PARIS ― Underpinning European integration is the belief that unity between nations should bring shared prosperity instead of social, political, and economic turmoil. But today’s debt crisis has exposed a fundamental weakness in the eurozone’s architecture: insufficient integration.
This adds another layer of complexity, compared to the United States or Japan, to the economic challenges that the European Union faces. To paraphrase Leo Tolstoy, the European family is unhappy in its own way.
The European Monetary Union acted as a powerful catalyst for European integration, rapidly bringing together 17 diverse economies in a single monetary union ― but without fiscal solidarity, a way to enforce fiscal discipline, or an established lender of last resort. This facilitated massive capital inflows and unsustainable borrowing in the peripheral countries ― most notably Greece, but also Portugal, Spain, and Italy ― shrouding, and thereby accelerating, their increasing loss of competitiveness. When the global financial crisis hit, the house of cards collapsed.
Now, troubled countries do not have the option of reducing their debt burdens and increasing external competitiveness by devaluing their currencies. Integration is thus incomplete, with eurozone countries having abrogated monetary sovereignty, while rejecting the stabilizing mechanisms of shared fiscal and economic policy.
With the single currency on the precipice, the necessity of greater fiscal and economic coordination is clear. But such a move would require profound treaty changes, and thus will take time. Still, more can be done to smooth the fiscal and economic adjustments taking place in the eurozone’s troubled periphery.
The current focus on austerity and structural reform carries severe social and economic risks, in part because disenchanted electorates are fertile ground for extremist parties. Indeed, in Greece’s recent elections, after five years of recession and 20 percent unemployment, extremist parties from both ends of the political spectrum made substantial electoral gains. Likewise, in the first round of France’s presidential elections last month, extremist parties from the right and left won more than 30 percent of the vote.
Europe needs a new plan to ensure sustainable and shared prosperity, based in part on rebalancing growth and competitiveness within the eurozone. Although Germany’s recent indication that it may consider wage increases for its workers is an encouraging start, a consumption-based recovery is clearly not sustainable.
Peripheral countries must undertake structural reforms, while recognizing that such changes will not bear fruit overnight, and that internal economic rebalancing will be painful. In order to facilitate this economic rebalancing and ameliorate its social consequences, they also need targeted public investments, co-financed at the European level.
The green sector provides a key opportunity for European investment, owing to its scale and long-term growth potential. After all, real resource prices have reached record levels and, on average, the oil intensity of GDP in Spain, Greece, and Portugal is 60 percent higher than the European average. Investing in the green sector would contribute to Europe’s long-term productivity, while providing productive cross-border capital flows to complement structural rebalancing within peripheral countries.
Europe’s leaders should therefore agree on a large-scale recapitalization of the European Investment Bank. During the crisis, the EIB has played a pivotal role in financing large-scale infrastructure projects, but it is now curtailing its lending ― and private banks cannot pick up the slack. Options for raising new capital include requesting a 10 billion euro ($13 billion) contribution from member states, using the 12 billion euros left over from the European Financial Stability Mechanism, or reallocating the tens of billions of unallocated funds from the EU budget.
Furthermore, the European Commission’s proposal that the EIB support privately financed infrastructure projects through guarantees for corporate bonds, called “project bonds,” must be accelerated and expanded. But there is not yet much demand for such bonds in Europe, and the initiative’s development will take time.
Therefore, eurozone members, possibly through the EIB, should guarantee “green covered bonds,” securitized by revenue from existing green-sector assets, such as renewable energy. This would allow banks to refinance green-sector investments, thus freeing up bank capital for further lending. Banks’ experience and the diversity of products offered in the sector mean that freeing up their balance-sheet capacities could swiftly inject funds into the real economy.
Thus far, Europe’s response to the debt crisis has been impeded by a false juxtaposition of austerity and stimulus. Productive investments in areas such as infrastructure and knowledge, can not only stimulate growth and employment in the short term, but also are a necessary condition for long-term prosperity.
Solvent countries currently can borrow at near-zero interest rates, so the time is right to invest in long-term productive assets in the peripheral countries, thus helping to facilitate the structural reforms that Europe needs to claw its way out of crisis and into a sustainable, prosperous future.
This is a European crisis, so all of Europe must share the burden of adjustment. That means coming together to provide the resources needed to restore competitiveness, revive growth, and prepare to face the challenges of tomorrow.
By Laurence Tubiana and Emmanuel Guerin
Laurence Tubiana is director of the Institute for Sustainable Development and International Relations at Sciences Po in Paris and a professor at Columbia University. Emmanuel Guerin is director of the Energy and Climate Department at IDDRI and a visiting fellow at London School of Economics. ― Ed.
(Project Syndicate)
