Evidently, the days of Helmut Kohl are in the distant past. The European Union, former monolith of region-to-region and state-to-state integration, has seen a decade of weakening unification — in spite of expansion, the EU looms like a big, wobbly house lacking a foundation able to accommodate so many guests. No one has dared develop the union any further, nor sacrifice any substantial aspects of their national sovereignty at the European level. The euro is now enduring the most serious crisis of its short history, and the failure by eurozone members to take swift action toward a floundering group of heavily-indebted countries: Portugal, Italy, Ireland, Greece, and Spain — known colloquially as the PIIGS — has left the region’s common currency hanging in the balance.
The most striking image of the financial crisis followed EU- and IMF-imposed government austerity measures in Greece which prompted violent anti-government protests including a state-wide general strike. Evidence arose at the beginning of 2010 that Greece had avoided EU regulations and deliberately falsified accounts, records, and the country’s official economic statistics, concealing significant deficit figures since at least 1997 which may have precluded the country’s entry into the EU back in 2001. Moreover, Greece paid millions in bank fees for the help of Goldman Sachs and other banks to arrange transactions that masked the level of borrowing, allowing the government to spend beyond its means. Combined with corruption and tax evasion ubiquitous in the country, the result was economic disaster. Due to poor oversight and lack of an objective, impartial auditing system capable of circumnavigating domestic interference, the growing deficit remained hidden from EU overseers Eurostat.
Despite this more dramatic example, if anything the fires and tear gas of Greece have obscured the fact that similar irregularities in financial reporting were also discovered in several other eurozone members, particularly Italy and Portugal. Similar ‘creative accounting’ methods have been employed by many countries in order to meet the deficit criteria for eurozone entry, required by the Maastricht Treaty to remain below an annual 3 per cent of the GDP at the end of the preceding fiscal year. Due to Eurostat’s reluctance to call the data submitted by national governments publicly into question, despite lingering suspicions about the figures’ credibility, the latent ‘massaging’ of statistics ballooned to epidemic proportions.
Unfortunately, massive financial fraud is now a secondary problem. Years of misreported economic statistics have culminated in grave economic trouble for five states in particular, placing the entire financial union is in serious jeopardy. Portugal, Italy, Ireland, Greece, and Spain face a fatal combination of high government deficits, massive sovereign debt, and successive downgrading of their debt ratings. Shaky confidence in these countries sparked speculation that lenders might stop providing loans, resulting in a default on part of their sovereign debt. To put things in perspective, a default by just one of these countries could cause a halt on loans to the others and their subsequent default — an armageddon for the euro. This debt is so massive and intertwined, these outstanding, uncollectible loans would result in such enormous bank losses that nearly every bank in Europe would be rendered insolvent.
Last May, EU officials took swift emergency measures, pushing forward an agreement for a €110 billion bailout package for Greece, conditional on strict austerity measures to be implemented in order to curb government spending. Nearly one fifth of the funds were supplied by Germany. The austerity plan in Greece, historically a country that provided a generous social wage to its citizens, is fraught with problems — more public sector pay cuts, pension reductions, new taxes on company profits, an increase on luxury and sin taxes, and an increase of the value added tax have been implemented by the Greek government, despite significant public outcry. Structural changes will be required as well: honesty with respect to taxation, eliminating the shadow economy, increasing consumption, stopping the flight of capital outside the country, making the country more competitive, reducing corruption, and fostering growth, to name a few. In essentially the same breath, Germany also pledged roughly 20 per cent of a massive €750 billion bailout fund to reserve in case of a prospective emergency in one of the other PIIGS.
Part of the problem is the regulations of the Maastricht Treaty were too rigorous. Formed without foresight of the EU entering a fiscal crisis, these rules left an incentive for countries – especially the PIIGS, which habitually carried large government deficits – to cook their books, proper oversight did not exist to catch this. Loud proclamations about a host of new measures including greater auditing power for Eurostat, more control over national budgets, and harsher sanctions for countries flouting debt rules are being announced, noble measures, but ultimately unlikely to avert the sorry economic state of the debt-rattled PIIGS.
Economists have warned that it could be a decade before the Greek economy recovers, even if it does not worsen first. Ireland has recently conducted a massive bailout of one of its banks. Italy still suffers from major underreporting of income, tax evasion, and has a shadow economy that accounts for an estimated 10 per cent of its GDP. Portugal has been described by ratings agency Moodys as facing a ‘slow death’. Spain has an unemployment rate of 20 per cent and an economy that is not expected to grow for at least 10 years. The UK is threatening to join the group, facing major cuts in government spending with its newly-released ‘emergency budget’. For these countries, depreciating their currency to regain competitiveness — a tactic that the US has employed successfully — is not an option. Their expenses remain so high that deflation, not devaluation, is the only way to keep costs down.
The bottom line is that economic expansion occurred out of geopolitical and economic necessity beyond the euro’s optimum confines, and was not followed up with appropriate steps toward sufficient political integration. Politicians naively proclaimed a two-speed Europe — a notion that slower nations surrounding the ambitious ‘core Europe,’ would simply catch up at their own pace — which has been exposed as a serious farce. The EU’s political and economic institutions have fallen apart when called to task and EU member states have continued to look after number one. These occurrences lend credence to the accusations that EU integration was mainly a market-led neoliberal project. Germany, formerly an architect of the EU at the hands of devotedly pro-integration politicians like Helmut Kohl, is finally catching on. Long the motor of European unity, having to foot the bill for failing economies due to being one of the sole successful ones has left a bitter taste in German mouths. Broader European interests can no longer be expected to supercede Germany’s national concerns — essentially, it can now behave like any normal country. But if the future of the euro is murky, there is one certainty: if the financial union is to continue, the decision is largely up to Germany. What remains to be evaluated is whether the economic benefits of the EU for Germans are worth the price of keeping it on life support.
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