first to the French franc and later the Euro – has delivered some benefits for the Francophone states. For one, relative to other African countries, the CFA franc zone member states have had very low inflation and a stable currency, which was <a href="https://www.imf.org/external/pubs/ft/fabric/backgrnd.htm">devalued</a> once in 1994. </p>
<p>Over and above the foreign exchange reserves arrangement, France guarantees the convertibility of the CFA franc at a fixed rate. The French Treasury stands ready to lend to the <a href="https://www.umoatitres.org/en/la-banque-centrale-des-etats-de-lafrique-de-louest-bceao/">Central Bank of West African States </a> should the central bank not have enough foreign reserves. For this arrangement or guarantee, a French representative sits on the <a href="https://www.bceao.int/en/content/board-directors">board of directors</a> of the Central Bank of West African States as well as the central bank’s various committees, including the <a href="https://www.bceao.int/en/content/monetary-policy-committee">monetary policy committee</a>. This representative has a statutory right of veto.</p>
<p>But it’s also been heavily criticised. And the launch of the new currency is aimed at breaking the current CFA arrangement that many view as being inherently unfair to African countries.</p>
<p>What complicates matters even further is that the choice of the name for the new currency for the West African Economic and Monetary Union has <a href="https://www.dw.com/en/west-african-states-mired-in-controversy-over-eco-currency/a-52045052">angered</a> fellow member states of the <a href="https://www.ecowas.int/">Economic Community of West African States</a> (ECOWAS). ECOWAS states decided last year on <a href="https://www.weforum.org/agenda/2019/10/is-a-west-african-currency-union-the-way-forward/">Eco</a>, as the name for the regional block’s new currency which they also planned to launch this year. </p>
<h2>The case critics make</h2>
<p>Critics of the CFA franc point to France’s right of veto as one that deprives West African states of their monetary sovereignty. Monetary sovereignty refers primarily to three rights. These are:</p>
<ul>
<li><p>the right to issue currency (coins and banknotes) that is legal tender within its territory; </p></li>
<li><p>the right to determine and change the value of that currency; and</p></li>
<li><p>the right to regulate the use of that currency, or any other currency, within its territory. </p></li>
</ul>
<p>The CFA franc arrangement has also been criticised for stifling industrialisation and economic development and has not facilitated trade among Member States of West African Economic and Monetary Union. Among the reasons for its failure to facilitate trade are inadequate transport infrastructure and costly border procedures.</p>
<p>The introduction of the ‘Eco’ will diminish France’s influence in the monetary union. France will no longer have representation on the monetary union board. CFA franc countries will also no longer be required to keep half of their foreign exchange reserves with the French Treasury.</p>
<p>France maintains, however, that it will continue to support the peg of the Eco to the Euro. Should countries using the Eco not be able to pay for their imports, France will cover these payments. The catch though is that such an event will trigger France’s return to the monetary policy committee.</p>
<h2>Central bank independence is key</h2>
<p>Announcing a break with the colonial past is one thing. The challenge will be maintaining the components of the monetary union – such as a stable currency and keeping inflation under control both of which require an independent central bank – once institutional arrangements change and the countries delink from France.</p>
<p>Will the Central Bank of West African States be able to maintain a stable currency and low inflation without France? This has been <a href="https://link.springer.com/chapter/10.1057/9781137462084_2">a huge struggle</a> for other West African central banks. </p>
<p>West African states have been unable to achieve a stable currency and low inflation rates largely due to lack of independence of their central banks. <a href="https://www.sciencedirect.com/science/article/pii/S1303070117300550">Indepedence</a> in this instance refers to the freedom with which a central banks controls the cost, supply and availability of money without political interference.</p>
<p>Achieving central bank independence across West Africa is likely to be a challenge without a robust legal framework protecting the regional central bank’s independence. But even with a robust legal framework for central bank independence, the <a href="https://www.ecb.europa.eu/ecb/history/html/index.en.html">European Monetary Union</a> experience shows that sustaining a single currency can be <a href="https://www.ecb.europa.eu/press/key/date/2020/html/ecb.sp200211_1%7Eb439a2f4a0.en.html">a challenge</a>. Currently, some of the states of the Economic Community of West African States <a href="https://www.weforum.org/agenda/2019/10/is-a-west-african-currency-union-the-way-forward/">don’t comply</a> with the economic convergence rules for the proposed monetary union.</p>
<p>Rather than aiming to achieve a monetary union across Economic Community of West African States, West African states should in the immediate term focus on strengthening their economies. They can do this by bringing down budget deficits, government debt, and inflation rates. </p>
<p>They should also boost intra-regional trade, increase foreign investment and job creation. This would inevitably enable the achievement of the convergence criteria - the economic requirements for joining a monetary union - and make member states ready to achieve a monetary union.</p><img src="https://counter.theconversation.com/content/130731/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Iwa Salami does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The decision by eight Francophone states to delink their common currency from France won’t be without challenges.Iwa Salami, Senior Lecturer in Financial Law and Regulation, University of East LondonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1307192020-01-31T11:07:20Z2020-01-31T11:07:20ZWhy Brexit has not and will not trigger EU disintegration<figure><img src="https://images.theconversation.com/files/312495/original/file-20200129-93004-16r7gng.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/brexit-removal-685267936">Norris3699 / Shutterstock.com</a></span></figcaption></figure><p>Brexit could radically change the UK. Both Scottish independence and Northern Ireland breaking away from Britain are conceivable and Boris Johnson’s government has a lot on his plate when it comes to negotiating the country’s future relationship with the EU, all the while delivering on the promised benefits of independence. </p>
<p>For the EU, Brexit marks more of a return to business as usual. The prospective fallout of Brexit will be rather less far-reaching or dramatic. At the time of the 2016 referendum, there were widespread fears that Brexit would unleash a contagion effect among other member states that <a href="https://theconversation.com/the-eus-ides-of-march-article-50-timing-could-spell-disaster-for-european-unity-66610">could destroy the EU</a>. </p>
<p>Opinion surveys conducted at this time <a href="https://www.ft.com/content/78b4ded6-51ce-11e7-bfb8-997009366969">suggested</a> that the EU had become extremely unpopular among citizens in many other member states and that, if they had also staged referendums on whether to leave the EU, the outcomes in some of them – notably in two of the biggest pioneer states, France and Italy – would have been very close.</p>
<p>Three and a half years on, these fears have proved to be unfounded. Rather, as the citizens of the remaining 27 states have observed the destabilising impact that the referendum decision has had on British politics, they have been inoculated against the desire to secede from the EU. Outside the UK, national-populist parties have moderated their anti-EU rhetoric and nowadays profess to want to change the EU from within <a href="https://cadmus.eui.eu/handle/1814/60897">instead of destroying it</a>.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/312496/original/file-20200129-92987-fhmibu.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/312496/original/file-20200129-92987-fhmibu.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=480&fit=crop&dpr=1 600w, https://images.theconversation.com/files/312496/original/file-20200129-92987-fhmibu.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=480&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/312496/original/file-20200129-92987-fhmibu.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=480&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/312496/original/file-20200129-92987-fhmibu.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=603&fit=crop&dpr=1 754w, https://images.theconversation.com/files/312496/original/file-20200129-92987-fhmibu.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=603&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/312496/original/file-20200129-92987-fhmibu.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=603&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">So far, Brexit has not been a good advertisement for leaving the EU.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/london-uk-july-20-2019-anti-1456391525">Mia Elliott Smith / Shutterstock.com</a></span>
</figcaption>
</figure>
<p>How lasting this inoculation effect proves to be depends to some extent on how, as it comes to be executed, Brexit affects the British economy, society and politics. The greater the success of Brexit, as perceived by citizens and elites in the remaining member states, the more likely it is that this inoculation effect of Brexit will wear off. </p>
<p>But the attractiveness of secession from the EU is not shaped only by the perceived impact of Brexit, before and after its execution, but also by how well or badly the EU manages the major issues that confront it. The 2016 UK referendum took place in the shadow of the <a href="https://theconversation.com/greece-exits-its-third-bailout-but-eurozone-still-has-much-to-learn-from-the-crisis-101709">eurozone</a> and <a href="https://theconversation.com/fencing-off-the-east-how-the-refugee-crisis-is-dividing-the-european-union-47586">refugee</a> crises, when the popularity of the EU among its citizens had reached its nadir. Since then, these crises have been contained and the EU’s popularity has recovered. </p>
<h2>Stable for now</h2>
<p>While the EU has stabilised these crises, it has failed to create the right instruments <a href="https://cadmus.eui.eu/handle/1814/60897">to achieve a lasting resolution of either of them</a>. If they flare up again, as is likely, or if new crises should break out, anti-European sentiment will resurge and secession from the EU may return to the political agenda in some member states. </p>
<p>The most likely candidates would probably then be larger member states whose citizens feel less dependent on the EU for their economic and physical security. The states that did not fare well in the refugee or eurozone crisis and where the EU is already politically contested. Hence <a href="https://journals.sagepub.com/doi/full/10.1177/0263395718766787">France</a> and, above all, <a href="https://www.politico.eu/article/italy-euroskeptic-surge-migration-crisis-eu/">Italy</a>.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/312513/original/file-20200129-93023-17o9whd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/312513/original/file-20200129-93023-17o9whd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/312513/original/file-20200129-93023-17o9whd.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/312513/original/file-20200129-93023-17o9whd.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/312513/original/file-20200129-93023-17o9whd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/312513/original/file-20200129-93023-17o9whd.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/312513/original/file-20200129-93023-17o9whd.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Euroscepticism is a force to be reckoned with in Italy.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/bologna-italy-february-2-2019-two-1302230143">Giuseppe Barletta / Shutterstock.com</a></span>
</figcaption>
</figure>
<p>Meanwhile, the general political orientation and day-to-day functioning of the EU will not be much affected by Brexit, either negatively or positively. A member of neither the euro nor the Schengen zone, the UK did not belong to the EU’s core mechanisms. </p>
<p>In an earlier era, the UK was the co-architect of important EU initiatives such as the single market, Eastern enlargement and security and defence policy. But by the time of the Brexit referendum it had relegated itself to the EU’s margins. In recent times no other EU member state regarded the UK <a href="https://www.ecfr.eu/page/ECFR269_EU_COALITION_EXPLORER_2018_V1.10.pdf">as its most important partner in the EU</a>. For 18 of the 27 other member states, this was Germany, for three it was France. </p>
<p>For sure, some member states – those closest to the UK in their overall political orientation, such as the Netherlands and the Scandinavian members, or former British colonies, such as Malta and Cyprus – will miss the UK more than others. But the post-Brexit EU is unlikely to change significantly. And the northwestern European member states have organised themselves into a <a href="https://www.ft.com/content/f0ee3348-f187-11e8-9623-d7f9881e729f">new coalition akin to the old Hanseatic League</a> to fill the vacuum left by the UK on economic and fiscal issues.</p>
<h2>Deep rifts remain</h2>
<p>It would be misplaced to think that the UK’s secession will make the EU more cohesive, however. The eurozone and migration crises, in neither of which the UK was a protagonist, showed how deep the political rifts are – north-south and east-west – that can divide the remaining 27 member states. </p>
<p>As in the past, how effectively such crises are mediated and how well the EU survives them will depend on the willingness and capacity of its key member states – Germany and France – to provide the other members with leadership that these can accept and that holds the EU together. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/312514/original/file-20200129-92987-am31sl.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/312514/original/file-20200129-92987-am31sl.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/312514/original/file-20200129-92987-am31sl.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/312514/original/file-20200129-92987-am31sl.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/312514/original/file-20200129-92987-am31sl.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/312514/original/file-20200129-92987-am31sl.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/312514/original/file-20200129-92987-am31sl.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">New leaders needed.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/brussels-belgium-17th-oct-2019-angela-1584666721">Alexandros Michailidis / Shutterstock.com</a></span>
</figcaption>
</figure>
<p>Already during the crises of the last decade, including Brexit, the French and German governments were not always willing <a href="https://cadmus.eui.eu/handle/1814/60897">or able to provide such leadership</a>. Shifting domestic political constellations in both Paris and Berlin could curtail this even further. Next year’s German parliamentary elections and the next French presidential election in 2022 will both be moments to watch.</p>
<p>In one key respect, the EU will never be the same again after Brexit. The teleological notion of “ever closer union” and that the process of European integration is irreversible (dear to many <a href="http://eprints.lse.ac.uk/66958/1/Hearing-10---Ever-Closer-Union-REPORT.pdf">scholars and champions of European integration</a>) has been decisively refuted. No one can assume safely that history has had its last word on how European states organise their relations with each other.</p><img src="https://counter.theconversation.com/content/130719/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Douglas Webber does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>At the time of the 2016 referendum, there were widespread fears that Brexit would unleash a contagion effect among other member states.Douglas Webber, Professor of Political Science, INSEADLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1232842019-09-10T16:20:58Z2019-09-10T16:20:58ZEight charts that explain why Germany could be heading for recession<p>Fears are rising of a <a href="https://www.bbc.co.uk/news/business-49342244">recession in Germany</a>, Europe’s biggest economy and long-time powerhouse of the eurozone. The latest data does not look good – the following eight charts show why a recession looks likely and why Germany must act to avoid a prolonged downturn.</p>
<p>The first reason that economists fear an oncoming recession is that Germany’s GDP has been going down since roughly mid-2018, painting a rather dark picture of the economic performance of Europe’s largest economy. Technically, a recession is two consecutive quarters of negative GDP growth in a row. The economy shrank by 0.1% in the second quarter of 2019 so all eyes will be on September’s data. </p>
<p><strong>1. German GDP growth</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/291730/original/file-20190910-190044-1m731wv.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/291730/original/file-20190910-190044-1m731wv.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/291730/original/file-20190910-190044-1m731wv.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=279&fit=crop&dpr=1 600w, https://images.theconversation.com/files/291730/original/file-20190910-190044-1m731wv.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=279&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/291730/original/file-20190910-190044-1m731wv.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=279&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/291730/original/file-20190910-190044-1m731wv.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=351&fit=crop&dpr=1 754w, https://images.theconversation.com/files/291730/original/file-20190910-190044-1m731wv.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=351&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/291730/original/file-20190910-190044-1m731wv.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=351&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="https://tradingeconomics.com/germany/gdp-growth-annual">Trading Economics</a></span>
</figcaption>
</figure>
<p>The second, and probably more significant, reason that a recession looks likely is that Germany’s latest figures for industrial production don’t look too good either. The overall decline we can see in the past 12 months has been at its longest since 2012-13. </p>
