In purely economic terms, and on the surface, the Euro crisis appears to be over. The recovery has gained in both strength and depth. Unemployment is now below its pre-crisis average. A number of former crisis-hit countries are staging an impressive recovery. Public debt ratios are coming down and the ECB is preparing to wind up its QE program by the end of the year. Nonetheless the recent meeting between Chancellor Merkel and President Macron in Meseberg, Brandenburg in the run-up to the forthcoming European Council meeting on 27-29 June can still rightly be seen as crucial. Economic misery continues, especially in Greece and Italy, but the deep wounds of the crisis have yet to heal in many countries. More fundamentally, the recovery hides the fact that major structural issues remain unresolved. The recent crisis of government formation in Italy illustrated this well, leading to a major spike in interest rates not only in the third-largest EMU-economy, with its low growth and debt ratio north of 130% of GDP, but also in other countries like Spain, with much lower debt and fast growth. The risk of contagion and of break-up has clearly not gone away. The recovery has merely papered over the cracks; but every recovery in history has given way to a downturn. The Euro Area, as currently institutionalised and with debt ratios still high, monetary policy highly expansionary, and political trust in short supply, cannot withstand a renewed downturn. [Read more…]
With the latest unemployment figures from Eurostat, for November 2017, the Euro Area has passed a milestone: for the first time the unemployment rate, at 8.7%, is below the average of the “normal times” prior to the economic crisis. This provides a good occasion to evaluate the current state of the labour market, as far as unemployment rates are concerned, in the Euro Area and its member states. To what extent have the scars of the crisis healed? Where do the most serious challenges remain?
Figure 1 shows the labour market recovery from the double whammy of the global financial and then the Euro crisis: it begins in the spring of 2013, in the wake of the belated “whatever it takes” announcement by the European Central Bank. Unemployment fell from its peak of 12.1% and by January 2017 it was below its average for the entire history of the common currency to date (9.6%). By November the continued improvement had brought the figure down below the average recorded up to the crisis (8.8%). Over the last 12 months the unemployment rate has fallen at an average of almost 0.1 percentage point – around 130 000 persons – a month. [Read more…]
Today the EU Commission launched a long-awaited set of concrete proposals to deepen European Monetary Union (EMU). The proposals are voluminous and in some areas detailed. Here’s a summary of the most important points and a first evaluation.
First, the European Stability Mechanism, currently intergovernmental, is to be transformed into a European Monetary Fund as a fully-fledged EU institution. Beyond the legal change – which is surely welcome, the intergovernmental solution having been chosen under the pressure of imminent crisis – the Commission envisages few functional changes. The main task of crisis-lending to Member States in need and the related ability to issue bonds to raise finance remain. New is that the EMF is to back-stop the Single Resolution Fund as part of the Banking Union. By providing guarantees or a credit line, and in parallel by reducing the policy areas subject to unanimity, the EMF will be able to offer swift assistance in the case of banking crises, plugging a notable hole in the policy framework. By underpinning confidence in financial stability, this should reduce the likelihood of its having to be used.
Reference is made to the possibility for the EMF develop new financial instruments “over time”. This is a door left open to a future extension of borrowing – and thus stabilization – capacity in the future.
Equally important, unlike in the vision of now-departed German finance minister Wolfgang Schäuble, the EMF is not foreseen to play a key role in disciplining member states and ensuring the implementation of structural reforms. Oversight responsibility is to remain unchanged (i.e. divided between the Commission and the Council). [Read more…]