AUTUMN 2015 AUTUMN THAT SINKING FEELING Stefan Kawalec THE EURO AS A THREAT TO EUROPEAN INTEGRATION Brigitte Granville THE IMF AND THE EUROZONE: FIREMAN OR ARSONIST RECOVERY Jean-Jacques Rosa Alberto Bagnai GIVING GREECE “AUSTERIANS” VS. A CHANCE “APPEALIANS” Joachim Starbatty Hans-Olaf Henkel HAS GERMANY THE EURO-RESCUE BENEFITED FROM POLICY AND THE EURO? BREXIT THE EURO HAS PROFOUNDLY CHANGED Tomasz Poreba is a Member of the European Parliament and President of New Direction – The Foundation for European Reform. EUROPE he introduction of the euro was supposed to strengthen the process of European integration. Unfortunately, although the euro has become one of the most visible symbols of the EU, the T number of harmful consequences is growing. The euro has distorted the way in which the economies of Spain, Portugal, Italy and Greece function. Moreover, the countries of southern Europe, as members of a currency union cannot use currency devaluation, the most powerful instrument for coping with a serious economic depression. Economic history teaches us that having your own currency is essential for a country facing a severe economic crisis, but appropriate reforms must follow devaluation to make a recovery sustainable. There can be little doubt that the euro has profoundly changed Europe. A deeper reflection on the nature and consequences of the monetary union in Europe is unavoidable. Today, more than ever before, we can see that the euro has still not improved the economic situation in the European Union. It was clearly a political rather than an economic project. The single currency, instead of accelerating Europe’s prosperity, has deepened divisions between EU member states. The introduction of the euro resulted in the disappearance of exchange rates risk within the eurozone and a sudden and massive inflow of capital to southern Europe.As a consequence, wages grew much faster than productivity and southern Europe lost its international competitiveness. The problem of competiveness is at the heart of the eurozone crisis. The euro has affected not only eurozone countries, but also the rest of the European economy. Eastern Europe is also influenced by the economic consequences of the euro, as its largest trading partners suffer from economic growth below the potential caused by the euro and the euro- rescue policy. What is more, the euro is responsible for constant calls to transfer more powers to Brussels, and diminishing the role of the principle of subsidiarity in the European project. With all views and analyses included in the New Direction magazine, I hope this publication will be a helpful tool in raising awareness of the economic and political ramifications of the single currency for the European Union. Tomasz Poreba GUEST EDITOR TABLE OF CONTENTS 6 10 14 20 Stefan Kawalec Brigitte Granville Jean-Jacques Rosa Zdzisław Krasnodębski The Euro as a threat to The IMF and the Eurozone: Giving Greece a Chance: European Monetary he eurozone crisis is European integration Fireman or Arsonist Grexit and the case for cooperation disunion among the greatest challenges facing the European Union. Many Teurozone countries, especially those in Southern Europe, are saddled with unemployment comparable in scale to that during worst days of the Great Depression of the 1930s. The very nature of the EU is being transformed: calls for a more centralized eurozone backed by a fiscal union feature centrally in the European political debate. The present euro-rescue 24 27 30 33 policy continues to prove itself an unmitigated failure. Alberto Bagnai Jacques Sapir Joachim Starbatty Jean-Pierre Vesperini “Austerians” vs “appealians”: The Euro and the current Has Germany benefitted The Euro’s Impact New Direction has invited The two sides of the austerity tale non-democratic shift from the Euro? on France leading economists and public intellectuals from a wide range of economic and political schools of thought—though all critical of the euro - to contribute essays assessing the eurozone crisis. It is time for an honest debate about the costs of the euro to take place in Europe, as its consequences impact non-euro countries, as well. New Direction is pleased to publish these essays, each of which combines clear, scholarly analysis with creative, 40 44 48 52 36 courageous thinking—precisely the qualities which the Peter M. Oppenheimer Hans-Olaf Henkel Roland Vaubel David Liebers Antoni Soy European political discussion Impact of the Euro: The Euro-rescue Banking Union: A Tale of Two Lefts The Illusion of the The View from Britain policy and Brexit A Breach of Faith and the Euro Spanish Recovery needs most. New Direction – The Foundation for European Reform, a non-for-profit organisation (ASBL/VZW) registered in Belgium and partly funded Hans-Olaf Henkel www.europeanreform.org follow us @europeanreform by the European Parliament. Registered Office: Rue D’Arlon 40, Bruxelles, 1000, Belgium. Director General: Naweed Khan. The European Parliament and