<p><strong>2. Industrial output 2009-19</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/291732/original/file-20190910-190061-1o0vyym.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/291732/original/file-20190910-190061-1o0vyym.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/291732/original/file-20190910-190061-1o0vyym.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=287&fit=crop&dpr=1 600w, https://images.theconversation.com/files/291732/original/file-20190910-190061-1o0vyym.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=287&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/291732/original/file-20190910-190061-1o0vyym.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=287&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/291732/original/file-20190910-190061-1o0vyym.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=361&fit=crop&dpr=1 754w, https://images.theconversation.com/files/291732/original/file-20190910-190061-1o0vyym.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=361&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/291732/original/file-20190910-190061-1o0vyym.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=361&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="https://tradingeconomics.com/germany/industrial-production">Trading Economics</a></span>
</figcaption>
</figure>
<p>In fact, since October 2018 German industrial output has been continuously negative, with up to 4% decline over summer 2019, meaning Germany has performed worse than France, Spain, Italy and even Greece so far in 2019. </p>
<p><strong>3. Industrial output 2018-19</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/291733/original/file-20190910-190021-cufde4.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/291733/original/file-20190910-190021-cufde4.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/291733/original/file-20190910-190021-cufde4.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=292&fit=crop&dpr=1 600w, https://images.theconversation.com/files/291733/original/file-20190910-190021-cufde4.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=292&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/291733/original/file-20190910-190021-cufde4.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=292&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/291733/original/file-20190910-190021-cufde4.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=367&fit=crop&dpr=1 754w, https://images.theconversation.com/files/291733/original/file-20190910-190021-cufde4.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=367&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/291733/original/file-20190910-190021-cufde4.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=367&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="https://tradingeconomics.com/germany/industrial-production">Trading Economics</a></span>
</figcaption>
</figure>
<p>A closer look at manufacturing (cars, machinery and others), which makes up almost 80% of Germany’s total industrial production, paints an even worse picture with a negative growth of -6%. </p>
<p><strong>4. Manufacturing production 2018-19</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/291736/original/file-20190910-190021-1go74ar.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/291736/original/file-20190910-190021-1go74ar.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/291736/original/file-20190910-190021-1go74ar.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=288&fit=crop&dpr=1 600w, https://images.theconversation.com/files/291736/original/file-20190910-190021-1go74ar.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=288&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/291736/original/file-20190910-190021-1go74ar.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=288&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/291736/original/file-20190910-190021-1go74ar.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=363&fit=crop&dpr=1 754w, https://images.theconversation.com/files/291736/original/file-20190910-190021-1go74ar.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=363&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/291736/original/file-20190910-190021-1go74ar.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=363&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="https://tradingeconomics.com/germany/manufacturing-production">Trading Economics</a></span>
</figcaption>
</figure>
<p>This is particularly concerning as the business confidence indicator of the German <a href="https://www.ifo.de/node/45018">Institute for Information and Research</a> also moved to its lowest value since November 2012 (94.3 points), indicating that German industry is anything but confident it will overcome this negative trend anytime soon.</p>
<h2>Reasons for the decline</h2>
<p>One of the main reasons why German industry is struggling so much is the country’s famous export dependency. Germany’s balance of trade, the difference between exports and imports, has seen some seasonally adjusted decline since the beginning of 2018 and only recently experienced what seems to be some kind of small recovery. </p>
<p><strong>5. Balance of trade</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/291735/original/file-20190910-190065-zd773g.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/291735/original/file-20190910-190065-zd773g.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/291735/original/file-20190910-190065-zd773g.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=287&fit=crop&dpr=1 600w, https://images.theconversation.com/files/291735/original/file-20190910-190065-zd773g.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=287&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/291735/original/file-20190910-190065-zd773g.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=287&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/291735/original/file-20190910-190065-zd773g.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=360&fit=crop&dpr=1 754w, https://images.theconversation.com/files/291735/original/file-20190910-190065-zd773g.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=360&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/291735/original/file-20190910-190065-zd773g.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=360&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="https://tradingeconomics.com/germany/balance-of-trade">Trading Economics</a></span>
</figcaption>
</figure>
<p>Global growth in the past year has declined due to the ongoing trade war between the US and China, as well as US tariffs on EU exports like steel, aluminium, clothes, <a href="http://trade.ec.europa.eu/doclib/docs/2018/may/tradoc_156909.pdf">cars and food</a>. This, along with the continued weak performance of European export markets, makes it difficult for the German industry to export and, hence, perform better.</p>
<p>Moreover, domestic consumer spending in Germany has seen rather slow growth in the second half 2018 and <a href="https://tradingeconomics.com/germany/consumer-spending">just recently picked up a bit again</a>. This may explain the recent recovery in industrial output as well. </p>
<p><strong>6. Consumer spending 2014-19</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/291740/original/file-20190910-190026-1uh9dr7.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/291740/original/file-20190910-190026-1uh9dr7.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/291740/original/file-20190910-190026-1uh9dr7.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=286&fit=crop&dpr=1 600w, https://images.theconversation.com/files/291740/original/file-20190910-190026-1uh9dr7.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=286&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/291740/original/file-20190910-190026-1uh9dr7.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=286&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/291740/original/file-20190910-190026-1uh9dr7.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=359&fit=crop&dpr=1 754w, https://images.theconversation.com/files/291740/original/file-20190910-190026-1uh9dr7.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=359&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/291740/original/file-20190910-190026-1uh9dr7.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=359&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="https://tradingeconomics.com/germany/consumer-spending">Trading Economics</a></span>
</figcaption>
</figure>
<p>The reason for the stagnation of consumer spending during the second half of 2018 and the beginning of 2019 seems to be correlated with the decrease in consumer credit and a continued increase in household disposable income both around July last year, meaning Germans, for a short period of time, preferred paying off their debts to spending their money on consumption. </p>
<p><strong>7. Consumer credit 2014-19</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/291738/original/file-20190910-190035-k30mhd.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/291738/original/file-20190910-190035-k30mhd.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/291738/original/file-20190910-190035-k30mhd.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=294&fit=crop&dpr=1 600w, https://images.theconversation.com/files/291738/original/file-20190910-190035-k30mhd.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=294&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/291738/original/file-20190910-190035-k30mhd.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=294&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/291738/original/file-20190910-190035-k30mhd.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=370&fit=crop&dpr=1 754w, https://images.theconversation.com/files/291738/original/file-20190910-190035-k30mhd.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=370&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/291738/original/file-20190910-190035-k30mhd.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=370&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="https://tradingeconomics.com/germany/consumer-credit">Trading Economics</a></span>
</figcaption>
</figure>
<p>Finally, it is worth looking at government spending, which, in a similar fashion to consumer spending, was relatively low in the second half of 2018 and only recently picked up again.</p>
<p><strong>8. Government spending 2014-19</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/291739/original/file-20190910-190065-15sfnhu.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/291739/original/file-20190910-190065-15sfnhu.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/291739/original/file-20190910-190065-15sfnhu.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=283&fit=crop&dpr=1 600w, https://images.theconversation.com/files/291739/original/file-20190910-190065-15sfnhu.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=283&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/291739/original/file-20190910-190065-15sfnhu.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=283&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/291739/original/file-20190910-190065-15sfnhu.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=355&fit=crop&dpr=1 754w, https://images.theconversation.com/files/291739/original/file-20190910-190065-15sfnhu.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=355&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/291739/original/file-20190910-190065-15sfnhu.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=355&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="https://tradingeconomics.com/germany/government-spending">Trading Economics</a></span>
</figcaption>
</figure>
<p>So weak global demand for Germany’s exports, as well as low domestic demand, both from the private and public sector, means the economy shrank by 0.1% from April to June 2019. While private and public spending has seen some growth recently, the question remains whether this is too little too late to avoid a recession. </p>
<h2>What’s needed</h2>
<p>Germany is a big contributor to the economic performance of the euro area and EU as a whole. It <a href="https://www.nytimes.com/2019/08/16/business/eu-economy-germany-recession.html">is the largest trade partner</a>, for many EU countries, including France, Italy, Belgium and Sweden. Given this, a recession in Germany will likely be felt across the continent, especially by those that form part of German supply chains.</p>
<p>The major factors outside of Germany’s control – US trade wars and tariffs – are unlikely to change anytime soon. Demand across the continent, which could improve German exports, is also likely to remain weak. </p>
<p>What Europe, and especially Germany, needs <a href="https://www.theguardian.com/science/political-science/2014/nov/27/junckers-investment-plan-how-to-radically-transform-it">is a state-funded investment programme</a> to spur innovation and domestic demand. So far, this kind of programme has proven extremely difficult. Most European states are fiscally conservative, with the narrative of austerity (not spending beyond your means) dominating the eurozone and Germany in particular.</p>
<p>But there are signs this could be changing. Reports <a href="https://uk.reuters.com/article/uk-germany-budget-exclusive/exclusive-germany-considers-shadow-budget-to-circumvent-national-debt-rules-sources-idUKKCN1VU1CY">are surfacing</a> that Germany – in recognition of this looming downturn – is looking for ways to take on new debt to invest in economic growth and take advantage of the fact that borrowing levels are at an historic low. Hopefully this investment will not come too late to avoid a prolonged recession.</p><img src="https://counter.theconversation.com/content/123284/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Imko Meyenburg does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>After a decade of nearly uninterrupted growth, the German economy is stuttering.Imko Meyenburg, Lecturer in Economics and International Business, Anglia Ruskin UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1200292019-07-09T16:33:24Z2019-07-09T16:33:24ZWhat victory for Kyriakos Mitsotakis means for Greece’s relationship with the EU<p>Victory for the centre-right New Democracy party in Greece’s July 7 elections brought to an end four years in power for the radical Syriza government of prime minister Alexis Tsipras, marked by turbulent relations with the EU. But what does the victory for New Democracy leader Kyriakos Mitsotakis mean for Greece’s relationship with the EU, and does it signal the country’s return to the European mainstream? </p>
<p>Since it came to power in Greece in 2015, Syriza maintained a steady path of austerity, despite promising the opposite. It signed <a href="https://fortune.com/2016/06/03/greece-eurozone/">an additional bailout agreement</a> with the EU and deepened cuts in welfare, pensions and the public sector. Nonetheless, it also insisted on shifting the blame for Greece’s predicament onto the EU. </p>
<p>In August 2018, <a href="https://www.reuters.com/article/us-eurozone-greece-bailout-tsipras/tsipras-declares-day-of-liberation-after-greece-exits-bailout-idUSKCN1L60PX">Tsipras declared Greece’s exit</a> from bailout supervision, but the country remains bound by an agreement to complete reforms and sustain a direction of fiscal discipline. Greek voters’ disappointment with Syriza continued, leading to a <a href="https://www.bbc.co.uk/news/world-europe-48420697">landslide victory</a> for the centre-right New Democracy party in the European parliamentary elections in May.</p>
<p>Tsipras called a <a href="https://www.ft.com/content/e9d234c6-8ba4-11e9-a24d-b42f641eca37">snap election</a> for July 7 as the ultimate political solution. The result brought the centre-right New Democracy back to power with an <a href="http://www.ekathimerini.com/242311/article/ekathimerini/news/tsipras-concedes-defeat-in-election">overall parliamentary majority</a>. But the road ahead is rocky for Mitsotakis. </p>
<p>The new government has a short grace period both domestically and with the EU. Despite Greek calls to postpone discussing the economy’s progress at a Eurogroup meeting of ministers on <a href="https://www.consilium.europa.eu/en/press/press-releases/2019/07/08/remarks-by-mario-centeno-following-the-eurogroup-meeting-of-8-july-2019/">July 8</a> because of the elections, Greece remained on the agenda. Europe is clearly continuing to monitor the Greek economy’s performance closely. </p>
<p>At the same time, New Democracy promised to introduce a number of tax cuts, increase foreign investment flows and make further reforms to the public sector. Tax cuts require savings to be found elsewhere, and that means Mitsotakis is likely to follow an austerity agenda too. But he must remember that the Greek electorate punished Tsipras for doing just this, and voters have now placed significant hopes on new leadership and a new direction. Mitsotakis will have to perform a balancing act between delivering on his promises and satisfying the EU – but he has little time to act, as both the EU and the Greek electorate want quick results. </p>
<h2>Austerity repackaged</h2>
<p>Since 2010, Greece’s reputation within the EU has been heavily scarred by the financial crisis and the bailout agreements. Seen as a pariah state and a peripheral country, its negotiating capacity diminished alongside its ability to project its national interests within Europe. Brussels may see new opportunities for a strong centre-right government to push a fresh austerity agenda.</p>
<p>Mitsotakis certainly has allies at the European level. The newly configured European institutions means he is surrounded by friendly political actors, ideologically aligned with his centre-right policy platform of stability. </p>
<p>While the EU need not worry about a U-turn in public policy in Greece, a prolonged agenda of stability – essentially a codename with which to reframe austerity – could bear significant political cost to New Democracy. As minister of administrative reform between 2013-15, Mitsotakis was linked to a number of important public sector reforms included in the previous Greek bailout packages, and he will carry that legacy with him during his term as prime minister.</p>
<h2>Repositioning Greece within the EU</h2>
<p>Beyond the economy, Greece has three more burning issues to consider in the context of its European relationship.</p>
<p>The first surrounds migration flows and refugees. The rise of far-right party Golden Dawn in the past pushed New Democracy further to the right on some issues, such as migration. Some less hardcore Golden Dawn supporters may have also been attracted to New Democracy by its promise for stronger immigration control and border security. Delivering on that promise will require further cooperation with the EU, including financial help to accommodate refugees on Greek soil. Given the current views on immigration in Europe, including those of New Democracy’s <a href="https://www.eppgroup.eu/newsroom/publications/position-paper-on-migration">sister parties</a> at EU level, which have become increasingly conservative when it comes to border policy, this presents another challenge ahead.</p>
