Tag Archives: Eurozone

Greece’s Economic Future

Less than a week after International Monetary Fund chief Christine Lagarde accused the Greek government of failing to negotiate in good faith, it appears Greece, the IMF and the European Union are no closer to reaching a deal to restructure or postpone Greece’s looming debt crisis. Greece faces a massive €1.6bn payment due on June 30. The Greek government has already indicated it will not be able to make the payment, an option the IMF says is not acceptable.

The Greek government has several options. It may compromise with the European Union and the IMF and cut spending on social services as part of a wider austerity package. But according to the Greek government, the effects of such a move would be devastating. Equally important from their perspective, it would violate a central campaign promise made by the center-left government less than a year ago.

If no agreement can be reached by June 30, Greece could default on its loan payment. If Greece defaulted, it could be forced to exit the Eurozone. No country has ever left the Eurozone so it is unclear what that process would look like or who would be responsible for making that decision.

What do you think? Can Greece reach an agreement with the EU and the IMF to avoid default? What might that deal look like? Or is Greece better off defaulting on its loan payments? Why?

The Future of Britain and the European Union

Britain's Prime Minister David Cameron

Britain’s Prime Minister David Cameron

The hostage crisis in Algeria forced British Prime Minister David Cameron to delay a long-awaited speech outlining his government’s view of the future of British involvement in the European Union. Nevertheless, in a truncated address over the weekend, Cameron asserted that the European Union is undergoing a process of “fundamental change,” and that a central component of that change must be addressing the “gap between the EU and tis citizens which has grown dramatically in recent years and which represents a lack of democratic accountability and consent that is—yes—felt particularly acutely in Britain. If we can’t address these challenges,” Cameron stated, “the danger is that European will fail and the British people will drift toward the exit.”

Cameron stopped short of calling for a referendum on British membership in the European Union, as some in his party had been calling for. Nevertheless, the thought that a sitting British Prime Minister would contemplate leaving the E.U. has caused concern on both sides of the Atlantic. According to the British Mail Online, President Barack Obama called Prime Minister Cameron, urging him to express his commitment to British membership in the EU and noting that the European Union has spread “peace, prosperity and security” around the world.

The idea that the European Union suffers a democratic deficit is longstanding. A democratic deficit occurs when organizations (like the United Nations or the European Union) fall short of living up to the principles of democracy and representation to which they are ostensibly committed. In the case of international organizations like the EU, the relative weakness of popularly-elected institutions (the European Parliament) vis-à-vis the power of the major players (the European Commission and the European Council) often lead to assertions of a democratic deficit. Yet the structure of the European Union privileges the position of Member States relative to the position of European citizens. The most powerful institutions within the European Union, in other words, are beholden to the governments of Europe rather than directly to its people.

So why all the fuss?

Cameron is likely responding more to domestic British politics than to changing dynamics or concerns at the European level. Certainly the ongoing economic crisis in Europe is a reason for concern. The threat of a Eurozone meltdown (led by Greece, but fueled also by Spain, Portugal, and perhaps even France) give reason for pause. But Britain is not a member of the Eurozone and consequently maintains considerable economic and fiscal policy autonomy.

Rather, the growing influence of euroscepticism on the domestic British political scene likely plays a greater role. More specifically three trends are driving policy reform. First, the traditional pro-free trade elements of the Conservative party have increasingly been challenged by more Eurosceptic elements, including the Cornerstone Group, which claims some fifty conservative MPs as members, including several members of the cabinet. Second, the rise of several small parties, including the UK Independence Party and the British National Party, have exacerbated these concerns. Finally, a broad level of euroscepticism appears to be gaining support among the British electorate. According to recent public opinion polling, half the British population now supports British withdrawal from the European Union.

Importantly, the United Kingdom is not alone in this respect. Eurobarometer polling data show that popular support for EUY membership was waning across many EU member states, most notably in Latvia, Hungary, and the UK, in which all are home to a majority population opposing EU membership. Every EU member state now has at least one political party with an anti-EU platform.

All of this raises questions about the future of the European Union. What do you think? Does has European integration hit is high water mark? Are we now witnessing the beginning of the end of the EU? Or does all this talk of withdrawal merely represent politically maneuvering and bluster? Take the poll or leave a comment below and let us know what you think.

