Thursday

11th Aug 2022

Greek drama heightens debate on economic co-ordination

The Greek drama currently being played out in financial markets across the globe has brought the eurozone's weaknesses into sharp relief, with greater economic co-ordination increasingly touted as a possible solution.

The recent financial crisis has also served to highlight the multitude of structural flaws embedded in the wider EU economy, with the bloc's permanent president, Herman Van Rompuy, amongst those advocating a European 'economic government'.

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  • Rowing together: Greater economic co-ordination is needed say many politicians and analysts (Photo: loic.photo)

Greater convergence of economic policies, it is argued, will boost EU growth and job numbers in years to come, and prevent weaker eurozone members from being forced out of the single currency.

The EU's new economic 10-year plan, currently being thrashed out by national capitals and EU institutions, appears the obvious method to achieve this greater convergence, although tough implementation mechanisms are seen as key to the plan's success.

Last month the Spanish EU presidency declared its support for binding mechanisms to ensure national capitals meet their allotted targets in areas such as research and innovation, although Berlin quickly poured cold water on the idea saying it risked creating further bureaucracy.

Yet with EU leaders recently indicating that a euro area bailout for Greece would be available if needed, some in Europe feel the tide is moving in the direction of greater co-ordination.

Amongst them is Edouard Balladur, a former centre-right French prime minister and close associate of President Nicolas Sarkozy. "We are at a crossroads," he told French daily Le Figaro on Wednesday. Mr Balladur believes each eurozone member should have to submit its annual budget to the 16-country bloc for majority approval.

Others are less convinced of the significance of last week's declaration on a possible Greek bailout. "They didn't spell out how they will do it. Only when they tell us this could you say it was a step towards increased economic co-ordination," Edin Mujagic, a monetary economist at ECR Euro Currency Research and Tilburg University, told this website.

Eurozone track record

Recent research conducted by Mr Mujagic shows the eurozone's track record is far from perfect. Set up in 1999, one of the currency framework's aims was to narrow economic difference between members.

Instead, inflation and growth rates have diverged more significantly, shows the study, with a similar widening seen for other economic variables such as productivity, labour costs, unemployment and debt levels. The European Central Bank's "one size fits all" interest rate policy is partly to blame, says Mr Mujagic.

"The fact that interest rates in the euro area started too low has led to imbalances in southern European states," he stressed, pointing to Spain's current account deficit as an example. He agreed however that economic co-ordination is what is needed. "If we don't establish some form of economic government, I wouldn't be be too optimistic for the survival of the euro area."

During the 1990s, many economists questioned whether a monetary union was possible without first establishing a greater political union. They pointed, and still do, to the different fiscal systems used in member states, and the imperfect movement of labour due to Europe's many languages.

Speaking in Brussels earlier this week, Greek finance minister George Papaconstantinou neatly summed up the dilemma. "For a common currency area to work you need a convergence of economic policy ...or else you need compensation flows between member states," he said.

"In the eurozone they have ruled out option two, but at the same time we also don't have a clear path for economic policy convergence," he added.

Observers say the EU's 2020 economic strategy is the clear path, but few are optimistic EU leaders will agree to the binding mechanisms necessary to make it work.

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