<p>The second issue is over North Macedonia. Tsipras was credited by Brussels with the successful completion of the 2018 Prespa agreement, in which Greece recognised its neighbouring country’s <a href="https://www.dw.com/en/north-macedonia-name-change-both-heals-and-divides/a-48194331-0">name as North Macedonia</a>. The deal was opposed by New Democracy and it cost Tsipras votes in the north of Greece. The normalisation of relations with North Macedonia, and the implementation of other aspects of the agreement, remain a challenge for a patriotically oriented party such as New Democracy, which may not attempt to stir matters further.</p>
<p>Third is the issue of Turkey and Cyprus. Tsipras left Greek-Turkish relations in a state of brinkmanship over the exploitation of gas and oil fields in the seabed south of Cyprus. While European companies were tasked with drilling in these fields, the Turkish president, Recep Tayyip Erdoğan, questioned Greek sovereignty and international sea borders. Yet, he was the first foreign leader to <a href="https://www.aa.com.tr/en/politics/turkish-president-congratulates-greek-premier-elect/1525663">congratulate Mitsotakis</a> on his victory, which could signal a new period of rapprochement.</p>
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Read more:
<a href="https://theconversation.com/cyprus-dangerous-row-over-gas-exploration-dates-back-to-british-colonial-meddling-119331">Cyprus: dangerous row over gas exploration dates back to British colonial meddling</a>
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<hr>
<p>Political analysts should not be quick to dismiss left-wing populism altogether in Greece. As <a href="https://onlinelibrary.wiley.com/doi/abs/10.1111/jcms.12093">research</a> my colleagues and I have done has demonstrated, populism is widespread across the spectrum of Greek political parties. Syriza’s vote percentage will allow it to use its well-tested left-wing populist strategy in opposition to the new government, which could prompt New Democracy to respond with right-wing populism. </p>
<p>This strategy is likely to involve wooing political elements who are less prone to domestic reform, and could put New Democracy at odds with its own European agenda. So while Europe hopes for change in Greek politics, politics in Greece may not have changed after all.</p><img src="https://counter.theconversation.com/content/120029/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Theofanis Exadaktylos does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The road ahead remains rocky for Greece’s newly elected prime minister.Theofanis Exadaktylos, Senior Lecturer in European Politics, University of SurreyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1159492019-04-28T20:21:39Z2019-04-28T20:21:39ZDebate: Beware, the European Union can dis-integrate<figure><img src="https://images.theconversation.com/files/270743/original/file-20190424-121220-1qksg3r.jpg?ixlib=rb-1.1.0&rect=0%2C154%2C1500%2C1021&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Signing the Treaty of Rome in 1957.</span> <span class="attribution"><a class="source" href="https://en.wikipedia.org/wiki/Treaty_of_Rome#/media/File:Treaty_of_Rome.jpg">Wikipedia</a></span></figcaption></figure><p>For a long time, scholars of European political integration were almost unanimous in their belief that this process could not be reversed. For decades, there was hardly any reason to think otherwise. More and more countries joined the EU. New treaties expanded the scope of the EU’s competences into numerous new issue-areas. Its agencies grew gradually more powerful compared to those of member states.</p>
<p>Some even argued that crises, when they occurred, prompted closer integration, according to the EU founder Jean Monnet’s adage that Europe would be “forged in crises” and be the sum of the solutions adopted to manage them.</p>
<p>However, the quadruple crisis (Eurozone, Ukraine, refugees, Brexit) that has tormented the EU during the last decade is deeper than any of its forerunners – by its duration, its multidimensionality, by the magnitude of the stakes involved and by the mass politicisation of European integration it has provoked.</p>
<p>Faced with this uniquely severe crisis, the EU has not proved as resilient as in the past. True, the Eurozone has emerged politically more integrated from its crisis, and the pre-existing level of integration in foreign and security policy also survived the Ukraine crisis. In the refugee crisis, however, the EU has suffered some – limited – political disintegration, with various member states defying EU decisions and ECJ rulings concerning refugee reallocation or Commission appeals that they should dismantle re-installed border controls.</p>
<p>Above all, for the first time an EU member state is on the verge of seceding, and not just any. The United Kingdom is the EU’s third most populous member, second-biggest economy, a net contributor to the budget and one of only two members with a significant military capacity, its own nuclear weapons and a permanent seat on the United Nations Security Council.</p>
<p>The (as yet provisional) outcome of the quadruple crisis thus shows us that the EU can indeed <em>dis</em>-integrate politically.</p>
<h2>Driven by elites, not markets</h2>
<p>The confidence of most scholars that European political integration cannot be reversed is rooted primarily in the conviction that this process is fuelled – in a fundamentally market-driven process – by growing levels of socio-economic interdependence between member states.</p>
<p>This belief is erroneous, however. European political integration is much less a response to market pressures than it is a project driven by political elites motivated mainly by long-term geopolitical considerations concerning European security and peace.</p>
<p>Two other factors explain why Europe has integrated politically far more closely than any other region or continent.</p>
<ul>
<li><p>Post-World War II (Western) Europe has been dominated politically by internationalist, “pro-European” political forces of the moderate Right, the Centre and the moderate Left (Christian and Social Democrats and Liberals). The EU was built on this political bedrock.</p></li>
<li><p>Political integration and responses to crises have been forged largely by uniquely close and intensive Franco-German cooperation – for which there is no equivalent elsewhere. The Franco-German “tandem” served as the functional equivalent of a hegemonic power that the international political economist <a href="https://en.wikipedia.org/wiki/Charles_P._Kindleberger">Charles Kindleberger</a> once argued was a necessary (but not sufficient) condition of a maintenance of a stable international system.</p></li>
</ul>
<p>A hegemonic power in Kindleberger’s conception exercises a predominant influence over how systems respond to crises, assumes a disproportionate share of the cost of crisis policies and mobilizes support for them among other members.</p>
<h2>Nationalism and the risk of deadlock</h2>
<p>Neither of the two fundamentally political factors that buttressed European integration is present today to the same extent as in the past. The Eurozone and refugee crises gave an enormous boost to “anti-European” movements that have won political office in several member states and look likely to win an unprecedentedly large proportion of seats in the European Parliamentary elections next month.</p>
<p>In a political system that operates largely on the basis of consensus, growing national-populist representation in the EU’s decision-making organs portends a growing threat of political deadlock.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/270744/original/file-20190424-121233-5yvxp8.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/270744/original/file-20190424-121233-5yvxp8.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=405&fit=crop&dpr=1 600w, https://images.theconversation.com/files/270744/original/file-20190424-121233-5yvxp8.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=405&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/270744/original/file-20190424-121233-5yvxp8.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=405&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/270744/original/file-20190424-121233-5yvxp8.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=509&fit=crop&dpr=1 754w, https://images.theconversation.com/files/270744/original/file-20190424-121233-5yvxp8.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=509&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/270744/original/file-20190424-121233-5yvxp8.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=509&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">France’s president Emmanuel Macron (left) with Germany’s chancellor Angela Merkel during an European Summit aimed at discussing the Brexit deal, the long-term budget and the single market on December 13, 2018 in Brussels.</span>
<span class="attribution"><span class="source">Emmanuel Dunand/AFP</span></span>
</figcaption>
</figure>
<p>Meanwhile, during the last decade the Franco-German alliance at the EU’s heart weakened. Since the EU’s inception, when France was “number one” among the member states, the balance of power between Paris and Bonn/Berlin has been reversed. Economic weakness and domestic political polarization over EU issues reduced French influence during the quadruple crisis, leaving Germany to play the role of a hegemon increasingly alone.</p>
<p>As argued in my new book, <a href="http://cadmus.eui.eu/handle/1814/60897"><em>European Disintegration? The Politics of Crisis in the European Union</em></a> (Red Globe Press, 2019), the extent to which the EU has <em>dis</em>-integrated during the quadruple crisis has been largely determined by the extent to which Germany played the role of a stabilizing hegemonic power.</p>
<h2>As Germany goes…</h2>
<p>In the Ukraine crisis, in which Germany played this role fully, no political disintegration occurred. In the refugee crisis, in which it played this role only to a limited extent, some political disintegration took place. In the Brexit crisis, in which it did not play this role at all, the most striking case of disintegration occurred.</p>
<p>The case of Eurozone is anomalous in as far as it survived its crisis despite the German government insisting on a highly asymmetrical distribution of crisis costs. But this is because there was a powerful supranational agency, the European Central Bank, which had the powers to substitute for a hegemonic member state and in 2012 played a decisive role in saving the Eurozone from collapse.</p>
<p>Germany’s uneven and mixed record in managing the EU’s quadruple crisis suggests that it is unable or unwilling to play the role of Europe’s hegemonic power, at least not sufficiently to preclude political <em>dis</em>-integration.</p>
<p>It is unable because it is not big enough relative to other member states to assume a big enough proportion of the costs to resolve crises durably. It is increasingly unwilling in the sense that, competing for voter support, political parties do not want Germany to assume these costs for fear of a domestic political backlash. This fear has of course been accentuated by the breakthrough of a Eurosceptic party, the AfD, in the 2017 federal elections.</p>
<p>If, as history and comparative analysis suggest, stabilizing hegemonic leadership is critical to keeping European political integration on the rails, it remains difficult to see how or by whom this can be provided other than by the usual – French and German – suspects.</p>
<p>The 2017 elections in both countries created a window of opportunity for a renaissance of the Franco-German tandem. France chose its most fervently pro-European president since the creation of the Fifth Republic, while in Berlin, of all feasible political constellations, the resurrection of the Grand Coalition probably represented the one most conducive to forging closer political integration.</p>
<h2>Looking forward</h2>
<p>Two years on, it looks doubtful whether this window will be exploited. The Berlin coalition’s reaction to President Macron’s proposals for closer European integration has been lukewarm at best. None of its constituent parties sees any domestic political benefits in championing this kind of agenda.</p>
<figure class="align-right ">
<img alt="" src="https://images.theconversation.com/files/270731/original/file-20190424-121245-ppbrlr.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/270731/original/file-20190424-121245-ppbrlr.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=917&fit=crop&dpr=1 600w, https://images.theconversation.com/files/270731/original/file-20190424-121245-ppbrlr.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=917&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/270731/original/file-20190424-121245-ppbrlr.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=917&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/270731/original/file-20190424-121245-ppbrlr.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1152&fit=crop&dpr=1 754w, https://images.theconversation.com/files/270731/original/file-20190424-121245-ppbrlr.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1152&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/270731/original/file-20190424-121245-ppbrlr.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1152&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
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<span class="attribution"><span class="source">Red Globe Press, 2019</span></span>
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</figure>
<p>In France, with the explosive rise of the <a href="https://theconversation.com/why-frances-gilets-jaunes-protesters-are-so-angry-108100">“gilet jaune” movement</a>, Macron’s economic reform agenda and authority are highly contested, raising the question of whether he can revive France’s economic fortunes – which he must for France to regain a role comparable to Germany’s in the EU – or win the next presidential election in 2022.</p>
<p>Absent strong Franco-German leadership, new crises – which are bound to occur – will likely bring about more disintegration than the quadruple crisis during the last decade.</p>
<p>However, after Brexit, no other member state is likely to try to leave the EU in the way that the UK has done. Rather, as member states prove unable to agree how to manage future crises, they will pursue unilateral policies by default and comply less and less with EU rules and regulations when they have been agreed. In this scenario, the EU would not collapse dramatically in a “big bang”, but rather – slowly, even invisibly – wither and die by a thousand cuts.</p><img src="https://counter.theconversation.com/content/115949/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Douglas Webber is the author of "European Disintegration? The Politics of Crisis in the European Union" and Professor of Political Science at INSEAD.</span></em></p>In the past decade the EU has been struck by a series of crises that have proven that it is far more vulnerable than previously imagined.Douglas Webber, Robert Schuman fellow, European University Institute, and Professor of Political Science, INSEADLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1097552019-01-14T12:08:56Z2019-01-14T12:08:56ZEurozone is recovery resistant but it could also be recession-proof<figure><img src="https://images.theconversation.com/files/253638/original/file-20190114-43532-83rxjt.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/damaged-euro-coin-shrouded-bad-weather-753476629?src=aXZiZjDsMX6w23qC93jr0Q-1-11">Shutterstock</a></span></figcaption></figure><p>For years, the eurozone has grown more slowly than the US and its growth has been unbalanced. Germany has enjoyed strong <a href="https://www.handelsblatt.com/today/finance/promoting-trade-germany-first-the-return-of-mercantilism/23570190.html?ticket=ST-830847-Un31ZhQTfNAhShmpzVtX-ap4">external trade and GDP growth</a> while Italy and France stagnate, and some smaller members submerge. </p>
<p>This has led many to condemn the eurozone’s design <a href="https://www.theguardian.com/business/2018/jun/13/euro-growth-eurozone-joseph-stiglitz">as fundamentally flawed</a> and predict that it could lose peripheral members – or break up altogether – if the world economy gets hit by an American or Chinese downturn. </p>
<p>But as fears grow of an unruly US derailing a fragile China <a href="https://www.smh.com.au/business/the-economy/china-europe-warn-trade-war-could-trigger-a-global-recession-20180626-p4znp1.html">to cause world recession</a>, the 19-member euro area is starting to look more stable, even if it isn’t growing. Fears that a <a href="https://www.dailymail.co.uk/news/article-6576821/Germany-looks-set-enter-RECESSION-Europes-financial-giant-sees-unexpected-collapse.html">German slowdown</a> will drag France, Italy and others into recession assume that Germany is the eurozone’s “engine of growth”. In reality its high savings and external surplus <a href="https://www.cer.eu/in-the-press/deflating-german-excuses">have long been a brake</a>, and a downturn that forces Germans to spend more might do their trading partners no harm. </p>
<h2>Self-containment</h2>
<p>Because its rules compel most members to operate at less than full capacity, with <a href="https://ec.europa.eu/eurostat/documents/2995521/9477410/3-09012019-AP-EN.pdf/1f232ebb-1dcc-4de2-85d1-5765fae86ea8">high (5%+) unemployment</a>, the eurozone runs a small but persistent external surplus. It exports more than enough to finance all imports, despite needing external fossil-fuel supplies. </p>
<p>This enables the eurozone to be a small net exporter of capital (accumulating financial and real assets in other regions) as well as a large supplier of remittances <a href="https://ec.europa.eu/eurostat/documents/2995521/9376912/2-15112018-BP-EN.pdf/63ece99d-8609-4b46-bbd5-d0552149150b">to the rest of the world</a>. Despite slow GDP growth, eurozone countries have steadily reduced their budget deficits since the 2008 global financial crisis, and achieved an <a href="https://ec.europa.eu/eurostat/documents/2995521/9332933/2-23102018-BP-EN.pdf/993b7e66-003e-41bf-95ec-00d2359188bf">overall budget balance in 2018</a>. </p>
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<em>
<strong>
Read more:
<a href="https://theconversation.com/greece-exits-its-third-bailout-but-eurozone-still-has-much-to-learn-from-the-crisis-101709">Greece exits its third bailout – but eurozone still has much to learn from the crisis</a>
