Twist, Stick or Bust – The EU’s Economy Game
Civitas, 16 June 2010
The EU has reached a critical state of play in dealing with the economic crisis, writes Natalie Hamill. The monetary decisions it makes now could bind or break the ideal of “an ever closer union”, with everything to lose if it makes the wrong move. One by one EU states are adjusting their economic forecasts and “knuckling down” for a difficult few years, and even the more robust states are sinking into the rhetoric of deficits and spending cuts.
Denmark, once voted the “happiest country in the world” , with a strong economy and unemployment rate of less than 2%, is the latest victim of the economic crisis. With its economy falling into deficit, unemployment rising (although at 4.1% it’s still one of the better rates in the EU) there’s a real chance that right now Danish citizens are not the happiest in the world. After years of an economy in comfortable surplus the prediction of it sinking to a 5.4% deficit this year has the EU in jitters, and the Commission handing out stern deficit reduction deadlines.
The Scandinavian country isn’t the only one whose economic dip from surplus to regulation breaking deficit is troubling for the EU. Finland and Cyprus, two of the other more stable EU economies have also found the latest crisis too much to control and their deficits soaring, for the first time, above the 3% limit set by Stability and Growth Pact. Finland’s deficit will rise to 4.1% and Cyprus to 6.1% this year. Will the economic crisis leave any country unscathed?
EU Economic and Monetary Commissioner, Olli Rehn, said “the entry into the excessive deficit procedure of these countries – which until recently had surpluses – shows the severity of the economic and financial crisis we have gone through. But now it is time to focus on returning to sound public finances.”
But how can states return to sound public finances?
The Commission and France have been busy advocating closer economic governance as the EMU’s “knight in shining armour”, but they have not been able to achieve EU wide consensus on the proposals. The UK, Sweden and Germany are appalled at the idea of the EU having first inspection rights on their national budgets.
The EU’s ace was the European Stability Mechanism – their safety-net hope for future protection against another eurozone bailout situation. However, today (Wednesday) Slovakia’s week old government put the brakes on the Commission’s dreams of an economic rapprochement, with Bratislava refusing to sign the Framework Agreement on the European Financial Stability Facility (EFSF) – the foundations for the European Stability Mechanism. The Conservative leader called the mechanism “bad, dangerous and [the] worst possible solution“. Without the signature of one of the eurozone members the Commission’s future safety-net mechanism may die before it gets off the page. Slovakia has also refused to contribute to the €110 Greek rescue package.
Instead states are striking out alone. Austerity measures are being introduced left, right and centre as governments desperately try to slash their deficits and debts. The sharp spending cuts however, may have the reverse effect, and succeed only in aggravating the situation and tipping the EU back into recession. For example, Germany has instigated €80 billion of spending cuts to be implemented over the next four years, much to the dismay of several economists. Rather than setting a good example and making Germany more competitive, the move is a selfish one with no reflection on the effect of the broader international economy. To quote Simon Tilford, chief economist at the Centre for Economic Reform “Instead of some masochistic rush to see who can cut the most, the eurozone needs a co-ordinated response.”
It may, however, be impossible to find a 27 member state consensus on the way back to “sound public finances”. The EU has a tough hand to play if it wants to emerge unscathed and unified from this economic crisis; it needs to plan its next move extremely carefully.