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Germany’s vast current-account surplus of 8% of GDP is the biggest and most dangerous imbalance in the eurozone.
Germany’s vast current-account surplus of 8% of GDP is the biggest and most dangerous imbalance in the eurozone.

Europe Economy Still Not Rosy

There is a burning sense of injustice that policymakers are incompetent, unaccountable, self-serving and even corrupt. All of which feeds into nationalist and xenophobic resentment that is destroying Europe

Europe Economy Still Not Rosy

The eurozone economy is doing better than expected this year. Growth is stronger everywhere and positive even in Greece. Unemployment is falling. In his state of the union speech on September 13, Jean-Claude Juncker, the president of the European Commission, will doubtless celebrate this long-awaited recovery as a success for eurozone policymakers’ crisis management.
But even with this welcome upturn, the economic situation is far from rosy. Ten years after the start of the financial crisis, bad debts continue to bedevil weak eurozone banks, weigh down on overstretched households and companies and depress demand, Philippe Legrain, a senior visiting fellow at the London School of Economics’ European Institute, opined for ips-journal.eu.
Two-and-a-half years after the European Central Bank finally followed the lead of other major central banks and launched a bond-buying program known as quantitative easing, underlying inflation remains well below its near 2% target. And the eurozone’s potential for long-term growth is hampered by dismal demography–an ageing and shrinking working-age population combined with swelling ranks of pensioners–and poor productivity growth.
Indeed, the eurozone’s performance over the decade since the crisis struck has been catastrophic–largely due to bad policy decisions and flawed governance. Average living standards–as measured by gross domestic product per capita–are no higher than a decade ago.
Most Europeans have suffered a lost decade of stagnant or falling wages. Unemployment remains scarily high in southern Europe, especially among young people. A common currency that was meant to bring Europeans together has instead led to economic divergence and political division. Germany has got richer and Greece much poorer.

  Glorified Debtors’ Prison
The enduring legacy of the crisis is that the political economy of the eurozone has been transformed; what began as a voluntary union of equals has become a glorified debtors’ prison. Misguided bank and sovereign bailouts have turned clashes between private creditors and debtors across the eurozone into national conflicts between creditor governments and debtor ones, with EU institutions becoming instruments for creditors to impose their will on debtors.
There have been welcome steps to create a eurozone system for resolving failed banks that imposes losses on their creditors rather than on taxpayers. But it remains flawed. The Italian government got the green light to inject public money into failed banks this year. And it remains doubtful whether the many weak banks in Germany would ever be wound down without taxpayer funds.
A dangerously tight fiscal straightjacket has been imposed: both a much tougher Stability and Growth Pact and the Fiscal Compact. This rigidly prevents national governments from stimulating the economy enough in a slump. It narrowly treats each eurozone member as if it were an island, neglecting the overall fiscal stance of the eurozone and its interaction with monetary policy.
And it perversely limits productive public investment that would boost demand now as well as future growth–and hence actually strengthen public finances. At a time when interest rates are at record lows and resources are lying idle, it is a tragic missed opportunity not to be investing enough in the future.

  Sense of Injustice
While Germany insists that the fiscal rules must always be followed, it refuses to comply with EU rules on dangerous macroeconomic imbalances. The European Commission is complicit: even though Germany’s vast current-account surplus of 8% of GDP is the biggest and most dangerous imbalance in the eurozone, it fails even to try to enforce the rules against Germany. Financial flows have fragmented and capital controls been imposed within the eurozone in Cyprus and Greece.
As a result of all this, the political capital of the European project built up over decades has been greatly eroded in just a few years. Animosity among Europeans has soared, with old stereotypes revived and new grievances created. And there is a burning sense of injustice that policymakers are incompetent, unaccountable, self-serving and even corrupt. All of which feeds into nationalist and xenophobic resentment that is destroying Europe.
The ECB needs a political master. Whereas other independent central banks have narrowly defined remits and are ultimately answerable to an elected government and parliament, the ECB enjoys extreme independence, enshrined in an EU treaty that is very difficult to amend. It floats above elected national governments, bossing them around at will.
The eurozone desperately needs a European Spring of economic and political renewal.

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