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<p>That was done largely by strengthening the eurozone’s tax base, to <a href="https://ec.europa.eu/eurostat/documents/2995521/9409920/2-28112018-AP-EN.pdf/54409e5e-6800-4019-b7c1-580797a67001">more than 40% of GDP on average</a>, enabling many members to shield public investment and welfare programmes. Its debt is also relatively stable <a href="https://ec.europa.eu/eurostat/documents/2995521/9332918/2-23102018-AP-EN.pdf/62d87091-1ff0-41f6-9f26-afffb1a307b6">at 86% of its GDP</a>. Though far above the Maastricht Treaty “ceiling” of 60%, this is economically safe since it is denominated in its own currency and owed mainly to its own residents. </p>
<p>In contrast, the US runs a <a href="http://www.bea.gov/data/intl-trade-investment/international-transactions">chronic external deficit</a> which is set to widen as rising demand runs up against domestic labour shortages (despite the trade war on China being meant to bring it down). This is matched by an equally enduring fiscal deficit, which had only just begun to fall (thanks to former president Barack Obama’s stimulus plan) when current president Donald Trump’s tax cuts set it on course <a href="https://www.cbo.gov/publication/53919">for an unprecedented rise</a>. On wider measures the federal government debt is already <a href="https://fred.stlouisfed.org/series/GFDEGDQ188S">above 100% of GDP</a>, with its budgetary costs set to grow as the Federal Reserve announces interest rate rises.</p>
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<strong>
Read more:
<a href="https://theconversation.com/i-predicted-the-last-financial-crisis-now-soaring-global-debt-levels-pose-risk-of-another-84136">I predicted the last financial crisis – now soaring global debt levels pose risk of another</a>
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<p>China’s economy is looking even more unbalanced, after its own promotion of public and private borrowing to ride out the 2007-08 credit crunch. With official data likely hiding a <a href="https://www.lowyinstitute.org/the-interpreter/china-looming-financial-crisis">slide towards recession</a>, there is <a href="https://www.bloomberg.com/quicktake/chinas-debt-bomb">mounting evidence</a> that high corporate and local government debt could overwhelm the stronger balance sheets of households and central government. </p>
<p>As for the UK, the slide in the pound which fuelled hopes of a pre-Brexit narrowing of the current account deficit has actually raised it <a href="https://www.ons.gov.uk/economy/nationalaccounts/balanceofpayments/bulletins/balanceofpayments/julytoseptember2018">to 5% of GDP</a>. This requires financing by foreign investment, which has shown signs of slowing <a href="https://www.ey.com/uk/en/newsroom/news-releases/18-03-29-signs-of-a-brexit-impact-on-uk-foreign-direct-investment">as Brexit approaches</a>. If the UK can’t boost exports, or attract more inward investment, it’ll just have to import less, which invariably means slower growth of income and spending.</p>
<h2>De-leverage us from evil</h2>
<p>The global financial crisis drew attention to private (household and corporate) debt as potentially much more dangerous than public debt. Where they borrowed too much before 2008, eurozone households have reduced their debt far more effectively <a href="https://www.mckinsey.com/%7E/media/McKinsey/Industries/Financial%20Services/Our%20Insights/A%20decade%20after%20the%20global%20financial%20crisis%20What%20has%20and%20hasnt%20changed/MGI-Briefing-A-decade-after-the-global-financial-crisis-What-has-and-hasnt-changed.ashx">than those in the US or UK</a>. </p>
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<p>Some are still awash in private sector debt, as the eurozone’s own array of vulnerability measures <a href="https://ec.europa.eu/eurostat/documents/2995521/9394392/2-21112018-AP-EN/5885909b-2ffd-4df3-aab6-40f7b1696ca8">makes clear</a>. But Italy, Portugal, Belgium and Greece remain the only four members where both private and public sectors have borrowed more than 100% of GDP – with no indication that this will undermine them, if a sharp rise in interest rates is avoided. </p>
<h2>Still vulnerable</h2>
<p>The eurozone banking sector still looks vulnerable to external disturbance, since it emerged from the 2008 crash with many weaker and less profitable players <a href="https://www.cnbc.com/2017/07/12/banks-jpmorgan-fed-citigroup-rbs-deutsche-bank-wall-street-brexit-yellen.html">than in the US</a>. Some may look even shakier if regulators are right <a href="https://www.bbc.co.uk/news/business-46382722">in suspecting ill-gotten capital gains</a>.</p>
<p>But eurozone banks look weak only when judged by the standards of the US, where large firms borrow more directly from the market via bond issues. The obverse is that America’s corporate debt remains almost twice the size of Europe’s, while China’s has <a href="https://www.mckinsey.com/%7E/media/McKinsey/Industries/Financial%20Services/Our%20Insights/A%20decade%20after%20the%20global%20financial%20crisis%20What%20has%20and%20hasnt%20changed/MGI-Briefing-A-decade-after-the-global-financial-crisis-What-has-and-hasnt-changed.ashx">grown at unusual speed since 2008</a>, leaving both at greater risk if corporate earnings start to recede. </p>
<p>Because it lacks central fiscal capacity, <a href="https://theconversation.com/greece-exits-its-third-bailout-but-eurozone-still-has-much-to-learn-from-the-crisis-101709">fears about the eurozone’s future</a> are not overblown. But while it looks like a swamp of stagnation in a reviving world economy, the eurozone is configured to be the island of tranquillity when lands around it submerge. </p>
<p>It trades mainly within itself, re-invests its own savings, and doesn’t rely on large transfers into or out of other regions. So if another financial or commercial shock sends the rest of the world running backwards, the unloved single currency area may defy gravity as stubbornly as it resists reform.</p><img src="https://counter.theconversation.com/content/109755/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Alan Shipman has previously funding from the British Academy / Leverhulme Trust. </span></em></p>As fears of a US-China trade war grow, the eurozone is starting to look like a rock.Alan Shipman, Lecturer in Economics, The Open UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1081492019-01-04T11:32:40Z2019-01-04T11:32:40ZThe euro at 20: An enduring success but a fundamental failure<figure><img src="https://images.theconversation.com/files/252330/original/file-20190102-32130-qxmvu7.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The euro just turned 20.</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-illustration/20eurorolls-3d-illustration-1256956459?src=cxFu0ptNgtux_c25nNTx5Q-1-61">Marc Osborne/Shutterstock.com</a></span></figcaption></figure><p>New Year’s Day 1999 saw the largest monetary changeover in history. On that date, just 20 years ago, 12 members of the European Union formally adopted a brand-spanking-new currency, the euro. </p>
<p>Today <a href="https://www.thebalance.com/what-is-the-euro-3305928">seven additional EU member states</a> use it, along with Montenegro, Kosovo, Andorra, Monaco, San Marino and Vatican City. If survival is the ultimate gauge of success, then this grand monetary experiment can be said to have succeeded. </p>
<p>But as <a href="https://www.sec.gov/fast-answers/answersmperfhtm.html">investment advisers say</a>, past performance is no guarantee of future results. </p>
<h2>History lesson</h2>
<p>To understand why, it helps to recall the motivations of the euro’s founders. </p>
<p>The first full-throated call for a single European currency was in the <a href="https://cdn.theconversation.com/static_files/files/432/publication6142_en.pdf?1546441529">Werner Report issued in 1970</a>. Its authors feared that the <a href="https://www.investopedia.com/terms/b/brettonwoodsagreement.asp">Bretton Woods system</a> of currency pegs to the dollar was terminally ill and that its collapse would wreak havoc with exchange rates within Europe and therefore with the continent’s economy. The proposal was renewed in 1989 in the <a href="https://www.cvce.eu/en/education/unit-content/-/unit/02bb76df-d066-4c08-a58a-d4686a3e68ff/021072be-929c-4ca0-ad76-32760b5dc2ff">Delors Report</a>, which presented a single currency as the capstone of Europe’s Single Market and its four freedoms: free movement of goods, capital, services and labor. </p>
<p>But these economic arguments <a href="https://global.oup.com/academic/product/eurotragedy-9780199351381?cc=us&lang=en&">did not suffice</a> to tip the political balance toward the euro. In addition there was the belief of leaders like French President Francois Mitterrand and German Chancellor Helmut Kohl that a single European currency would apply irresistible pressure for political integration. It would lead eventually to their ultimate goal: a European political federation not unlike the United States. </p>
<p>Their logic ran as follows. To function smoothly, monetary union requires banking union – in other words, a single supervisor for all the banks and a union-wide deposit insurance scheme. Otherwise banks overseen only by their national supervisors would be allowed to undertake cross-border lending operations irrespective of the impact on neighboring countries. And in the absence of a union-wide deposit insurance scheme, a run on the banks in one country could infect the banking systems of its neighbors.</p>
<p>Similarly, to operate smoothly, a monetary union requires an integrated fiscal system, like those of political federations such as Australia and the United States. States that give up their monetary policy to a higher authority can no longer adjust it to changing national conditions. They can no longer lower interest rates to spur investment when the national economy is slowing more than those of its partners. </p>
<p>But if the partners operate an integrated fiscal system, the more prosperous members can shift resources to the depressed region, substituting for the no-longer-possible interest-rate cuts.</p>
<p>Here’s the rub: Banking union and fiscal union will only be regarded as legitimate if those responsible for their operation can be held accountable for their decisions by citizens. That means more power for the European Parliament – and less for national legislatures. It means that monetary integration creates a logic and therefore irresistible pressure for political integration. </p>
<p>Or so the euro’s architects believed.</p>
<h2>The fly in the ointment</h2>
<p>The problem is that the <a href="http://ec.europa.eu/commfrontoffice/publicopinion/index.cfm/Archive/index">vast majority of Europeans</a>, as distinct from the elites, don’t like the idea of giving up their national sovereignty. They identify as German or Italian first and as European only second, if at all. </p>
<p>They have little appetite for pooling national sovereignty at the European level. And 20 years of the euro have done little to change this.</p>
<p>Hence there was no banking union in the first decade of the euro. In its absence, <a href="https://doi.org/10.1257/jep.26.3.49">large amounts of capital</a> cascaded across Europe’s internal borders. Banks in Germany and France financed all manner of speculative investments in Irish and Spanish property markets and Greece’s public debt.</p>
<p>When, in 2008 and 2009, <a href="https://global.oup.com/academic/product/hall-of-mirrors-9780199392001?cc=us&lang=en&">problems developed</a> in the economies on the receiving end of these flows, the banks curtailed their lending. The Irish, Spanish and Greek governments, facing new constraints on their borrowing, were forced to sharply compress their spending, since there was no fiscal union to transfer resources to them from the more prosperous members. </p>
<p>But rather than advocating the creation such a system, nationalistic commentators in Germany and the members of the <a href="https://www.economist.com/europe/2018/12/08/northern-member-states-unite-on-euro-zone-reform">so-called New Hanseatic League</a> – made up of eight northern European Union countries – warned of the dreaded specter of “transfer union.” In other words, <a href="https://www.project-syndicate.org/commentary/road-to-a-european-transfer-union-by-hans-werner-sinn-2018-01?barrier=accesspaylog">they warned</a> that cross-country transfers would all go one way, and that they would be on the paying, not the receiving, end. </p>
<p>In the absence of the political solidarity required for such transfers, the crisis countries were forced to double down on spending cuts. For them, the eurozone was transformed into an engine of deflation and depression. </p>
<p>The conclusion follows that absent a willingness to contemplate political union, banking union and fiscal union are not possible. And without them, monetary union by itself will not stand. </p>
<h2>Still it breathes</h2>
<p>Yet the euro is still with us. </p>
<p>It has survived for fully 20 years. It survived the mother of all stress tests, the global financial crisis. </p>
<p>As the <a href="https://www.bbc.com/news/business-13856580">Greek, Irish and Spanish crises all showed</a>, and as the <a href="https://www.cfr.org/article/does-italy-threaten-new-european-debt-crisis">Italian crisis is showing</a> again, exiting the euro <a href="https://www.nber.org/papers/w13393">is even harder</a> than exiting the European Union. </p>
<p><a href="https://www.nber.org/papers/w13393">As I explained more than a decade ago</a>, abandoning the currency would ignite a full-blown financial crisis, as depositors frantically liquidated their bank balances and investors dumped their government bonds to avoid seeing their savings devalued. Each time a European leader, such as Greece’s newly elected Prime Minister Alexis Tsipras in 2015, has contemplated abandoning the euro, this specter has caused a reversal.</p>
<p>But neither is the <a href="https://www.consilium.europa.eu/en/meetings/euro-summit/2018/12/14/#">alternative</a> of far-reaching institutional reform in the cards. At their summit last month, European leaders agreed only to modest future steps to build out the monetary union.</p>
<p>They agreed to create a eurozone deposit insurance scheme, but only after problems of nonperforming loans in Italy and other countries were resolved, which is to say no time soon. They agreed to create a euro-area fiscal capacity, but only after high debts were brought down, which means not in this lifetime. They agreed to grant the <a href="https://www.esm.europa.eu">European Stability Mechanism</a>, the rescue fund established in 2012, additional resources and powers, but, again, only after existing bad-loan problems are addressed, which means at best in the very distant future. </p>
<p>This agreement falls far short of banking union, fiscal union and political union. It is an agreement to “work toward” rather than to “establish.” It will not change the operation of the monetary union. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/252332/original/file-20190102-32142-16maba4.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/252332/original/file-20190102-32142-16maba4.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=450&fit=crop&dpr=1 600w, https://images.theconversation.com/files/252332/original/file-20190102-32142-16maba4.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=450&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/252332/original/file-20190102-32142-16maba4.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=450&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/252332/original/file-20190102-32142-16maba4.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=566&fit=crop&dpr=1 754w, https://images.theconversation.com/files/252332/original/file-20190102-32142-16maba4.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=566&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/252332/original/file-20190102-32142-16maba4.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=566&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Euros everywhere.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-illustration/falling-down-euros-rain-174476393?src=82N0QqCjpP6bzgnrbWE7LQ-1-86">ImageFlow/Shutterstock.com</a></span>
</figcaption>
</figure>
<h2>Stumbling forward</h2>
<p>So the euro will stumble forward. No one will be happy with its operation. Equally, no one will leave. Progress will be minimal, since there is no appetite for the political union needed to support fundamental reforms. </p>
<p>As a result, the euro remains vulnerable to another crisis. The next crisis could heighten the perceived urgency of fundamental reforms and lead Europe’s citizens to accept the modicum of political integration needed to implement them. So reformed and restructured, the euro would operate better. </p>
<p>Or the next crisis <a href="https://global.oup.com/academic/product/the-populist-temptation-9780190866280?cc=us&lang=en&">could empower anti-elite</a>, nationalist, anti-EU – that is to say populist – politicians, making it impossible to implement even the modest reforms agreed in 2018. </p>
<p>In which case the euro will function even less smoothly. </p>
<p>Only one thing is certain. History doesn’t run in reverse. For better or worse – and both arguments can be made – the euro is here to stay.</p><img src="https://counter.theconversation.com/content/108149/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Barry Eichengreen is a research associate of the National Bureau of Economic Research and faculty research fellow of the Centre for Economic Policy Research. He’s also a nonresident senior fellow at CIGI in Waterloo, Ontario, Canada, and serves on the advisory board of the Peterson Institute for International Economics in Washington, DC.</span></em></p>While the euro’s survival for two decades is evidence of its success, it was born with fundamental problems that have weakened it, leading to near-constant crisis.Barry Eichengreen, Professor of Economics and Political Science, University of California, BerkeleyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1017092018-08-20T10:43:57Z2018-08-20T10:43:57ZGreece exits its third bailout – but eurozone still has much to learn from the crisis<figure><img src="https://images.theconversation.com/files/232653/original/file-20180820-30605-w1thdc.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Greece nearly crashed out of the eurozone in 2015.</span> <span class="attribution"><span class="source">Bill Anastasiou / Shutterstock.com</span></span></figcaption></figure><p>After nine years of unprecedented peacetime economic hardship, Greece <a href="https://www.bbc.co.uk/news/world-europe-45207092">exits its IMF bailout programme</a> on August 20. So ends a series of three bailouts organised by the so-called troika of the IMF, European Central Bank and European Commission. A total of €336 billion was lent to Greece in the wake of the financial crisis, to stop it defaulting on its national debt, with approximately €300 billion used so far. </p>
<p>What’s more, over 90% of the funds were not directed toward investment projects, but went on <a href="https://www.palgrave.com/de/book/9783319522913">servicing Greece’s national debt</a>. And the financial aid was provided on the basis of severe cuts to spending – a harsh regime of austerity. </p>