The Greek Option: Monetary and Fiscal Policy

German Chancellor Angela Merkel meets with Greek Prime Minister Antonis Samaras in August.

German Chancellor Angela Merkel meets with Greek Prime Minister Antonis Samaras in August.

The Greek government met with the European Union, the European Central Bank, and the International Monetary Fund over the weekend. The meeting between Greece and the troika was intended to clarify requirements to qualify for the next round of bailout funds. Greece has already committed to more than 11.5bn euros in spending cuts and another 2bn euros in tax revenue. But Prime Minister Antonis Samaras concedes Greece is unlikely to meet expectations imposed by international lenders.

The challenge for Greece is that the plan is highly unpopular, and the country has been rocked by several rounds of widespread protest. The Greek economy has collapsed, contracting by 20 percent over the last year alone. Yet absent external relief from the IMF and EU, Greece faces the prospect of bankruptcy and potential expulsion from the eurozone. And outside of Greece, observers in Spain, Portugal, and other troubled eurozone economies are watching developments closely.

The current conundrum in Greece illustrates some of the economic challenges of the common European currency. In normal times, a common currency presents clear benefits. It facilitates closer and more efficient management of the economy, reduces transaction barriers and cost of trade between countries sharing the currency, and can help to reduce economic uncertainty.   Indeed, when the euro was adopted as the exclusive currency in the eurozone in 2002, it was highly popular, and many eurozone members enthusiastically embraced the new currency.

At the same time, though, the common currency presents a key challenge, particularly during economic downturns. Traditionally, governments have two economic toolkits available to them. Fiscal policy, advocated most famously by John Maynard Keynes, focuses on the use of government revenue (taxation) and expenditures (spending) to influence economic activity in the country. Keynes argued that in good times, governments should run a budget surplus so that during poor economic times, it would have ample revenue to spend, including running a deficit, and prevent a deep recession or depression.

Monetary policy, on the other hand, focuses on manipulation of the money supply, often through interest rates, to promote economic growth and stability. Monetary policy, which was most famously promoted by Milton Friedman, provides that governments should lower interest rates to promote economic growth, but should engage in contractionary policies (including raising interest rates) to prevent the economy from overheating. Above all, monetary policy focuses on maintaining a stable money supply and money value, and keeping inflation as close to zero as possible.

In practice, governments regularly use a combination of both monetary and fiscal policy to manage economic growth and stability. However, the eurozone encompasses a wide range of countries and economies, ranging from the economic powerhouse of Germany to the crisis-ridden economies of Greece, Spain, and Portugal, to a large number of smaller economies somewhere in the middle. The question of how to balance competing demands across all eurozone economies presents a challenge. The monetary policies that would maintain economic stability and growth in Germany are different from the monetary policies that might be used to prevent economic collapse in Greece. Consequently, the European Central Bank faces the challenge of finding a fine line to walk between the two.

The other challenge, of course, is that because Greece is a member of the eurozone, it effectively has cut off one of the two primary economic policies governments might use to address the economic crisis. While the Greek government can continue to use fiscal policy, its ability to use monetary policy to address the crisis is sharply limited by the fact that the Greek government does not control the Greek currency.

Not that leaving the eurozone would make things better for Greece. For now, it appears the Greek government is committed to remaining in the seventeen nation eurozone, and the German government is committed to helping Greece remain there. But if Greece is unable to reach agreement with the troika, exiting the eurozone, either on its own terms or aftering being forced out by the other members, may be Greece’s only option.

What do you think? Do the benefits of eurozone membership outweigh the costs for the Greek government? Should Greece make the sharp spending cuts demanded by the international community to remain part of the eurozone? How would Greece leaving the eurozone affect future economic developments in other troubled European economies, like Spain and Portugal? Let us know what you think by leaving a comment or answering the poll question below.

Greece, France, and the Perils of State Sovereignty

President-elect Francois Hollande will become France’s first Socialist president in nearly two decades.

Sunday’s elections in Greece and France have sent shockwaves through Europe. The election of candidates who reject austerity (tax increases and painful spending cuts) as the path out of Europe’s financial crisis will affect Greece’s ability to make good on the conditions of its bailout and herald a clash between German leader and austerity champion Angela Merkel and the newly elected French president, Francois Hollande.

