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special issue: federations and the economic crisis
European Union feels the pain
REUTERS/Yves Herman
European Parliament President Jerzy Buzek (left) and European Commission President Jose Manuel Barroso (right) spak at a news conference at the European Parliament in Strasbourg.
By David Gow
The European Union is the global region suffering the most from the “great
recession” and probably will be the last to recover.
The latest World Economic Outlook (July 2009) from the IMF forecast that the economic contraction in Japan will be deeper this year than in the EU but the country will return to growth next year and Asia as a whole is leading the world out of its slump. Europe’s economy, by contrast, is forecast to suffer a further shrinkage in 2010.
The 27 countries in the world’s biggest economic and trading bloc even now have been and remain unsure about how to respond to the worst downturn in the international economy in 80 years.
Under the French presidency of the EU in the final quarter of 2008, especially the active leadership of France’s Nicolas Sarkozy, the bloc put aside its differences and led the way in promoting first a regional response to the crisis, then a global one. At two mini-summits in Paris and the G20 summit in Washington in November 2008, the EU secured agreement on the need for co-ordinated stimulus programs and a new regime to regulate the financial sector.
Cracks in policy
But by the EU’s own summit in March 2009 and at the reconvened G20 summit in London in April, the final communiqués simply covered widening cracks in its responses. Those cracks widened not only between older members in the west and newer ones in the east, but also between Britain on the one hand and France and Germany on the other.
Overall, the EU as a whole was weakened by these divergent responses, with a notable increase in euro-scepticism and an all-time low turnout in the European Parliament elections in early June.
These cracks underline the fact that the EU is not a federation. Since a referendum in Ireland in 2008 rejected the Lisbon Treaty meant to secure more efficient functioning of the EU, power relations among its three main institutions – the commission, council of ministers and parliament – remain fluid and only semi-formed. While the European Parliament is elected using proportional representation, the European Commission, the executive branch of the EU, has 27 members – one per state, appointed by the European Council, itself composed of the 27 heads of state. Also, the commission’s
meagre powers can be taken away by the council at any time.
This has had two main results. First, there has been a growing trend toward nationalist, even protectionist, measures to confront the crisis amid severe political pressures and increasing Balkanization of the banking sector. Second, under commission president José Manuel Barroso, Brussels is widely perceived to have been behind the curve in marshalling a collective response.
Indeed, Barroso’s weak leadership was becoming a common concern across the political spectrum by the early summer – so much so that doubts even emerged among his supporters about his suitability for a second term as president.
Central bank criticized
The European Central Bank handles monetary policy for the 16 eurozone members – those EU members who use the euro as their currency. The bank faces criticism over cutting interest rates too little, too late. It was also criticized for failing to adopt “quantitative easing” – buying private sector and government debt – to reboot the economy through improved credit markets.
The commission claims to have spearheaded a stimulus package worth more than two trillion euros, or five per cent of gross domestic product in 2009-10. The commission, which is struggling to enforce rules of the single market in the face of protectionist sentiment, is accused of hastening the financial sector’s Balkanization by enforcing the break-up of the four dozen large cross-border banks. Chances of getting the 27 governments to agree on a new pan-EU system of regulation are considered to be nil.
The commission is also urging a swift return to fiscal restraint and restoration of the so-called Maastricht Treaty rules requiring central government budget deficits of no more than three per cent of GDP and debt of no more than 60 per cent of GDP. Even countries such as Germany, architect of the rules and a cheerleader for fiscal prudence, are doing little more than paying lip service to them as the downturn continues. Indeed, when EU finance ministers met in early July, the prospect of any exit strategy from stimulus spending had receded. The Maastricht rules, designed to ensure non-inflationary growth, have been indefinitely suspended.The question is, at this stage in the downturn, does it makes sense to focus on fiscal restraint?
By spring 2009, commentators expressed concern about the inadequacy of the response as official figures confirmed the scale of Europe’s economic contraction. The EU’s economy, and that of the eurozone, shrank 2.5 per cent in the first quarter of 2009, largely because of Germany, whose national output fell 3.8 per cent. Europe’s largest economy was hammered by the decline in global trade which hurt its key industrial exports.