<p>It had tragic results. A quarter of Greece’s 2009 economic output has been wiped out, 20% of its workforce is out of work, and youth unemployment is at about 40%. At the <a href="https://theconversation.com/syriza-surges-ahead-of-january-election-as-greek-voters-reject-austerity-35829">height of the crisis</a>, in 2014-15, unemployment reached a staggering 27%, with youth unemployment exceeding 50%.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/232456/original/file-20180817-165967-c6a2mt.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/232456/original/file-20180817-165967-c6a2mt.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/232456/original/file-20180817-165967-c6a2mt.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=436&fit=crop&dpr=1 600w, https://images.theconversation.com/files/232456/original/file-20180817-165967-c6a2mt.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=436&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/232456/original/file-20180817-165967-c6a2mt.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=436&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/232456/original/file-20180817-165967-c6a2mt.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=548&fit=crop&dpr=1 754w, https://images.theconversation.com/files/232456/original/file-20180817-165967-c6a2mt.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=548&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/232456/original/file-20180817-165967-c6a2mt.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=548&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">IMF analysis shows how Greece’s depression has been as bad as the Great Depression and has lasted longer.</span>
<span class="attribution"><a class="source" href="http://www.imf.org/en/Publications/CR/Issues/2018/07/31/Greece-2018-Article-IV-Consultation-and-Proposal-for-Post-Program-Monitoring-Press-Release-46138">IMF</a></span>
</figcaption>
</figure>
<p>The strict nature, implementation and dramatic social costs of the EU bailouts prompt questions about their effectiveness – and whether they should be used in the future. Greece suffered the most. But bailouts, with strict conditions and severe consequences were meted out to Ireland, Portugal, Spain and Cyprus. The exact nature of the bailouts differed in each country, but they all shared the same draconian nature and rationale.</p>
<p>The IMF, which helped with Greece’s bailout loans, has <a href="http://www.imf.org/external/pubs/ft/scr/2013/cr13156.pdf">since admitted</a> that it underestimated the negative effects that austerity would have and the scale of the recession that would ensue. But this is <a href="https://www.palgrave.com/de/book/9783319522913">not enough</a>.</p>
<h2>Blame game</h2>
<p>The repercussions of the bailouts raise a core question. Whether the eurozone debt crisis was caused by the fiscal profligacy of the countries that were crisis-stricken and needed bailing out? Or whether it was down to deeper issues with the eurozone system as a whole?</p>
<p>There is no concrete answer to this fundamental question. Many observers focus on the aspects of the crisis that fit their particular narrative. For example, there is no doubt Greece and Portugal had overspent for decades before 2010. But politicians in the eurozone’s north <a href="https://www.reuters.com/article/us-eurozone-greece-schaeuble/dont-blame-others-for-your-problems-germanys-schaeuble-tells-greece-idUSKBN1CT2YX">focused</a> entirely on fiscal profligacy when assessing the causes of overspending. </p>
<p>Other factors – such as consistently higher military expenditure than the EU average in Greece; the country’s unique geography, which includes 2,000 islands of which 200 are inhabited; the lack of an industrial base, and a political system based on a clientele relationship between the state and its citizens – were completely ignored. For politicians in the fiscally prudent north of the eurozone, tax avoidance and overspending was more than enough to justify the bailouts. </p>
<p>But fiscal laxity was far from the norm in Spain and Ireland. Both countries had very low debt-to-GDP ratios up to 2008 (considerably lower than the EU Maastricht Treaty’s 60% limit) and yet they were subjected to the same draconian bailout provisions. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/232647/original/file-20180820-30587-1grqa2r.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/232647/original/file-20180820-30587-1grqa2r.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/232647/original/file-20180820-30587-1grqa2r.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=354&fit=crop&dpr=1 600w, https://images.theconversation.com/files/232647/original/file-20180820-30587-1grqa2r.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=354&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/232647/original/file-20180820-30587-1grqa2r.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=354&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/232647/original/file-20180820-30587-1grqa2r.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=445&fit=crop&dpr=1 754w, https://images.theconversation.com/files/232647/original/file-20180820-30587-1grqa2r.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=445&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/232647/original/file-20180820-30587-1grqa2r.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=445&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="https://www.google.co.uk/publicdata/explore?ds=ds22a34krhq5p_&met_y=gd_pc_gdp&hl=en&dl=en#!ctype=l&strail=false&bcs=d&nselm=h&met_y=gd_pc_gdp&scale_y=lin&ind_y=false&rdim=country_group&idim=country_group:eu&idim=country:el:es:ie&ifdim=country_group&hl=en_US&dl=en&ind=false">Google public data</a></span>
</figcaption>
</figure>
<p>Some <a href="https://www.tau.ac.il/%7Eyashiv/Wyplosz%20The%20Eurozone%20Crisis.pdf">critics</a> of the bailout perceive the crisis to be primarily institutional and so oppose the punishing measures that came with them across the board. They claim that had the European Central Bank acted decisively in 2010 by introducing <a href="https://theconversation.com/eurozone-qe-creates-breathing-space-heres-what-governments-must-do-now-70355">quantitative easing</a>, the extent of the required cuts would have been significantly reduced, thanks to the extra liquidity.</p>
<p>And despite Greece’s obvious need for extra liquidity from 2010-15, it was the only eurozone country to be excluded from the European Central Bank’s quantitative easing policy from 2015-18. The ECB’s intervention in 2010 could have mitigated the effects of the cuts and ultimately made the recession less severe, as was the case in Ireland and Portugal.</p>
<h2>The way forward</h2>
<p>Somehow, the eurozone has survived the experience of the bailouts and remains intact. But the lack of consensus over the causes of the crisis makes it difficult for the eurozone to move forward in the best way possible.</p>
<p>Alongside a central fiscal authority to oversee the budgets of all eurozone countries (in effect, a eurozone finance ministry that would take considerable time and effort to establish as it would have to aggregate national preferences over taxation and spending), the eurozone urgently needs a complete banking union to prevent future crises. This would involve a pan-eurozone deposit guarantee scheme. Had such a scheme existed in 2008, depositors would not have had the incentive to move their assets from one eurozone country to another when the crisis hit, thereby exacerbating it. </p>
<p>Attempts to create such a union over the last five years <a href="https://www.ft.com/content/003af25a-396e-11e8-8b98-2f31af407cc8">have stalled</a>. Eurozone countries like Germany, the Netherlands, Austria and Finland want depositors to participate in bank bailouts, as in the case of Cyprus in 2013, as a means of preventing the need to nationalise banks and their liabilities. The authorities in these countries fear that it would be their taxpayers that would be called upon to bail out banks in southern eurozone countries, in particular Italy <a href="https://theconversation.com/italy-and-the-euro-sergio-mattarella-has-opened-a-window-of-opportunity-to-save-the-single-currency-97428">where economic crisis looms</a>. </p>
<p>This is a perfectly rationale argument. But so is the southern eurozone authorities’ point, that it is very difficult to maintain sufficient liquidity in their banking sectors in the absence of such a banking union, as the mere suspicion of financial difficulty or political instability could precipitate abrupt and massive flows of capital out of their countries. Hence the current deadlock. </p>
<p>Yet a banking union is the best way to boost confidence in the eurozone and make it less prone to economic shocks that it may find difficult to withstand, let alone to absorb. Greece has taught us this much.</p><img src="https://counter.theconversation.com/content/101709/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Dimitrios Syrrakos does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The strict nature, implementation and dramatic social costs of the EU bailouts prompt questions about their effectiveness.Dimitrios Syrrakos, Deputy Head - Department of Economics, Policy and International Business, Manchester Metropolitan University, Manchester Metropolitan UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/977152018-06-05T13:14:13Z2018-06-05T13:14:13ZItaly’s new government is on a collision course with EU fiscal rules – it’s time for eurozone reform<figure><img src="https://images.theconversation.com/files/221538/original/file-20180604-175414-1tfvxd3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Man the lifeboats!</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/paper-ship-italian-european-flag-concept-422831047?src=kFW2f9YAj1xqNTtIB-Bcgg-1-6">Miriam Doerr Martin Fromherz</a></span></figcaption></figure><p>In the end it happened: after a lengthy process and some <em>coups de théâtre</em>, Italy’s two populist parties, the Five Star Movement (M5S) and the Lega, <a href="https://www.bbc.co.uk/news/world-europe-44322429">have managed</a> to form a government. </p>
<p>Their route to power was nearly thwarted by a <a href="https://theconversation.com/italys-political-crisis-is-a-moment-of-reckoning-for-european-liberal-democracy-97387">constitutional dispute</a> in which Italy’s president, Sergio Mattarella, refused to accept the two parties’ original nomination of Paolo Savona as economy minister. Savona, an economics professor, <a href="https://scenarieconomici.it/il-piano-b-per-litalia-nella-sua-interezza/">had outlined</a> in a 2015 conference a “Plan B” on how to exit the eurozone, which contained the striking statement that no popular vote or referendum would be required. </p>
<p>Mattarella explained that <a href="http://www.quirinale.it/elementi/Continua.aspx?tipo=Discorso&key=835">he had rejected</a> Savona’s nomination because the post required a “representative of the majority”, who “may not be seen as the promoter of a line of reasoning, often manifested, that could probably, or even inevitably, provoke Italy’s exit from the euro”. </p>
<p>The constitutional stalemate has now been solved by moving Savona to a different ministry – <a href="https://www.thelocal.it/20180526/paolo-savona-the-eurosceptic-at-the-heart-of-italys-standoff">EU affairs</a> – and appointing an alternative economy minister, a professor, Giovanni Tria. He has been judged to be <a href="https://www.thelocal.it/20180601/giovanni-tria-italy-pro-euro-finance-minister">less inimical</a> to euro membership, despite being broadly critical of the eurozone’s functioning.</p>
<p>The key two key questions for Italy now are: first, whether the new government’s fiscal stimulus plan is compatible with eurozone rules; and second, whether Italy’s quest for “fiscal sovereignty” is really being thwarted by euro membership. </p>
<h2>Italy in the eurozone</h2>
<p>Let’s start with the second question. By joining the eurozone, Italy lost its ability to devalue, and there were fears that its trade balance would deteriorate. As we know from the UK, however, having your own floating currency <a href="https://www.ons.gov.uk/economy/nationalaccounts/balanceofpayments">does not necessarily</a> translate to a trade surplus. </p>
<p>In any case, Italy’s competitive position has arguably improved markedly in recent years. Following a period of trade deficits during 2002-11, since mid-2012 the country has been running a <a href="https://tradingeconomics.com/italy/balance-of-trade">healthy trade surplus</a>, thanks to a <a href="https://tradingeconomics.com/italy/exports">major surge</a> in export growth. </p>
<p>Italy has also benefited hugely from much lower interest rates since joining the euro. In 1992 Italy’s ten-year bond yields were around 7.5 percentage points above Germany’s. By monetary union in 2002 the gap was around 5.1 points. </p>
<p>Last week, despite the political crisis, Italy’s treasury was still managing to issue ten-year bonds at 3%, around 1.6 points above German bund yields. Yes the spreads were <a href="https://tradingeconomics.com/italy/government-bond-yield">much higher</a> in the wake of the eurozone crisis, but they have since been driven down, thanks to the European Central Bank’s <a href="https://uk.reuters.com/article/us-eurozone-economy-poll/ecb-to-end-qe-by-dec-but-should-do-so-sooner-economists-idUKKBN1F81TJ">quantitative easing</a>, creating a boon for the stretched Italian exchequer in the process. </p>
<p><strong>Italian ten-year bond yields, 1990-2018</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/221514/original/file-20180604-175434-urbmb6.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/221514/original/file-20180604-175434-urbmb6.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/221514/original/file-20180604-175434-urbmb6.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=245&fit=crop&dpr=1 600w, https://images.theconversation.com/files/221514/original/file-20180604-175434-urbmb6.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=245&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/221514/original/file-20180604-175434-urbmb6.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=245&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/221514/original/file-20180604-175434-urbmb6.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=308&fit=crop&dpr=1 754w, https://images.theconversation.com/files/221514/original/file-20180604-175434-urbmb6.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=308&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/221514/original/file-20180604-175434-urbmb6.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=308&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="https://tradingeconomics.com/italy/government-bond-yield">Trading Economics</a></span>
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<p>So let’s do an economics <a href="https://www.britannica.com/science/Gedankenexperiment"><em>Gedankenexperiment</em></a>. What would happen if Italy were able to wave a magic wand and leave the euro overnight? We’ll set aside the practical complications of achieving this – though they would make Brexit look like a walk in the park.</p>
<p>A major rise in bond yields to pre-euro levels would be almost inevitable, thus sharply increasing the government’s interest repayments on its debt over time. With <a href="https://tradingeconomics.com/italy/government-debt-to-gdp">government debt</a> currently at 132% of GDP, this would quickly make Italy’s fiscal position unsustainable. It would lead without doubt to problems of refinancing, triggering a debt restructuring. Even a hike in yields to the level seen during the 2011 eurozone debt crisis would be catastrophic. (Interestingly, the ECB <a href="https://www.ft.com/content/8a688786-67f8-11e8-8cf3-0c230fa67aec?emailId=5b15489268bfde0004ff6985&segmentId=3d08be62-315f-7330-5bbd-af33dc531acb">scaled back</a> its proportion of debt-buying aimed at Italy last month, in what might be seen as a signal of its concerns.) </p>
<p>One result would be that Italy’s banks would fail: about 60% of Italy’s treasury debt is held by the country’s residents, three-quarters of which are in holdings in Italian banks. A substantial burden would fall on Italy’s poorer socioeconomic groups who don’t have the means to diversify their wealth. Plan B suddenly looks like Plan Z. </p>
<h2>Collision course</h2>
<p>Then there is the question of whether the incoming government’s spending programme is compatible with the eurozone’s fiscal rules. The programme suggests increasing annual spending by between €107 billion and €126 billion (£94 billion to £110 billion), including around €50 billion to introduce a “<a href="https://www.bloomberg.com/news/articles/2018-05-14/italy-populists-go-all-in-on-pricey-vows-preparing-to-take-power">quasi-flat tax</a>” of 15% on individuals’ income and 20% on companies; and €17 billion to introduce a “citizen’s income and pension”. On 2017 figures, this is a fiscal stimulus of around 6.3%-7.4% of GDP – well outside the parameters of the <a href="https://www.ecb.europa.eu/pub/pdf/other/mb201203_focus12.en.pdf?0ea5f8ccbeb103061ba3c778c8208513">eurozone’s fiscal rules</a>. </p>
<p>You also have to ask what this fiscal expansion is trying to solve. Italy’s main problems are slow economic growth, inequality (though that increased mainly in the 1990s) and particularly <a href="https://www.statista.com/statistics/266228/youth-unemployment-rate-in-eu-countries/">youth unemployment and underemployment</a>. </p>
<p>These difficulties are mainly attributable to <a href="https://tradingeconomics.com/italy/productivity">stagnating</a> productivity <a href="https://www.weforum.org/agenda/2016/07/what-is-productivity-and-how-do-you-measure-it/">growth</a>. Increasing annual spending by cutting taxes and increasing welfare spending would not kickstart productivity growth. Also, bear in mind that both the quasi-flat tax and the universal untargeted welfare spending are likely to be regressive, shifting more of the overall tax burden on to the poor – hardly lessening inequality. And if these tax and pension giveaways are, even in part, financed by increases in indirect taxes such as VAT, that would be <a href="http://www.taxresearch.org.uk/Blog/2011/01/04/why-vat-is-regressive/">even more regressive</a>. </p>
<p>Many economists have been critical of the design of the eurozone fiscal rules. I <a href="https://theconversation.com/greece-in-crisis-even-if-grexit-is-averted-the-eurozone-needs-a-fundamental-rethink-44095">have argued</a> in favour of redesigning the system – above all that the monetary union <a href="https://theconversation.com/greece-a-bad-deal-for-everyone-44627">requires</a> political oversight and also better risk-sharing through elements of fiscal union. </p>
