OECD Observer
The euro: A message of solidarity

The EU’s crisis has as much to do with leadership and solidarity as resolving fiscal and debt problems. It is time to dispense with caricatures and write the next chapter in the EU’s ongoing history. And for that, clear and transparent data will be needed.

“Europe will not be made all at once, or according to a single plan. It will be built through concrete achievements which first create a de facto solidarity.” These are the words of Robert Schuman, one of the founding fathers of the EU. The solidarity he was referring to in 1950 has been built up over six decades, but is now being sorely tested.

What is happening today in Greece and threatens to happen elsewhere–the scenes of violent protest, increasing numbers of destitute people being provided with food by charities, extremist and divisive politics–runs counter to Schuman’s vision and is weakening the foundations which he, together with Jean Monnet, laid out for the EU way back in the 1950s. With new signs of crisis or falling confidence almost every week, rarely has Europe looked so vulnerable.

How did it all go so wrong? How can Europe be put back on track? Does this crisis spell the end of the euro or, as its first real test, will it jolt European leaders into writing the next vital chapter in Europe’s story of ever closer union?

Building the EU was never going to be easy. The boom period until 2008 blinded many of us to some stark realities about a work very much in progress. This blindness afflicted Germany which breached the euro area’s original 3% fiscal limit (on which Germany itself had insisted) and which allowed its banks to make some foolish investments both in the US and in the euro area, just as much as it afflicted Greece or France.

It seemed all Europe had to do was take on new members, as it did as recently as May 2004 when the union expanded from 15 to 25 members. Ireland, now a country mired in crisis, presided over the EU that year, and as the Irish ambassador to the OECD, John Rowan, remarked in the OECD Observer at the time, it was an unprecedented “Day of Welcomes”.

But while the economy boomed, efforts to build a stronger Europe received a huge setback with the defeats in referendums in France and the Netherlands of the Constitutional Treaty in 2005; the eventual Treaty of Lisbon failed to address Europe’s weaknesses. How the crisis has brought everyone crashing back to earth.

Yet the 1980s and 1990s were periods of movement and achievement for the EU, a customs union riddled with non-tariff barriers, and it was transformed into a genuine, if still incomplete, internal market between 1985 and 1992.

Remember also that following the end of the post-Second World War division of Europe, Germany was re-unified by its inclusion in the Federal Republic in 1990 of the previously communist East Germany. It was a huge step to take. The EU also gave support to the transformation of other former communist economies, and commenced an accession process designed to transform them into rounded democracies. On the basis of the Maastricht treaty of 1992, the road was paved for a single currency amongst initially 11 countries, and the euro was created between 1999 and 2001.

The making of Europe is about other policy initiatives too. At the beginning of the 2000s, new environmental (20% less greenhouse gases, 20% more energy efficiency and 20% renewable energy) and social goals (70% employment rates, poverty reduction) and competitiveness (research and development spending at 3% of GDP) were established. These initiatives have had much less impact on the public than did the building of the single market and single currency, but they reflected shared ambitions and a desire for solidarity to meet common problems. It is this solidarity which appears to have taken the severest blow in the crisis.

There was already a feeling of loss of direction when, in late 2008, the US subprime crisis led to bank collapses across the EU leading to a deep recession, which in turn set off sovereign debt crises in the periphery of the euro area. Since then the EU project has been buffeted by a succession of crises, and it has gone from one to the next, followed by accusations of having no clear objectives or sense of direction–as if survival in a crisis were not a sufficient goal in itself. Indeed, according to opinion polls all euro area countries would prefer to stay in the single currency to avoid the negative consequences of a break-up. In an ironic way, this is a testimony to the EU’s solidarity, but a more optimistic narrative is now needed to keep the EU and its citizens moving forward.

Sticking together
A new and more positive view of the euro area and the wider EU requires the ability for all players to openly admit past mistakes, an appreciation of shared interests in finding a way out of the crisis and a consequent sense in which membership of the EU, especially the euro area, requires solidarity to get through testing times.