In the other largest European economies, France posted a decline of only 1.2 per cent, thanks to intervention in industry and financial services, while the economies of Italy, Spain and Britain contracted 2.4 per cent, 1.8 per cent and 1.9 per cent, respectively.
Stabilization imminent
Some signs of stabilization have been seen, with analysts suggesting the worst could be over as “green shoots” appear, but it is the U.S. and China that are leading the global recovery. In early May the commission produced forecasts, steeply revised downward, of a four per cent contraction in 2009 – twice that foreseen in January – with declines of 5.6 per cent for Germany, as much as 4.5 per cent for Italy and Britain, and three per cent for France and Spain.
It predicted stabilization will occur in 2010 when the EU’s economy is expected to shrink by 0.1 per cent – except in Spain which could see a further one per cent contraction. Joaquin Almunia, a Spanish socialist and economic and monetary affairs commissioner, warned that even this “modest and gradual” recovery was risky because of the still-ailing financial sector and the real economy. The commission expects EU unemployment to rise by 8.5 million between 2008 and 2010, up to 11.5 per cent, and the budget deficit to triple.
For Germany, the sheer scale of the contraction is traumatic. Carsten Brzeski, a senior economist at Dutch bank ING, said the recession “has returned the economy to its size of late 2005. The last three years of economic growth have gone up in smoke.”
Surprisingly, German business confidence is rising despite forecasts that exports and investment will fall about 20 per cent this year and unemployment will hit 10.5 per cent next year. The country, which regained competitiveness within the eurozone through effective wage cuts, appears sullenly resigned before general elections in September.
Avoiding freefall
It is in manufacturing, which accounts for nearly 30 per cent of German GDP, that these tensions have become most acute. Regional governments have promoted rescues for large firms based in their areas.
The situation is perhaps more acute in Spain where the minority socialist government of José Luis Rodriguez Zapatero relies on the support of regional parties and faces a resurgent opposition. Spain’s government is now struggling to contain an economy in apparent freefall after years of stellar growth. Unemployment, already at 17.4 per cent in March – the highest within the EU – is set to top 20 per cent next year.
Zapatero, who has injected 71 billion euros into the economy without having to bail out Spain’s biggest and predominantly healthy banks, is desperately trying to restore confidence through stimulus measures.
Fellow social democrat Gordon Brown used to vaunt Britain as the model European economy – flexible, deregulated and post-industrial – but now the country is viewed as the EU’s most centralized and discredited economy. British people are bracing for austerity as government borrowing balloons to about 13 per cent of GDP, deep spending cuts loom and
unemployment climbs.
The Labour government’s response has been to try and boost consumer spending, an engine that helped generate three per cent growth in earlier years. Brown’s government is doing this through a temporary cut in the value added tax and by allocating hundreds of billions of pounds to the financial sector while delaying decisions about much smaller rescues for what remains of the manufacturing sector. There is much talk of stricter regulation of financial services, but the City of London, still Europe’s biggest financial centre by far, actively opposes this and has been lobbying strongly against it.
For now, the outcome in Britain seems certain: according to recent opinion polls, the Conservatives will be swept back to power by June 2010 with a clear majority and a mandate for economic and constitutional reform. It is possible that they could decentralize both the economy and the state, handing more power to citizens as consumers and political actors, and to regional governments, for example, in Scotland and Wales.
For Europe as a whole, the future appears uncertain. All countries are examining their business models, with Germany pressed to end the overweight role of industry, Spain that of private consumption and construction, and Britain that of personal and financial services sector debt.
As well, the EU will probably continue to freeze its enlargement process by not accepting new members, and might revert to becoming an inter-governmental body with the downgrade of the European Commission. Other possible scenarios could play out, including some dramatic developments if David Cameron, as Britain’s new Tory prime minister, were to take the country out of the EU through a referendum, and France and Germany spearhead a two-tier, federalist push. 
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