<p>This could be achieved through the type of reform agenda which the French president, Emmanuel Macron, has <a href="http://www.dw.com/en/how-frances-emmanuel-macron-wants-to-reform-the-eu/a-43002078">been advocating</a>, which would include a joint eurozone budget, a post of EU finance minister and a new body to oversee EU economic policy. Or equally there could be some reform of the eurozone fiscal rules which would allow some room for manoeuvre in the short term to individual countries facing macroeconomic shocks not shared by the rest of the zone. At present this is anathema to Germany and its EU allies. </p>
<p>Is this déjà vu? Yes. It’s another version of David Cameron’s pre-Brexit <a href="http://www.bbc.co.uk/news/uk-politics-eu-referendum-35622105">negotiation</a>, which arguably set back EU reform by years. </p>
<p>The problem is that the M5S-Lega agenda, far from encouraging such much-needed reform, will trigger more resistance to change among eurozone fiscal hawks. The irony of course is that Italy could not afford this populist profligacy even if it were outside the eurozone. Yet whether the EU’s overseers can afford to reject these plans from Rome without at some point reforming the existing system is another matter entirely.</p><img src="https://counter.theconversation.com/content/97715/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Anton Muscatelli does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The new coalition’s spending plans will ramp up Italy’s annual budget by over €100 billion a year.Anton Muscatelli, Principal and Vice Chancellor, University of GlasgowLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/975352018-05-31T19:50:49Z2018-05-31T19:50:49ZVital Signs: Italy is broke, and the markets have lost all faith in its elected politicians<p>We are now in another <a href="https://theconversation.com/italy-and-the-euro-sergio-mattarella-has-opened-a-window-of-opportunity-to-save-the-single-currency-97428">full-scale European crisis</a>.</p>
<p>The results of Italy’s <a href="https://en.wikipedia.org/wiki/Italian_general_election,_2018">general election on March 4</a> were problematic. Roughly one-fifth of Italians voted for the populist <a href="https://theconversation.com/italy-how-matteo-salvini-sacrificed-bid-for-northern-autonomy-to-save-the-league-97392">Northern League party of Matteo Salvini</a>, and one-third backed the <a href="https://theconversation.com/after-brexit-keep-a-close-watch-on-italy-and-its-five-star-movement-61589">Five Star Movement</a>, a eurosceptic, anti-establishment party founded by standup comedian Beppe Grillo.</p>
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<a href="https://theconversation.com/after-brexit-keep-a-close-watch-on-italy-and-its-five-star-movement-61589">After Brexit, keep a close watch on Italy and its Five Star Movement</a>
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<p>Salvini has <a href="https://www.businessthink.unsw.edu.au/Opinion/Pages/QuItaly-is-now-a-real-possibility.aspx">responded</a> to the refugee crisis by saying that Italy needs “a mass cleaning – home by home, street by street, neighbourhood by neighbourhood”. Grillo, meanwhile, has championed the idea of celebrating “<a href="https://www.newyorker.com/magazine/2008/02/04/beppes-inferno">V-Days</a>” – short for the Italian <em>vaffanculo</em> (the various English translations all begin with an expletive and end with either “off” or “you”) – taking aim at the political elite as part of an eccentric grab bag of largely anti-capitalist policy ideals.</p>
<p>Setting aside the bizarre prospect of a coalition between the far right and the loopy left, as a prospective government the pair do not bode well for Italy or Europe. Although officially disavowing any move to exit the Eurozone, they almost surely would have sought to do so. That would have triggered an automatic exit from the European Union, perhaps inevitably nicknamed “<a href="https://www.smh.com.au/business/markets/remember-grexit-it-feels-like-2012-again-as-quitaly-roils-markets-20180530-p4zic5.html">Quitaly</a>”.</p>
<p>Italy, and the European experiment with it, might have bled out slowly.</p>
<p>But when Italian President Sergio Mattarella <a href="https://www.theguardian.com/world/2018/may/27/italys-pm-designate-giuseppe-conte-fails-to-form-populist-government">refused</a> to allow the putative coalition to form government in its currently proposed form, all hell broke loose.</p>
<p>With a second election now on the cards, the spread on two-year Italian bonds quickly jumped to around 300 basis points over German bonds. That’s the market suggesting a staggering risk of default.</p>
<p>Yesterday Mattarella tried to calm things down by suggesting that he could appoint an interim technocratic government, giving Salvini and Five Star’s current leader, Luigi Di Maio, more time to produce a list of ministers that he could live with.</p>
<p>That’s probably the right thing to do, but it’s tough to get the toothpaste back in the tube. The markets are spooked. It will take a lot more than the prospect of securing a coalition government between two lunatic-fringe parties bent on getting Italy out of the euro to calm things down.</p>
<h2>Greece is the word</h2>
<p>Italy is Europe’s third-largest economy and it has <a href="https://tradingeconomics.com/italy/government-debt-to-gdp">public debt of €2.3 trillion</a>. A bank run on the Italian economy, similar to what <a href="https://www.theguardian.com/business/live/2015/jun/28/greek-crisis-ecb-emergency-liquidity-referendum-bailout-live">happened in Greece in 2015</a>, would be a cataclysm that would likely be impossible to stop without Italy exiting the euro.</p>
<p>The seeds of Italian populism were fairly predictable in the wake of the great recession. <a href="https://tradingeconomics.com/italy/unemployment-rate">Italy’s unemployment rate doubled to more than 12% and is still at 10.9%</a>. Youth unemployment peaked at a 42.7% in 2014 and remains around 35%. GDP fell by more than 7% per year at an annualised rate and only turned positive in 2014. Real GDP is still below its 2007 level. Italy’s current GDP growth of 1.5% is the lowest in the Eurozone.</p>
<p>The question is what to do about it. Radical spending promises that can’t possibly be fulfilled without totally blowing the government’s books are not the answer. Having them delivered by an unstable government comprised of a loose coalition of warring tribes is less encouraging still.</p>
<p>On the other hand, fresh elections will just spook the markets even more.</p>
<p>Right now, Mattarella’s proposed technocratic government looks like the least worst option. There is an open question about how long it should govern for, but a reasonable starting point would be three years. That might give it time to get the Italian economic ship back upright. Enough time to take some tough decisions. This, of course, simply cannot be guaranteed under the constitution, so all Mattarella can do is install it and hope that the prospect of stability becomes self-reinforcing.</p>
<p>That is the kind of government that former Greek finance minister <a href="https://theconversation.com/yanis-varoufakis-from-accidental-economist-to-finance-minister-36827">Yanis Varoufakis</a> would hate, given his fierce resistance to the austerity imposed on Greece by its creditors. And I’m sure it will take about five seconds for me to be labelled a Washington Consensus, IMF-loving neoliberal for suggesting it. It would certainly attract plenty of criticism in Italy, given the strong anti-establishment sentiment that created this crisis in the first place. </p>
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<a href="https://theconversation.com/italy-and-the-euro-sergio-mattarella-has-opened-a-window-of-opportunity-to-save-the-single-currency-97428">Italy and the euro: Sergio Mattarella has opened a window of opportunity to save the single currency</a>
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<p>But, to use the language of bankruptcy, the bottom line is that Italy is in political and economic <a href="http://www.uscourts.gov/services-forms/bankruptcy/bankruptcy-basics/chapter-11-bankruptcy-basics">Chapter 11</a>. It is broke. It’s not technically insolvent just yet. But it will be, as they say in debt contracts, “but for the passage of time”.</p>
<p>It’s time to bring in the receivers to restructure. There needs to be serious microeconomic and labour-market reform, of the kind Emmanuel Macron is trying to implement in France. There also needs to be some attempt to get the debt under control. Lowering the interest rate through increased confidence would be a good start.</p>
<p>This would also help the rest of Europe. Perhaps there is some hope that German Chancellor Angela Merkel would be grateful, and thus more amenable to assistance measures for Italy. She certainly could not be less well disposed to help out than at present.</p><img src="https://counter.theconversation.com/content/97535/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Richard Holden does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Italy’s economy is verging on bankrupt and its election results have dealt a hammer blow to the prospects of fixing things. The best option, financially at least, may be to put someone else at the helm.Richard Holden, Professor of Economics and PLuS Alliance Fellow, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/974282018-05-30T10:31:06Z2018-05-30T10:31:06ZItaly and the euro: Sergio Mattarella has opened a window of opportunity to save the single currency<p>Crisis looms large over the eurozone yet again. And this time it’s swirling around Italy. If <a href="https://www.palgrave.com/gb/book/9783319622224">Cyprus was a tropical storm</a> for the euro in 2013 and <a href="https://theconversation.com/how-greeces-liquidity-problem-could-cause-an-unplanned-grexit-41691">Greece a hurricane in 2015</a> what will Italy turn out to be in 2018? </p>
<p>Italy’s public debt is <a href="https://www.bloomberg.com/news/articles/2017-11-09/italian-debt-load-up-this-year-above-130-in-2018-eu-says">132% of GDP</a>. This is the second highest in the euro area (Greece is still out in front with 180.8%). In absolute terms, however, Italy’s public debt at €2.3 trillion dwarfs Greece’s €320 billion. Meanwhile, the eurozone’s third largest economy contains a rising tide of populist, anti-EU sentiment.</p>
<p>It is therefore not surprising that Italy is now the biggest ever threat for the euro. As Greece showed, a sovereign debt crisis can quickly transform itself <a href="https://theconversation.com/euro-nightmare-unfolds-queues-at-banks-in-greece-as-capital-controls-follow-ecb-funding-cap-43984">into a banking crisis</a>, as depositors flock to take their money out.</p>
<p>Part of the problem is that the Five Star Movement and the League – the big winners in the March election who were <a href="https://theconversation.com/italys-new-government-why-a-political-novice-is-a-strategic-choice-for-prime-minister-97196">set to form a coalition government</a> – made electoral pledges so wild that to call them populist is to put it mildly. Among these was taking Italy out of the eurozone and cancelling €341 billion Italian debt held by the European Central Bank (ECB).</p>
<p>Although their <a href="https://www.ft.com/content/e0cd0f22-5a7c-11e8-bdb7-f6677d2e1ce8">draft programme</a> for government had removed all direct references to a eurozone exit, it included enough anti-euro rhetoric and such drastic reforms to the eurozone’s architecture and economic policies that it sent shivers across the continent. What’s more, the coalition’s spending commitments are around €100 billion or 6% of Italy’s GDP, potentially making a bad public debt situation worse and conflicting with EU budgetary rules. </p>
<p>The two parties also want to “radically revise” the EU’s banking rules that protect public finances from failing banks and seek to compensate retail investors for any losses already incurred. Such a prospect could prove destabilising not just for Italy but also for Spain, Cyprus and Slovenia – where creditors <a href="https://voxeu.org/article/bank-bail-ins-lessons-cypriot-crisis">were “bailed-in”</a> (the opposite of a bail out). It would, in effect, undo all the progress towards a banking union in the eurozone and mean returning to the days when taxpayers footed the bill for bank failures. </p>
<p>The two parties even appeared to have had <a href="https://www.bloomberg.com/news/articles/2018-05-29/league-five-star-had-euro-exit-plan-italy-s-democrats-say">a Plan B</a> in case Europe didn’t accept their demands. They were prepared for a “secret” exit from the euro over a weekend, accompanied by the cancellation of all Italian debt held by the ECB. No referendum was planned as this would cause financial havoc. </p>
<p>If Italy were to leave the euro, the ECB would have to write down its holdings of Italian public debt and all central banks across the eurozone would make massive losses. The respective governments – funded by the taxpayers – would have to foot the bill. That would be bad enough, even before considering whether the euro could survive an Italian exit and all the knock-on effects that would ensue. </p>
<p>The icing on the cake, which has led to the country’s latest political impasse, was the nomination of Paolo Sanova, a well-known eurosceptic, as finance minister. This explosive proposition was <a href="http://www.bbc.co.uk/news/world-europe-44277888">rejected by Sergio Mattarella</a>, Italy’s president, who has vetoed the coalition’s proposed government, wisely claiming it would have destabilised the country. He has installed Carlo Cottarelli, a former IMF official, as interim prime minister, instead. </p>
<h2>A poisoned chalice</h2>
<p>Had Italy’s president gone along with the Five Star Movement-League proposal, the crisis would have escalated very quickly. Markets and bank depositors were unlikely to wait until the “secret” weekend when Italy exits the euro. A bank run would have ensued almost immediately and that could have caused a new and unprecedented challenge for the ECB. </p>
<p>In the cases of Greece and Cyprus, the ECB supported their respective banking systems while political negotiations were ongoing and had a reasonable prospect of agreement. Even so, such support was never automatic. When negotiations stalled, it was frozen or restricted, resulting in extended bank holidays and capital controls. </p>
<p>In Italy’s case, the decision whether to provide such support would be much more of a poisoned chalice. Throwing good money after bad to support banks in a country whose government is threatening to abandon the euro could be seen as financially and legally reckless, if not politically suicidal. </p>
<p>Providing a lifeline to a government that is so hostile to the euro would have caused a furore in Germany where the ECB is already seen as too soft on the periphery, in general, and Italy in particular. Yet not supporting banks in Italy would lead to an immediate shut down of the banking system and an even bigger economic and political crisis, which could prove to be the final blow to the euro.</p>
<h2>Window of hope</h2>
<p>Unsurprisingly, Mattarella’s decision was welcomed with relief in both France and Germany, although Chancellor Angela Merkel was <a href="https://www.reuters.com/article/us-italy-politics-germany/merkel-tells-italy-euro-zone-rules-must-frame-economic-discussions-idUSKCN1IT1FG">quick to stress</a> that she would be willing to work with any coalition government that respected eurozone roles. </p>
<p>But the interim technocratic government is only a very short-term fix that may not even last until the end of summer, if it fails to get a vote of confidence in parliament. As the president’s actions are already inflaming anti-EU sentiment in Italy, a new election could well deliver an even more populist outcome. Financial markets are certainly becoming spooked and that can force an even earlier election.</p>
<p>Some commentators, including former Greek finance minister <a href="https://www.theguardian.com/commentisfree/2018/may/28/italy-eurosceptic-far-right-technocrat-matarella-racist-populist">Yanis Varoufakis</a>, are suggesting that the only way for the euro to withstand an Italian tsunami is for Berlin to show more flexibility. But if Berlin were to give in to the demands of one populist government, that could signal the beginning of the end for the euro, as it would be a gift to populist parties in other member states. In turn, that’s likely to lead to a rise of the far right in Germany – surely the beginning of the end of Europe as a project for peace.</p>
<p>I’m not saying the eurozone is perfect or that Italy should not receive any form of help. Far from it. But the interim government provides a small window of opportunity to fast track eurozone reforms. These need to be based on sound economic logic and pragmatic politics, rather than populist notions that are often poorly disguised ways to shift the burden of one country’s past excesses to others. </p>
<p>Time is limited, but there are already several sensible proposals around, including the one for a <a href="https://www.imf.org/en/Publications/Staff-Discussion-Notes/Issues/2018/03/22/A-Central-Fiscal-Stabilization-Capacity-for-the-Euro-Area-45741">rainy day fund by the IMF</a>, a proposal for a new debt instrument by the European Commission and <a href="https://www.ft.com/content/10069151-0736-3072-b185-c4c635e59174">reform ideas</a> from top French and German economists. </p>
<p>This is the only way forward if the European project is to survive the new threat from Italy. Although the German government <a href="https://global.handelsblatt.com/finance/imf-lagarde-rainy-day-fund-euro-zone-904034">isn’t thrilled</a> by these proposals, it may now be the last opportunity to save the eurozone. Unless its benefits are seen to be more widely shared, the euro’s days are numbered.</p><img src="https://counter.theconversation.com/content/97428/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Panicos O Demetriades does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>If you thought the risk of Grexit was bad, you’ve got a shock coming in the shape of Italy.Panicos O Demetriades, Professor of Financial Economics, University of LeicesterLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/973872018-05-29T12:58:05Z2018-05-29T12:58:05ZItaly’s political crisis is a moment of reckoning for European liberal democracy<p>After months of wrangling, Italy’s political crisis has a hit an impasse, with new elections now increasingly likely. The country faces an institutional crisis without precedent in the history of the Italian republic. Its implications extend well beyond Italy, to the European Union as a whole.</p>
<p>Since an <a href="https://www.theguardian.com/world/ng-interactive/2018/mar/05/italian-elections-2018-full-results-renzi-berlusconi">election</a> on March 4, there have been endless vain attempts to form a government – with the likely outcome changing every 24 hours. By mid-May, the Five Star Movement (M5S) and the League, both populist parties, had come together to <a href="https://www.ft.com/content/e0cd0f22-5a7c-11e8-bdb7-f6677d2e1ce8">draft a programme</a> for government featuring tax cuts and spending plans. But it sent shivers down the spines of those contemplating Italy’s public debt – running at <a href="https://www.bloomberg.com/news/articles/2017-11-09/italian-debt-load-up-this-year-above-130-in-2018-eu-says">over 130% of GDP</a> – and threatened the stability of the eurozone. </p>
