State of the Union shows EU’s tied hands


The audience listening to Mr. Barroso’s speech while bestowed with full democratic legitimacy, enjoys limited powers and a dismal record for enforcing something more than its own petty prerogatives.The daunting crisis has flatly exposed the severe shortcomings of a European scheme intended to foster integration but lacking a credible toolkit for repairing massive disruptions in the internal market.

Ambitious plans to provide a sense of common purpose sacrifice once and again inner consistency to reach consensus, the flaws surrounding the common currency standing as the best example. Harnessed by a monetary policy exclusively aimed at trimming inflationary bouts, the Euro only stood a decent chance to run smoothly in an expansionary environment. Lacking any mean to enforce a consistent fiscal and economic stance, the bonanza years yielded the false sentiment that any imbalance could be easily financed. Country risk was shrugged off as an old fashioned angst, the single currency providing a safe shield against any unpleasant surprise.

In short, the allocation of resources paid little attention to potential dangers linked to bubble-propelled processes in most Southern countries. Flows of cheap money, never witnessed before by these economies, fueled a real estate and consumption led growth financed by rapidly expanding indebtedness. Banking institutions added fuel to the fire by frantically channeling savings from surplus countries to this new Eldorado. As the crisis unraveled doubts on solvency quickly turned into a stampede for safety. What followed is all too well known.

Barroso proudly claims that confronted with formidable challenges the Euro has survived, Greece and other peripherals escaping from looming bankruptcy. No country has left the common currency area while new members wait at the door. But such a complacent summing up conceals the dire cost inflicted to growth and employment by the desperate salvage plans aimed at keeping the ship afloat.

Unwinding piled liabilities fulled a deep-rooted recession driving public finances to unsustainable deficits in lagging-behind countries. The harsh discipline implemented for curbing budget imbalances on a tight time schedule has only made things worse. Germany finally imposed across the Euro zone its highly prized fiscal neutrality thus closing previous loopholes that prevented monetary stability from ring-fencing itself against profligate governments. So be it, but don’t expect this new policy-mix to address recession or delivering growth.

Only the central bank has the stamina to invigorate an ailing economic outlook. Last year, talking boldly to the markets, it prevented the Euro from collapsing. But subject to Berlin’s close scrutiny it lacks the ability to run a vast and lasting recovery drive as the one the Fed is implementing. This state of play leads to place all hopes on structural reforms in an effort to enhance competitiveness.

Introducing extra flexibility in the economy is indeed welcome. But unless confidence picks up and reverses the current dampened demand, there is little hope to anchor growth on a solid basis. A sound and responsive macroeconomic management, rather than reducing it to a merely neutral stance, stands as the only way to solve Europe’s woes.

About the Author

JP Marin Arrese
Juan Pedro Marín Arrese is a Madrid-based economic analyst and observer. He regularly publishes articles in the Spanish leading financial newspaper 'Expansión'.

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