New Direction assume no responsibility for the opinions expressed in this publication. Sole liability lies with the author. THE EURO AS A THREAT TO EUROPEAN INTEGRATION Stefan Kawalec 1 urope can be proud of in Poland in the domestic currency was 105% in Germany, 108% in the its achievements in the remained unchanged, in terms U.S., and 124% in Poland. second half of the 20th of the currencies of the country’s century. After the terrible trading partners, they declined by Trade and current account deficits in Eexperience of two world wars, the 30%. This was probably the most the southern countries were mostly creation of the European Union important factor which enabled eliminated, but this was largely the and the common market were Poland to enjoy positive economic effect of depressed domestic demand. remarkable political and economic growth in 2009, when all other Wages declined much less than successes. However, these EU economies contracted. Today, necessary. At their present levels, achievements are currently being Poland continues to benefit from the current accounts can be balanced endangered by the adverse effects improved competitiveness obtained only if the southern economies do of the introduction of the euro. 2 as a result of the adjustment of the not utilize their potential, and rates exchange rate in 2008/2009. of unemployment remain at elevated levels. A higher utilization of the RESTRAINTS OF The Eurozone countries in countries’ economic potential would COMMON CURRENCY crisis cannot improve their automatically result in a reappearance ARE PAINFUL IN TIMES competitiveness through currency of a substantial current account deficit. OF CRISIS depreciation. Instead, they have Therefore, southern countries have been trying to implement a so the prospect of the continuation of When the euro crisis erupted in called ‘internal devaluation,’ the ‘internal devaluation’ policy in the 2010, one of the main problems which is in fact an ordinary coming years. of the affected Eurozone deflation policy. The main tool of southern countries was the loss this policy is fiscal tightening i.e. of international competitiveness. reducing government spending and A FRIGHTENING It was estimated that in order increasing taxes in order to weaken ANALOGY WITH THE regain competitiveness and repair domestic demand with the hope GREAT DEPRESSION their trade and current account that this will result in a decrease of balances, Greece, Portugal, Italy domestic prices and wages. There is a dreadful parallel and Spain needed to bring their between today’s ‘internal wages down by 20-30%. If these However, as economists have devaluation’ policy applied in countries had their own currencies, known for decades, wages are order to defend the euro, and the such substantial improvements in inflexible downwards. When deflation policy applied in order competitiveness could have been demand falls, companies reduce to defend the gold standard in the accomplished relatively quickly employment, and nominal interwar period. In Great Britain, a via currency deprecations, like the wage cuts are rare. The internal six-year policy of deflation (1925- one implemented in Poland, which devaluation policy resulted in a 1931) was unable to correct prices 1. The author is the CEO of Capital Strategy, a 05-14/save-europe-split-the-euro.html European Market”, German Economic Review, strategy consulting company in Poland, and a • B. Granville, H.-O. Henkel and S. Kawalec, 14 (1), February 2013, p. 31-49. is a member of the EU but not of decline in GDP and employment. and wages, that were overvalued former vice-minister of finance of Poland. ‘France Must Lead Breakup of Euro’, Bloomberg • S. Kawalec and E. Pytlarczyk, “Controlled the Eurozone. At the peak of the Compared to 2007, GDP in 2014 was by about 10%, i.e. three times less 2. This article draws from the following texts that View, May 16, 2013. http://www.bloomberg. Dismantlement of the Eurozone: A Proposal also discuss other aspects of the topic: com/news/2013-05-15/france-must-lead- for a New European Monetary System and world financial crisis in 2008/2009, 74% in Greece, 91% in Italy, 93% than the overvaluation that the breakup-of-euro.html a New Role for the European Central Bank”, • B. Granville, H.-O. Henkel and S. Kawalec, ‘Save • S. Kawalec and E. Pytlarczyk, “Controlled National Bank of Poland Working Paper No 155, the Polish zloty depreciated by in Portugal, and 95% in Spain. For Eurozone southern countries are Europe: Split the Euro’, Bloomberg View, May 15, Dismantlement of the Eurozone: A Strategy Warsaw 2013. http://www.nbp.pl/publikacje/ 2013. http://www.bloomberg.com/news/2013- to Save the European Union and the Single materialy_i_studia/155_en.pdf. about 30%. Thus, although wages comparison’s sake, this same ratio currently coping with. 7 countries/regions, but rather it is a way election in a member country may NEITHER THE EU NOR to permanently finance the deficits potentially shake the Eurozone.