<p>They were prevented from taking office thanks to their <a href="https://www.reuters.com/article/us-italy-politics/italys-president-rejects-savona-as-economy-minister-may-mean-new-election-idUSKCN1IS0HL">insistence</a> on the appointment of the economics professor, Paolo Savona, as finance minister. Due to Savona’s well-known eurosceptic views, Italy’s president, Sergio Mattarella, refused to appoint him. </p>
<p>Although Mattarella’s decision is within the constitution, and previous presidents have refused to appoint certain ministers before, it is in many respects without precedent and has arguably enabled the populists – who have a parliamentary majority – to stage a propaganda coup. The institutional crisis has been deepened by M5S’s announcement that it will <a href="https://www.theguardian.com/world/2018/may/27/italys-pm-designate-giuseppe-conte-fails-to-form-populist-government">seek to “impeach”</a> the president and by <a href="https://www.bloomberg.com/news/articles/2018-05-28/italy-s-populists-mobilize-in-protest-as-cabinet-list-drawn-up">calls from both parties</a> for public demonstrations to protest Matarella’s decision.</p>
<p>The <a href="http://www.bbc.co.uk/news/world-europe-44280046">appointment</a> of Carlo Cottarelli, a former official from the International Monetary Fund, as prime minister on May 28 was merely a stop-gap measure until fresh elections in the autumn. His government will almost certainly fail to win the necessary vote of confidence required of all incoming governments upon taking office. This means that it will be unable to undertake any legislative initiatives that go beyond day-to-day administration.</p>
<h2>Populists emboldened</h2>
<p>Under these circumstances, campaigning for the next election will continue throughout the summer with the far-right, anti-immigrant, League, emboldened by a <a href="http://www.repubblica.it/politica/2018/05/29/news/sondaggi_m5s_lega-197625623/">considerable jump</a> in its opinion poll ratings. </p>
<p>Support for the M5S is less certain but the party is likely to benefit from the same anti-establishment narrative that powers the League and whose purchase has been so considerably strengthened by the showdown with the president. The problem for M5S, which draws its support from across the left-right spectrum, is that it has been driven into the arms of a far-right, eurosceptic party from whose embrace it will find it difficult to extract itself during the coming weeks. The campaign seems bound to focus on the two themes that have given rise to the crisis: the programme for government agreed by the two parties and popular disaffection arising from Italy’s place in Europe.</p>
<p>Against this background, it’s highly likely that the upcoming election will be widely framed as a contest between the forces of the establishment, on the one hand, and their eurosceptic challengers on the other. </p>
<p>This was <a href="https://www.msn.com/it-it/notizie/politica/di-maio-inutile-votare-il-governo-lo-decidono-le-lobby/ar-AAxSFd1?li=BBqg6Qc">suggested</a> by M5S leader, Luigi Di Maio, in a recent Facebook post which, in true populist fashion, framed the issue as a basic principle of democracy: </p>
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<p>Let us be clear about it: in this country, voting is pointless because whatever the outcome, governments are decided upon by the ratings agencies and the financial and banking lobbies. It is always the same people who decide.</p>
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<h2>Constitutionalism at stake</h2>
<p>While such rhetoric serves to fan the flames of popular resentment and undermines the authority of Italy’s democratic institutions, it is based on the dangerous premise that democracy is about the supremacy of the will of a majority. Rather than – as is set out in <a href="https://www.senato.it/documenti/repository/istituzione/costituzione_inglese.pdf">the first article</a> of the Italian constitution – that democracy is the exercise of popular sovereignty “in the forms and within the limits of the constitution”. </p>
<p>In this respect it reflects the unfolding of a crisis with clear echoes elsewhere in Europe, most notably the UK, Hungary and Poland. The Italian impasse was precipitated by populist politicians whose challenge to the entire European integration project carries with it an attack on the basic assumptions of liberal democracy. </p>
<p>Looking back on the March 4 elections, it’s difficult to think of a more significant vote in the recent history of Europe. It was one that has raised questions about the nature of party politics, the future of the EU and about the nature of democracy itself in the 21st century.</p><img src="https://counter.theconversation.com/content/97387/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>James Newell does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>What’s caused Italy’s political crisis and what’s likely to happen next.James Newell, Professor of Politics, University of SalfordLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/950162018-05-08T11:15:48Z2018-05-08T11:15:48ZGermany’s deep-rooted obsession with saving – a brief history<figure><img src="https://images.theconversation.com/files/218101/original/file-20180508-34009-dcwt4w.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com">shutterstock.com</a></span></figcaption></figure><p>A small exhibition <a href="https://www.dhm.de/en/ausstellungen/saving.html">recently opened</a> in the German Historical Museum in Berlin all about Germany’s love of saving money. It might have had a mundane sounding title, “Saving – History of a German Virtue”, but it provides an interesting insight into what is a deep-rooted national obsession. </p>
<p>As well as an opportunity for self-reflection for visiting Germans, the exhibition also provides a window into the historical roots of German morality when it comes to being financially prudent and the country’s attitude towards European policies and its partners. </p>
<p>Saving has a long history in German society. The first savings bank opened in 1778 in Hamburg. By 1836, there were more than 300 of these savings banks operating in the then German Confederation, allowing Germans to save their hard earned income for some interest. </p>
<p>There is <a href="https://www.dhm.de/fileadmin/medien/relaunch/ausstellunngen/Sparen/SH_DHM_Sparen_Flyer_4cSC_A6_180312_web.pdf">plenty of evidence</a> in the exhibition that the concept of saving was established as a virtue from this period, through the Weimar Republic, which followed World War I, then in the Nazi era and after World War II on both sides of the Berlin Wall. Saving became an essential part of the country’s tax planning, welfare provision and social policies.</p>
<p>The legacy of this virtue has made Germans the top savers in the world. Households consistently saved more than 8% of their disposable income over the last two of decades, <a href="https://data.oecd.org/chart/5am1">according to OECD data</a>. The last time UK households came close to the German savings rate was in 1995. Two decades later, in 2015, German savers keep an equivalent of 9.96% of their disposable income in the country’s 400 savings banks, while the British were merely at 0.16%. </p>
<p>Looking at total savings of households, companies and the government (gross domestic savings) in these two countries, the gap is equally large. In 2015, German’s gross domestic savings were at 27.2% while in the UK figure shows merely 15.3%</p>
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<p>Germans not only save more than their UK counterparts, but the deep rooted national habit has more implications than those numbers would reveal.</p>
<p>Understanding the German obsession with savings is important when one wants to understand German attitudes towards domestic and European policies. For example, since 2012 the main European Central Bank interest rate has been below 1%, and in March 2016 <a href="https://www.ecb.europa.eu/stats/policy_and_exchange_rates/key_ecb_interest_rates/html/index.en.html">was reduced to 0%</a>. The reason for these low interest rates, along with large programmes of quantitative easing, was to stabilise the European banking sector <a href="https://theconversation.com/explainer-what-is-the-ecb-bazooka-and-will-it-spur-a-eurozone-recovery-56302">and to encourage lending, spending and economic recovery</a>. </p>
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<p>The move was widely praised by various governments. But in Germany, it was criticised by the country’s saving public who feared the low interest rates would destroy their wealth <a href="https://www.ecb.europa.eu/press/key/date/2017/html/ecb.sp171009_1.en.html">and ruin their retirement plans</a>. As the conservative German newspaper, <a href="http://www.faz.net/aktuell/finanzen/finanzmarkt/zinsen-was-die-ezb-wirklich-fuer-die-sparer-tut-15482224.html">FAZ, put it</a>: “there is something ritualistic about cursing the Italian president of the ECB for keeping interest rates low, depriving savers of their well-deserved interest.”</p>
<h2>At the state level</h2>
<p>The virtue of saving in Germany is not limited to households or companies, but to state finances too. A good state does not live beyond its means and saves money where it can. The state, seen as the virtuous and prudent <a href="https://www.economist.com/news/europe/21595503-views-economics-euro-and-much-else-draw-cultural-archetype-hail-swabian">Swabian housewife</a>, is at the centre of the German pro-austerity narrative, which has not only affected domestic but <a href="https://mainlymacro.blogspot.co.uk/2016/09/explaining-macroeconomics-to-swabian.html">most of all European policies</a>. </p>
<p>In the aftermath of the European sovereign debt crisis the implementation of austerity policies in the southern periphery, specifically Greece, was justified with the necessity to reduce spending and increase savings. It is no surprise that Germany was one of the leading advocates of these fiscal policies. To the German psyche, austerity was the necessary antidote to a country that had lived recklessly beyond its means up until 2008. </p>
<p>To <a href="https://www.ft.com/content/97b826e2-d7ab-11e0-a06b-00144feabdc0">quote</a> former Germany’s finance minister at the time, Wolfgang Schäuble: </p>
<blockquote>
<p>It is an undisputable fact that excessive state spending has led to unsustainable levels of debt and deficits that now threaten our economic welfare … Governments in and beyond the eurozone need not just to commit to fiscal consolidation and improved competitiveness – they need to start delivering on these now.</p>
</blockquote>
<p>Schäuble was seen as a stickler for rules. So much so that he became <a href="http://www.bbc.co.uk/news/world-europe-33511387">a hate figure in Greece</a> for emphasising austerity policies. </p>
<p>But, with the history and importance of saving in Germany in mind, it is unlikely that Olaf Scholz, Schäuble’s successor as finance minister, or the country he represents, will change its mind on this any time soon. </p>
<hr>
<p><em>Correction: the interest rate graph in this article was updated on May 10 2018 to correct an inaccuracy in the interpolation.</em></p><img src="https://counter.theconversation.com/content/95016/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Imko Meyenburg does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The importance of saving is so deep rooted in Germany that an exhibition recently opened to commemorate it.Imko Meyenburg, Lecturer in Economics and International Business, Anglia Ruskin UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/950222018-04-23T10:27:41Z2018-04-23T10:27:41ZMacron-Trump summit has high stakes for France’s embattled leader<p>French President Emmanuel Macron can expect a warm welcome from Donald Trump – and, most likely, <a href="https://theconversation.com/emmanuel-macron-staged-a-punk-coup-on-the-champs-elysees-81119">some glitz and pomp</a> – when he arrives in Washington on April 23 for a two-day summit. It is the Trump administration’s first state visit of a foreign leader.</p>
<p>The two leaders, both <a href="https://www.washingtonpost.com/politics/trump-and-macron-once-cast-as-adversaries-show-they-have-much-in-common/2017/07/13/0ed71dda-67ea-11e7-8eb5-cbccc2e7bfbf_story.html">political outsiders who achieved surprising electoral victories</a>, have developed a <a href="https://www.nytimes.com/2018/03/23/opinion/macron-trump-friendship.html">strong working relationship</a> despite their many ideological differences. <a href="https://www.nytimes.com/2018/03/23/opinion/macron-trump-friendship.html">Macron and Trump speak regularly on the phone</a>, and Trump reportedly greatly appreciated the <a href="https://theconversation.com/emmanuel-macron-staged-a-punk-coup-on-the-champs-elysees-81119">warm reception he received in France</a> when he visited Macron in July 2017. </p>
<p>As a scholar who <a href="https://theconversation.com/four-reasons-why-the-french-parliamentary-elections-matter-77774">studies France</a>, I believe the stakes in the summit are particularly high for Macron. The two presidents will tackle a list of complex international challenges, such as the Syrian civil war, terrorism and relations with Russia and North Korea. </p>
<p>Macron will also have to convince Trump, a conservative with protectionist instincts, not to break with Europe over <a href="https://theconversation.com/trumps-go-it-alone-approach-to-china-trade-ignores-wtos-better-way-to-win-93918">trade tariffs</a> and the <a href="https://theconversation.com/pompeos-rise-will-make-mideast-war-more-likely-93345">Iran nuclear deal</a>.</p>
<p>A successful return from Washington would give Macron a political boost at home and abroad. </p>
<h2>Triumphs, then strikes</h2>
<p><a href="https://www.economist.com/news/europe/21731114-emmanuel-macron-revolutionised-french-politics-now-he-wants-repeat-trick-europe">Macron’s rise to power</a> was remarkable. </p>
<p>In 2014, most French people had no idea who he was. By 2017, he was elected president in his first-ever run for public office. Shortly afterward, the political party he created from scratch, En Marche, <a href="https://theconversation.com/four-reasons-why-the-french-parliamentary-elections-matter-77774">captured a large majority in the French Parliament</a>. Macron achieved all this before turning 40. </p>
<p>In office, Macron has tried to deliver on his campaign promises of <a href="https://theconversation.com/a-victory-for-macron-and-for-the-european-union-now-its-time-to-unite-a-divided-france-77306">transforming France</a> by revitalizing its moribund economy and restoring its influence on the world stage. </p>
<p>After years of sluggish growth and persistently high unemployment, he easily passed <a href="https://www.reuters.com/article/us-france-reform-labour/macron-signs-french-labor-reform-decrees-idUSKCN1BX1K7">controversial reforms to France’s labor market</a>. Among other changes, the new rules make it easier for companies to hire and fire employees. </p>
<p>But the French president <a href="https://www.theguardian.com/commentisfree/2018/apr/04/emmanuel-macron-france-strikes-labour-reforms">faces stiffer resistance</a> to his latest batch of proposed reforms. </p>
<p>A government plan to prevent new hires at France’s state-owned national railway from being awarded the same generous benefits as current workers – such as early retirement, extra vacation time and lifelong employment guarantee – has been met with three months of strikes. Railworkers also oppose Macron’s decision to end the railway’s monopoly, <a href="https://www.reuters.com/article/us-france-reform-sncf/france-hit-by-second-day-of-rail-chaos-as-strike-bites-idUSKCN1HB1DA">opening it up to foreign competition by 2020</a>, in line with European Union rules. </p>
<p>At the same time, college students across the country <a href="http://www.france24.com/en/20180419-france-students-strike-macron-reforms-paris-university">are also protesting</a> a proposal to make university admissions more selective and merit-based. They have staged sit-ins, barricaded campuses and disrupted classes. </p>
<p>French medical workers and <a href="https://www.independent.co.uk/travel/news-and-advice/air-france-strikes-latest-news-flights-cancelled-passenger-delays-april-a8295661.html">Air France pilots</a> have now joined this broader strike movement. </p>
<h2>Challenges at home and abroad</h2>
<p>Union opposition is <a href="https://www.economist.com/news/leaders/21739959-president-must-be-firm-not-arrogant-railway-strikes-test-macrons-reforms">a significant first political test for Macron</a>. It comes at a critical time: A year into his presidency, Macron’s approval rate is <a href="https://www.politico.eu/article/emmanuel-macron-france-approval-ratings-hit-record-low-poll/">40 percent</a>. It was <a href="https://qz.com/1159399/emmanuel-macrons-approval-ratings-show-unprecedented-rise-in-popularity-in-france/">64 percent just after his election</a>. </p>
<p>Macron also faces challenges abroad. He campaigned as a uniter who would <a href="https://theconversation.com/french-election-highlights-a-deep-divide-on-the-european-union-77193">deepen European cooperation</a>. He has <a href="http://international.blogs.ouest-france.fr/archive/2017/09/29/macron-sorbonne-verbatim-europe-18583.html">championed the European Union</a> at a time when rising nationalism threatens to divide its membership.</p>
<p>Macron enjoyed early support from German Chancellor Angela Merkel, who has <a href="https://theconversation.com/is-the-world-ready-for-a-strong-german-leader-77442">emerged in recent years as the reluctant leader of Europe</a>. But Germany’s <a href="https://www.nytimes.com/2018/02/14/world/europe/german-coalition-merkel-schulz.html">new coalition government</a> disagrees <a href="https://www.ft.com/content/f7296d36-3ef4-11e8-b7e0-52972418fec4">with parts of Macron’s plans</a> to create a larger – and more flexible – European Monetary Fund that would offer countries bailouts to prevent a repeat of Europe’s continuing <a href="https://www.telegraph.co.uk/news/0/european-debt-crisis-not-just-greece-drowning-debt/">debt crisis</a>. </p>
<p>France’s strikes mark a particularly crucial juncture for Macron. If he faces down France’s powerful unions to implement his labor reforms, he will have achieved <a href="https://www.economist.com/news/leaders/21739959-president-must-be-firm-not-arrogant-railway-strikes-test-macrons-reforms">something none of his predecessors</a> could do. And that, I expect, is something Donald Trump could respect.</p>
<h2>Convincing Trump</h2>
