Results of this year “Transatlantic Trends Survey”, an annual publication of the German Marshall Fund of the United States in close cooperation with several institutions, among which the Luso-American Foundation, is quite revealing on the growing disbelief of Europeans towards the union institutions and dissatisfaction on how the economic crisis has been handled so far, both at national and supranational levels. As a matter of fact, EU-favourability rates in Portugal or Spain, despite still above 60%, dropped about 20 percentage points from 2009 to 2012 (as graphically illustrated by the increasing distance to the centre, a hypothetical scenario of 100% approval):
Source: “Transatlantic Trends 2012”, TNS Opinion and the German Marshall Fund of the United States. Data prepared for: Tavares, José (2012), “A Europa Existe? O Sim e o Não”, Mimeo, Flad, Lisboa, Portugal
Such results underlie, in my opinion, two different but not disconnected phenomena: on one hand a certain demand for more Europe as the only way out of this unexpected and persistent sovereign debt crisis; on the other, an increasing discomfort (an “austerity fatigue”, as put by Nouriel Roubini), especially in southern nations, on the policy actions taken to achieve the necessary macroeconomic rebalancing.
Departing from the former, it seems clear that the pressure exerted by financial markets on peripheral economies can only be definitely appeased if Eurozone members take coordinated steps towards a higher degree of risk-sharing. In fact, fears of reversibility of the common currency will persist if the current regulatory framework is kept unchanged and no guarantee of bank recapitalization is given. A move for a banking union would thus appear logical, but such solution has so far been delayed by the uneasiness demonstrated at the core, namely by Germany.
This brings us to the never-ending debate on the German hesitant leadership, an issue that already produced numerous articles and speeches, such as the remarkable statement of Radek Sikorski (current Polish minister for foreign affairs) on how German power was not as scarier as his “fear for German inactivity”. Reality, despite not so extreme, has shown us that Berlin’s government is absolutely reluctant to accept any policy action that might be judged as sign of openness to debt mutualisation.
Chancellor Merkel’s executive has privileged so far a much needed deepening of integration at budgetary level. The new Treaty of Stability, Coordination and Cooperation, by strengthening the supervising powers of the Commission, aims at streamlining fiscal discipline in the Euro Area, therefore constituting and essential effort to prevent irresponsible deficit-bias and episodes of internal bad governance that are quite persistent in southern countries.
Nevertheless, by solely insisting on the budgetary stance while neglecting the monetary one (in what constitutes a true war of attrition), Germany is inadvertently deferring any prospects for Europe’s economy to grow out of the current crisis. Regardless of how hard it is to abdicate of an historically-rooted commitment to low inflation, having such an unstable currency as the Euro appears to be nowadays (judging by the enormous amount of assets transferral within the Union, the persisting differential in sovereign bonds valuation and the growing divide between creditor and debtor countries) is, in the long-run, incomparably more costly. The eventual reversibility of the Euro would mean the collapse of the single market and, with it, the erosion of the current welfare pattern.
Meanwhile, what room of manoeuvre is left for domestic governments to reverse an economic turmoil that, for the case of peripheral countries, also exposed years of low competitiveness and systemic deficiencies? At a first glimpse it appears little. A question such as this leads us to the issue of possible alternatives to austerity aimed at avoiding excessive social “fatigue”. Taking the case of Portugal, Vítor Gaspar and his team at the finance ministry are undoubtedly competent to understand that prolonged austerity will end up chocking any hopes of revival. Nonetheless there are three factors constraining any potentially different action, three obstacles to change that must be corrected:
On the first hand, the undermining unrest of financial markets, more and more the new source of political evaluation in the globalized era. In here, only a coordinated action at European level, of the nature and with the depth previously identified, appears credible enough to curb investors’ fear and release some of the pressure to the adoption of a growth agenda.
Secondly, the absolute rigidity imposed by the country’s labour laws and constitutional arrangements, sources of the actual dichotomy observed between rigid life-long contracts benefiting an older social stratum and a panorama of precariousness harming a more qualified youth. The better example of such inefficiency is the State itself, too heavy and too unthrifty for the existing resources, yearly assigning roughly ¾ of its current expenditure to the pay-roll of public servants, something that should be reduced.
Finally, the ideological backwardness with which both State and public opinion still regard the entrepreneurial sector, phenomenon constituting a hindrance to long-run growth prospects. On that respect, it is vital to ensure the fiscal conditions for more competitiveness, and thus export-driven success, of medium-sized companies operating in the tradable sector, especially in knowledge intensive/high value-added industries. However, such options of fiscal devaluation seem condemn at start if political forces (among others) persist on the old rhetoric that opposes firms to families when, in fact, improving the performance of the former translates into the well-being of the later.
Wrapping up, it is now evident that European citizens, especially at the periphery, feel growingly detached from the decision-making processes and solutions preconized at both national and supra-national levels. Therefore, overcoming the current crisis crucially depends on how actors and institutions identified interpret such discomfort and reveal the necessary ability/predisposition to change in face of it.
About the author, Simão Arouca is a Masters student in Economics at NOVA SBE. He is strongly interested in the areas of macroeconomics and econometrics. He is currently developing research work on the determinants of birth, growth and death of firms in Portugal given municipal institutional factors (directed by Professor José Tavares). Simão is currently Vice-President of NEC and Teaching Assistant of the course of Principles of Macroeconomics at Nova Sbe.