Solidarity does not need to be interpreted as requiring the richer, stronger countries to provide long-term financial transfers to those in difficulty, the so-called “transfer union” which stronger nations fear being cajoled into. The EU budget, totalling only 1% of its GDP, already has a regional policy which uses about a third of that budget to help poorer countries and regions; this is not likely to be significantly increased.

In fact, financial flows from banks in stronger countries to weaker countries during much of the 2000s were a cause of the problem, since they allowed the latter to grow demand more rapidly than they should have by running external current account deficits and building up external debts. The extent of these flows resulted from mistakes made by banks and their regulators in the stronger countries as well as from mistakes by those in the weaker ones. Banks that made unwise decisions to borrow were complemented by banks that made unwise decisions to lend. Hopefully, the creation of a banking union will help address this problem.

The trouble is, the economic cost of these mistakes has fallen overwhelmingly on the weaker countries. If the principle of solidarity is to be applied, the stronger countries must be prepared to take some financial losses–in effect, they must share some of the pain, as well as the cost, of the imbalances they helped to create. It is in their own interest to act constructively to make recovery of the troubled countries feasible rather than forcing them into such deep and painful austerity as to make recovery impossible.

For example, Germany, the Netherlands and Finland should not try to backtrack, as they have done, on the agreement of the June European Council to no longer require lending to Spain’s banks to be guaranteed by the Spanish state.

That move is vitally important to give Spain the chance to escape the lethal interaction of the banking and sovereign debt crises. The politicians in the stronger countries should point out to their sceptical voters that they have a strong self-interest in the recovery of the currently weaker economies, because it is the only way that the creditors can hope to be paid back.

Solidarity and good governance depend crucially on good information, including reliable, relevant and well-presented statistical data. In fact, some of the failures that prepared the ground for the present crisis across the euro area can be ascribed to poor statistics, not least the presentation of government finances in ways which cast them in an excessively favourable light. This opaqueness has weakened the basis of the EU project.

Transparent, clear communications are needed. The status of the EU’s statistical agency, Eurostat, should be enhanced, and should be moved from Luxembourg to the European Commission’s main offices in Brussels, given that it is a crucial part of the work of the Commission’s Directorate General for Economic and Financial Affairs, with which it should co-operate more closely. It needs to have the authority to confront member states where there are reasons to suspect that they are not providing reliable information. Accessible and reliable statistics are crucial at a time when weakened economies need to be nursed back to health.

Solidarity does not mean allowing any country to avoid responsibility for taking painful measures to close fiscal deficits. But this accusation cannot be levelled at any of the EU’s vulnerable countries, and especially not Greece, where take-home pay by public servants has been slashed by up to 50% since 2008. Solidarity does mean taking account of the condition of the economies for which fiscal prescriptions are made. Eurostat and the European Central Bank should also provide clear and well-publicised statistics on levels of private (household and corporate) debt as well as public debt. The OECD, which has long provided reliable comparative data, could play a monitoring role. No longer can it be argued that public debt does not matter as long as it is balanced by private savings. Economists said this for years about Italy. But private savings are volatile, and can flee the country too. Equally, it should not be considered that, if public debt is low, the rise of private debt does not matter. As has been shown in Ireland and Spain, the unwinding of private debt can lead to rapidly rising public debt and economic collapse.

A message of a shared destiny, combined with reliable facts, is the only way to combat the caricatures and myths developing in some countries about their fellow euro countries, which risk pulling the euro area apart and de-railing the whole European project.

*Charles Jenkins ran the Europe desk of the Economist Intelligence Unit (EIU) from 1976 until his retirement in 2012. A commentator on European affairs, he launched various influential EU reports, has written and lectured extensively and has been a strong advocate of European unity. His father, Roy Jenkins, was president of the European Commission from 1977 to 1981.

The views expressed in this article are the author’s alone.


For more views by Charles Jenkins, see www.insighteu.com

Rowan, John (2004), “EU enlargement and the OECD: A new era”, in OECD Observer No 243 May.

Schuman, Robert (1950), The Schuman Declaration, 9 May.

©OECD Observer No 293 Q4 November 2012