<p>Trump is rolling out the red carpet for Macron’s visit: a private dinner at George Washington’s home, Mount Vernon, and a joint address to Congress.</p>
<p>Macron and Trump agree on several important foreign policy issues. France <a href="https://www.nytimes.com/2018/04/13/world/middleeast/trump-strikes-syria-attack.html">joined recent U.S.-led air strikes against Syria’s chemical laboratories</a> and both countries continue to cooperate well on counterterrorism.</p>
<p>But it is less clear that Macron can <a href="https://www.nytimes.com/2018/03/23/opinion/macron-trump-friendship.html">leverage his good relationship with Trump</a> to prevent a major breakdown over two important areas of discord: trade and Iran. </p>
<p>The U.S. administration temporarily exempted the European Union from its major tariffs on steel and aluminum imports announced last month, <a href="https://www.ft.com/content/e3924776-2e8b-11e8-9b4b-bc4b9f08f381">but this exemption is set to expire on May 1</a>. Trump has called on the European bloc to rectify what he deems “unfair” trade practices.</p>
<p>Macron is probably hoping to secure a permanent exemption for Europe while in Washington. But European leaders have stated their steadfast <a href="https://www.cnbc.com/2018/04/07/trade-tensions-between-eu-and-the-us-have-calmed-down-katainen.html">refusal to negotiate under what they consider blackmail</a>, so Macron has limited room to maneuver on trade.</p>
<p>Macron will also try to convince Trump to <a href="https://www.washingtonpost.com/politics/trump-expected-to-stay-the-course-on-iran-deal-but-add-new-penalties/2018/01/11/366004b6-f723-11e7-b34a-b85626af34ef_story.html?utm_term=.0549efad897b">stick with the 2015 Iran nuclear deal President Barack Obama signed along with France, the United Kingdom, Germany, Russia and China</a>. Trump has said the agreement has “<a href="https://www.reuters.com/article/us-iran-nuclear-decision/trump-issues-ultimatum-to-fix-iran-nuclear-deal-idUSKBN1F108F">disastrous flaws</a>” and gave Congress until May 18 to “fix” them. Otherwise, he has said, he will withdraw the U.S. from the deal. </p>
<h2>Do no harm</h2>
<p>The French president is a skilled diplomat, but still I find the odds of a breakthrough over trade and Iran unpromising. Donald Trump has historically paid little heed to his foreign counterparts’ input on global issues like <a href="https://theconversation.com/why-trumps-decision-to-leave-paris-accord-hurts-the-us-and-the-world-78707">climate change</a> and <a href="https://theconversation.com/in-brussels-leaders-wait-defiantly-and-nervously-for-trump-78283">NATO</a>.</p>
<p>Reports suggest that <a href="https://www.bloomberg.com/news/articles/2018-04-18/macron-heads-to-washington-with-iran-deal-hanging-in-the-balance">Macron himself is not very optimistic</a>. He probably hopes simply to avoid further damaging transatlantic relations by entering in a prolonged dispute on either subject – or, worse, on both. </p>
<p>A trade war would be very costly for the U.S. and Europe, which are <a href="http://ec.europa.eu/trade/policy/countries-and-regions/countries/united-states/">economically interdependent</a>. And if Trump withdraws from the Iran deal, it would both provoke and humiliate the United States’ European partners who spent <a href="https://www.armscontrol.org/factsheet/Timeline-of-Nuclear-Diplomacy-With-Iran">more than a decade</a> crafting this agreement. </p>
<p>The summit could not have higher stakes for Macron. He must realize <a href="https://www.brookings.edu/blog/order-from-chaos/2018/04/20/the-fate-of-the-western-alliance-is-in-macrons-hands/?utm_campaign=Foreign%20Policy&utm_source=hs_email&utm_medium=email&utm_content=62269944">that the fate of the more than a half-century-old Western alliance</a> might rest on his ability to sway Donald Trump in Europe’s direction – which will be no easy task.</p><img src="https://counter.theconversation.com/content/95022/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Garret Martin is editor at large at the European Institute and a board member for the institute's journal, "European Affairs."</span></em></p>Trump is rolling out the red carpet for Macron’s visit to Washington. But the French president has some tough talks ahead, as the two leaders discuss thorny issues like trade and the Iran deal.Garret Martin, Professorial Lecturer, American University School of International ServiceLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/929432018-03-06T12:07:06Z2018-03-06T12:07:06ZItaly’s new government has a huge economic challenge ahead<figure><img src="https://images.theconversation.com/files/209084/original/file-20180306-146655-1sa96zs.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Voters are set to be disappointed.</span> <span class="attribution"><span class="source">EPA-EFE/Ettore Ferrari</span></span></figcaption></figure><p>Italy’s general election delivered a result as <a href="https://theconversation.com/italy-election-what-we-know-so-far-about-who-could-form-a-government-92861">astonishing as it was predictable</a>. After 20 years of sluggish growth, a deep recession, a number of <a href="https://theconversation.com/how-brexit-opened-up-the-pandoras-box-of-italys-banking-malaise-62329">bank bailouts</a>, and a large influx of refugees <a href="https://theconversation.com/the-spectre-of-fascism-haunts-italy-after-attempted-massacre-forces-african-migrants-to-stay-indoors-91293">from across the Mediterranean</a>, Italian voters turned against the parties most recently in power. </p>
<p>They rewarded those with wildly optimistic goals to turn the struggling economy around. These voters are likely to be disappointed with the outcome.</p>
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<p>Both the Northern League party and Five Star Movement share a dislike for the European project, <a href="https://www.ft.com/content/e6a89252-1ffa-11e8-a895-1ba1f72c2c11">and distrust for “elites”</a>. They both toy with the idea of exiting the euro, and share an economic agenda of policies to redistribute wealth, such as introducing universal basic income and lowering retirement age. They also share protectionist ideas, with talk of introducing import tariffs, and stopping the (alleged) negative effect of immigration on natives’ salaries and public finances. </p>
<p>Both have a very expensive shopping list for extra spending, with little detail on how to fund these policies. They often resort to overly-optimistic estimates of how government spending can spur growth. </p>
<p>They also resort to an anti-EU narrative: “We’ll revise the EU treaties”, “We’ll scrap the <a href="https://ec.europa.eu/info/publications/fiscal-compact-taking-stock_en">EU fiscal compact</a>”. In other words: more deficit, and more debt. Yet public debt is something Italy already has in abundance, as it is now well above 130% of GDP. </p>
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<p>Unfortunately, many of the proposed recipes will do little to solve Italy’s longlasting problems, and possibly worsen others.</p>
<h2>Curing the ‘Italian disease’</h2>
<p>New <a href="http://faculty.chicagobooth.edu/luigi.zingales/papers/research/Diagnosing.pdf">research</a> by Bruno Pellegrino and Luigi Zingales explored the origins of this <a href="https://theconversation.com/italys-economy-has-cronyism-disease-but-will-its-next-government-treat-it-92807">“Italian disease”</a> of slow growth and stagnating salaries. The research highlights what Italy needs now – and what Italy is not very likely to get with its new government.</p>
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<p>The authors don’t point their fingers beyond the Alps, towards Brussels, the European Central Bank or the German chancellor. Looking at Italian company data across sectors, they establish that one of the main causes of the sluggish Italian economy can be found by observing how firms reacted to the ICT “revolution”. </p>
<p>Italy has been slow to take advantage of the productivity gains created by this technological progress. Investment in ICT has been comparable to other neighbouring countries, but its full exploitation has been limited by a number of factors. One is the sheer old age of managers, as pointed out by <a href="http://journals.sagepub.com/doi/abs/10.1177/0019793915586971?journalCode=ilra">other research</a>, but also the lack of meritocracy within firms and the inefficiency of local and central governments. </p>
<p>Non-meritocratic, loyalty-based systems are common in Italy. And bribery and tax evasion <a href="https://www.business-anti-corruption.com/country-profiles/italy">are widespread</a>, which exacerbates this.</p>
<p>The inefficiency of Italy’s government is best understood by looking to the country’s civil courts. It takes just over a year to have a tribunal decide on a civil case, more than 800 days <a href="https://www.giustizia.it/giustizia/it/mg_2_15_4.page">in case of appeal</a>. Even more worryingly, Bruna Szego from the Bank of Italy <a href="https://www.bancaditalia.it/pubblicazioni/quaderni-giuridici/2008-0061/quarigi_61.pdf?language_id=1,%2520">calculated</a> that 50% of appeals are successful – so the appeal reverses the first judge’s decision. This is dangerously high. It makes the use of court too similar to a lottery, and opens the door to recourse to justice for frivolous litigation as a delaying tactic. </p>
<p>This has a significant effect on firms’ performance. In their <a href="http://www.bancaditalia.it/pubblicazioni/temi-discussione/2013/2013-0898/en_tema_898.pdf">working paper</a>, Silvia Giacomelli and Carlo Menon compared Italian firms in neighbouring localities, which are in different judicial districts, and found that the more efficient the judiciary, the better effect it has on firms’ employment and productivity. Needless to say, these problems are present across Italy, but more strongly so in its southern part. </p>
<p>As another example, take the educational attainment system, as measured by PISA test scores in maths. </p>
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<p>This is on average comparable with other OECD countries, but shows once again the huge territorial divide between the north and south, with students in the northern region of Trentino showing attainment similar to that of Japanese or Korean students. Calabrian students in the south, on the other hand, enjoy a similar level of attainment to Turkish or Mexican children.</p>
<p>All of these problems – the lack of meritocracy, the inefficiencies of the civil service, corruption – which are exacerbated by the territorial differences, call for action. Italy’s productivity crisis needs to be tackled by reforming the civil service, incentivising investment in human capital both in schools and in the workplace, and attracting foreign investors. Toying with a euro break-up and setting out poorly planned spending sprees is not going to be of much help.</p><img src="https://counter.theconversation.com/content/92943/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Emanuele Bracco does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Both the Northern League party and Five Star Movement have a very expensive shopping list for extra spending, with little detail on how to fund these policies.Emanuele Bracco, Senior Lecturer in Economics, Lancaster UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/855572017-10-12T13:41:57Z2017-10-12T13:41:57ZCatalonia, Spain and the economic consequences of a split<p>The prospect of Catalonia seceding from Spain has <a href="http://www.bbc.co.uk/news/world-europe-41588819">never looked closer</a>. Following a <a href="https://theconversation.com/violent-scenes-in-catalan-referendum-were-not-the-return-of-spains-francoist-police-85073">messy referendum vote</a> on the matter (which the Spanish government refused to recognise but sent police in to prevent from taking place) and a series of protests, there seems to be a real possibility of a split taking place. But what might the economic consequences be?</p>
<p>In terms of size and population, Catalonia is comparable to several European countries, such as Switzerland. Although it has 16% of the Spanish population, it generates 19% of Spain’s GDP <a href="https://www.oecd.org/edu/imhe/46827358.pdf">and 25% of its exports</a>. Its GDP per person is currently 14% higher than the EU average (but slightly below that of other regions of Spain such as the Madrid region, the Basque Country and Navarra). Meanwhile, the rest of Spain has a GDP per person of about 10%-15% below the EU average. Unemployment is also lower in Catalonia than in the rest of Spain, and similar to that of the region of Madrid.</p>
<p>This means that Catalonia, as well as the new Spanish state that emerges from a split, could be perfectly viable countries on their own. There would, of course, be economic consequences for both following a split – but these may be worse in the short-term than the long-term.</p>
<h2>Tax and spending</h2>
<p>In terms of tax collection, Catalonia would immediately gain and the rest of Spain would lose from secession. This is because Catalonia transfers significantly more to the central Spanish government than it gets in return in the form of public services and investment. Some <a href="http://www.wilson.cat/ca/mitjans-escrits/articles-dels-membres/item/210-el-dividend-fiscal-de-la-independencia.html">estimates</a> suggest that Catalonia transfers up to 8% of its GDP a year. </p>
<p>Part of the gain would most likely be used by the new Catalan state to repair an underfunded railway system and other infrastructure that successive Catalan governments and think tanks <a href="http://www.cambrabcn.org/en_US/web/cambra-english/barcelona-chamber">claim to be critical</a>. For example, in the port of Barcelona and the railway system that connects Barcelona with cities across the Mediterranean. </p>
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<img alt="" src="https://images.theconversation.com/files/189969/original/file-20171012-31422-cj3cn5.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/189969/original/file-20171012-31422-cj3cn5.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/189969/original/file-20171012-31422-cj3cn5.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/189969/original/file-20171012-31422-cj3cn5.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/189969/original/file-20171012-31422-cj3cn5.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/189969/original/file-20171012-31422-cj3cn5.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/189969/original/file-20171012-31422-cj3cn5.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">Catalonia wants more investment in key infrastructure like the port of Barcelona.</span>
<span class="attribution"><span class="source">shutterstock.com</span></span>
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<p>Spain as a whole is still suffering economically, following the financial crisis. While the Catalan government would agree that it should play a role in redistributing its wealth, there is a <a href="https://www.bookdepository.com/Espanya-capital-Par%C3%ADs-tots-els-camins-porten-Madrid-Germa-Bel-I-Queralt/9788496735521">widespread feeling</a> within the region that the central government has spent public funds on inefficient, politically-motivated infrastructure investments elsewhere.</p>
<p>Catalonia would of course need to invest in creating new state structures, such as embassies and a central bank. This may cost more than what Catalonia pays now as a proportion of the same structures for a larger state. Conversely, the new Spanish government could use the split as an opportunity to simplify its own administrative structures, as the preferences of the rest of the Spanish population would be more homogeneous without Catalonia. </p>
<h2>Negotiating the split</h2>
<p>Another issue is government debt. The new Spanish state and Catalonia would need to negotiate the allocation of joint assets and liabilities. Currently, most of the public debt in Spain is issued by the Spanish government. The Catalan government has a relatively small public debt of its own, on top of its proportional share of the Spanish government debt, which Catalonia would probably also need to take on as part of the split negotiation. </p>
<p>The Catalan government would probably need to seek funding from financial markets. This could be possible if it becomes an independent state which raises its own taxes. Although the new Spanish state may be in a worse financial situation than it currently is, it would retain the support of the European Central Bank. </p>
<p>In the short-run the split may be costly, as both sides may also face economic uncertainty and disruptions to trade, as their populations may boycott each other’s goods and services (as has happened <a href="http://www.nytimes.com/2006/03/13/world/europe/a-war-of-words-over-catalonia-sets-off-a-war-of-wine.html">at previous times of tension</a>). Because of the size difference, Catalonia would end up suffering more from this (the rest of Spain accounts for one third of Catalan exports). </p>
<p>But it is unclear how long boycotts would last, and how restrictive they might be. Businesses may also search out other markets, as they have even in the recent past. Exports of Cava from Catalonia to other countries, for example, increased substantially following an informal boycott <a href="https://econpapers.repec.org/article/bpjbejeap/v_3a16_3ay_3a2016_3ai_3a1_3ap_3a185-218_3an_3a3.htm">from the rest of Spain ten years ago</a>. </p>
<p>A key factor is whether Catalonia could gain independence and remain in the EU. If Catalonia were to remain as part of the EU, not much would change for either side. If it were required to remain outside the EU for a period of time, it would need to negotiate trade agreements with the new Spanish state and the rest of the EU.</p>
<p>Despite the inevitable transition costs for both sides, there may also be some benefits to a split. The new Spanish state would lose a dynamic economy with better economic indicators than its average in terms of GDP, unemployment, exports and innovation. But this may trigger greater economic development and modernisation in its remaining regions. The new Spanish state may gain in the long run if the preferences of its citizens are more homogeneous and better aligned with the central government than at present. </p>
<p>Needless to say, prior to independence, both parties may have vested interests in using economic and non-economic threats against each other. After secession, however, mutually beneficial agreements would unavoidably be pursued. In any case, both new states are viable, and they could well be better off in the long run.</p><img src="https://counter.theconversation.com/content/85557/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Despite the inevitable transition costs for both sides, there may also be some benefits to a split.Mireia Jofre-Bonet, Professor in Economics, City, University of LondonAlbert Banal-Estanol, Professor in Economics, City, University of LondonLicensed as Creative Commons – attribution, no derivatives.