There is even talk of Greece leaving the eurozone. As reported in the LA Times today, Alexis Tsipras of the Radical Left Coalition, or Syriza, “called on other political forces in the country to ‘end the agreements of subservience’ threatening more job cuts in the coming weeks. ‘The bailout parties no longer have a majority in Parliament to vote for measures that plunder the country,’ Tsipras told reporters in Athens after laying out a five-point plan for a new government he hopes to form with other leftist forces. It includes ‘immediate cancellation’ of further public spending cuts and a moratorium on debt servicing…Those cancellations would include the 150,000 state job cuts and $14 billion in new austerity measures expected next month in order for Greece to get the latest tranche of a bailout deal reached last year.”

The reason why the European Union, the International Monetary Fund, and other International Governmental Organizations (IGOs) cannot just impose their will on member states and force them to abide by their commitments is the continued dominance of state sovereignty in world politics. Sovereignty has been a bedrock principle of the international system since the Treaty of Westphalia in 1648, and it allows states’ governments to rule as the ultimate authority within their borders. While sovereignty protects states’ independence and helps to minimize external interference, it plays havoc with attempts to create authoritative supranational rules and bodies to deal with issues including human rights, trade, and arms control.

What do you think? Does the public rejection of austerity measures in Greece, France, and elsewhere make the end of the 17-member eurozone inevitable? Take the poll below and let us know your thoughts.

Economic Globalization Meets Shaky Economies: Fasten Your Seatbelts

Traders on the floor of the New York Stock Exchange on Thursday, when the Dow plunged more than 500 points.

Dramatic developments over the last few days have once again highlighted the interconnectedness of the world’s economies and the ease with which economic problems in one corner of the globe can quickly spread to others. Globalization refers to the integration of markets, cultures, and information networks and it has accelerated in recent decades with advances in communication technologies and increased global trade.

As reviewed in this timeline from BBC news, the 2007-2008 global financial crisis began with the sub-prime mortgage collapse in the United States, but economic turmoil quickly spread to Europe and beyond as banks that had invested in mortgage-backed securities suffered serious losses.  Similarly, the debt problems of Greece, Ireland, and Portugal since 2009 led to a decline in the value of the euro and have thrown the entire 17-country eurozone into crisis.

On Thursday stocks plunged on Wall Street; the Dow fell over 500 points in the biggest single day loss since 2008. Interestingly, most analysts attributed the selloff not primarily to concerns about the American economy, but to fears about the solvency of Italy and Spain–the third and fourth largest eurozone economies behind Germany and France.  The threat of a “contagion” effect is highlighted in this explainer from CNN:

“…Anxieties over Italy’s economic future have led many to wonder what its default might mean for Europe and beyond, with the dreaded word ‘contagion’ on many lips. [Former IMF executive board member Domenico] Lombardi believes the current situation is serious. ‘If you affect Italy, you can really weaken the euro significantly,’ he says, describing it as the ‘weakest link’ among Europe’s big economies.  Worse, he says, the European Union, the IMF and the European rescue fund do not have enough money to bail it out as they did smaller European economies — sparking a potential domino effect. So far the crisis has been limited to Greece, Ireland and Portugal, he said.  ‘But of course if the crisis was to hit Italy, it would spread also to France, to the rest of the euro area, and of course you would have contagion to the U.S. through the banking system.’ The huge public debt held by the United States also would make it more vulnerable to speculators, he added.”

How Standard and Poor’s decision (announced late Friday) to downgrade the U.S. credit rating will affect the global economy is the subject of great speculation this weekend. Officials from the G-7 and G-20 groups of major economies are holding conference calls this weekend to plan for further turmoil in the financial markets.

Is there anything individual countries can do, in a globalized world, to limit the damage they may suffer from a possible global contagion, or are they and their citizens at the mercy of the world economy?  Could protectionist trade practices and other tools of economic nationalism safeguard the U.S. or would this only make problems worse?

Two-Level Games and the Greek Financial Crisis

Violence erupts on the streets of Athens in response to the Greek parliament's approval of harsh austerity measures demanded by the EU and IMF.

