The Eurozone will not fall apart, because the price of getting out of the game is too high for each country. When, in early September, it was announced that the ECB would buy government bonds in unlimited quantities, the bridges behind the Euro area countries have collapsed. There is no way back, and this means that one can only move forward and fight for their own happiness.
In order to make the path easy, the monetary union must be supported by four other unions: banking, fiscal, converged and political. To be sustainable in the long-term, political economy will have to fight for its present.
It is a long and ambitious list, but the more the experts think of the situation in Europe, the more inevitable such findings seem, said Professor Klaus Schwab, Founder and Executive Director of the World Economic Forum.
“Since the signing of the Treaty of Paris between Belgium, France, Germany, Italy, Luxembourg and the Netherlands in April of 1951, European integration became more intense. Can we imagine the history of Europe without the development of institutions designed to unite the European countries under the banner of shared values and common ideals? It is inconceivable.
The Euro provides major economic benefits: elimination of currency risks, lower inflation, growth of trade in the euro area and the closer integration of the European financial markets. In general, the single currency has contributed to monetary stability and predictability, which is often overlooked in the current debate.
At the same time, the crisis has revealed a number of shortcomings in the structure of the euro area. Europe lacks a strong and unified fiscal policy, the differences in competitiveness between North and South of the region brought the threat of a default, and the lack of a bank union gave rise to systemic risks. Add to this the complexity of European political institutions, lack of democracy, and here is the result: failure to make real decisions.
Clearly, the Euro will survive in its current form, but there is a need to deal with the problems in the surrounding institutions. First, it is a banking union. Without it, the currency will simply not succeed. Solid banking associations should implement banking supervision, mechanism of recapitalization and guarantees for bank deposits. The good news is that the first item is already being implemented. On September 12 it was proposed to create a single regulatory body under the auspices of the European Central Bank. The last two items would require lengthy negotiations that could take years.
Talks about creating a bank union will inevitably lead to a discussion of a fiscal union, as they both complement each other – a bank union would not make sense without a fiscal union. Any fiscal union in Europe would inevitably include three components: direct bank recapitalization program, the European system of deposit insurance that would help banks in weaker countries, and some form of debt offsets.
It is important not to go into extremes – “all or nothing”. Between a complete absence of fiscal union and self-sufficiency of the U.S. or Switzerland there is a number of possible intermediate options that could contribute to the development of financial solidarity and discipline.
A reform of the European finance management is a necessary, but insufficient condition for success. It will not solve the main issue posed by the crisis: the gap in competitiveness between the north and the south. Strengthening of the EU’s banking system and restoration of the macroeconomic stability will help southern countries to increase their productivity, but they themselves have to take part in this long-running project to make its labor market more flexible, and investment in education and innovation more significant.
The return of the entrepreneurial spirit of the “lost generation” should be the most important consequence of these reforms. The unemployment rate among young Europeans is a cancerous tumor on the body of the economy. This is theft of their future and undermining of the potential growth in the decades ahead.
A positive moment is that the reforms continue. Despite a rather slow progress, the plan “Europe 2020″ is quite capable of giving boost to the competitiveness of the region. I believe that the direction is clear, and that European leaders will begin looking at the future with hope, and that Europe will be able to shame the pessimists.”