The financial crises that have gripped debt-ridden countries in the eurozone in the last year offer some excellent examples of the challenges and complexities of “two-level games.” A two-level game, as defined by political scientist Robert Putnam, refers to a common situation faced by political leaders when negotiating agreements such as trade deals with foreign states. To reach an acceptable agreement a leader must take into account the demands of actors at two levels: the domestic level and the international level. For example, in negotiating a trade deal with China, President Obama would need to try to balance the demands of China’s government with the demands of domestic actors such as Congress and business or labor interest groups. These demands restrict the set of acceptable outcomes at each level, and the final agreement must therefore be located within that window of overlap where both domestic and international actors would find an agreement acceptable. The absence of an overlapping set of acceptable options would ordinarily produce a negotiating failure (examples might include the Kyoto and International Criminal Court Treaties, which President Clinton favored but could not get the U.S. Senate to ratify). The theory of two-level games also highlights the fact that leaders can use constraints at one level to gain leverage at the second level. So Obama might tell China’s leaders that he can’t budge any further on trade concessions due to American business demands, or he might tell Congress this is the best deal they’re going to get from an intransigent Chinese leadership.

What does all of this have to do with the eurozone financial crises? Debt-ridden countries such as Ireland, Portugal, and Greece have sought emergency loans from the European Union and the International Monetary Fund in order to stay afloat financially, but the EU and IMF have attached strict conditions to these loans. Recipient countries have been required to enact harsh austerity measures designed to correct the problems that necessitated the emergency bailouts. These unpopular measures include raising taxes, slashing welfare spending, and cutting government jobs and pensions. Leaders such as the Prime Ministers of Ireland and Greece have faced strong opposition to these internationally imposed demands from a range of domestic actors (the general public, interest groups, and some members of parliament). George Papandreou, the Greek Prime Minister, narrowly survived a no confidence vote in parliament on June 22, and violent protests have erupted in the streets of Athens in response to the proposed austerity measures. Papandreou succeeded in holding together enough domestic support to get these measures approved by parliament, although clashes between riot police and protesters escalated after the vote.

But this isn’t the end of the story. As Foreign Policy blogger David Rothkopf notes in a post entitled “15 Things the Greek Austerity Vote Won’t Accomplish,” the parliament’s decision to approve the controversial measures “won’t guarantee that Greece sticks with the plan that’s approved. Riots in the streets illustrate that the people of Greece are deeply unhappy with what they perceive as a foreign-imposed squeeze. They can force a political reversal that leads to a policy reversal.” In other words, round one of this two-level game may have been won by actors at the international level, but the game continues…and domestic actors in Greece, Portugal, and elsewhere may yet be able to exert sufficient pressure on their leaders to change the game decisively in their favor.

The Challenge of a Two-Speed Europe

German Chancellor Angela Merkel and French President Nicolas Sarkozy at the Summit of EU Heads of State.

German Chancellor Angela Merkel and French President Nicolas Sarkozy at the Summit of EU Heads of State.

The recent spate of crises in the European Union has once again raised questions about the future of the European Union. As Greece and Ireland struggle to rebuild their economies, the debate over the future of the European Union is once again on the stage. At one extreme, Germany and France continue to push for further integration, particularly within the eurozone, the group of seventeen countries using the euro as their unified currency. At the other end, euroskeptics in the European Parliament continue to debate the need for the EU in the first place. Governments in the United Kingdom and many of the former Soviet-bloc countries appear to be hesitant about further economic integration.

This tension, which has long been known as the problem of a two-speed Europe, has become more pronounced in light of recent economic crises and the pressure placed on the euro by the collapse of the Greek and Irish economies. Blogging at the Finanical Times, Philip Stephens points out  that the euro has to date been maintained largely by the sheer will of the German government and its willingness to devote considerable resources (not to mention foreign policy clout) to support the euro and prop up several of the weaker European economies.  Euroskepticism, in other words, has not reached the German Länder. This is not to suggest that German magnanimity is the basis of the euro…Germany clearly benefits as well, as its exports to the rest of the eurozone indicate. But what happens if Germany decides that the euro is no longer a core part of its foreign policy vision?

Or more to the point, is the euro in danger? There is good reason to believe that future crises are in store for the eurozone. The economies of Portugal, Italy, and Spain leave considerable room for concern.

A far more likely scenario, however, would be the continued development of a two speed Europe, with France and Germany leading the charge for a more integrated economic policy within the eurozone, while Britain, the Scandinavian states, and many of the former Soviet-bloc countries, standing on the sidelines of economic integration while moving forward with political union. Certainly some interesting things to consider.