Éloi LAURENT (OFCE/Sciences-po)

eloi.laurent@sciences-po.fr

Université d’été “Le capitalisme en crises”Université de Montréal, 29 June 2010.

The European crisis :integration or disintegration ?

Outline

From the "U.S. financial crisis" to the European political crisis;

European integration or politics repressed; Maastricht or the nominal illusion; the euro, ten years

on; Tax and social competition; Germany and the small-

country mindset; How to get out of the crisis in Europe? Three long-term scenarios.

From the “US financial crisis” to the European political crisis

In late 2008, early 2009: tenth anniversary of the euro: general self-indulgence in Europe. Everything was perfect in the best of worlds;

But the global crisis shed a crude light on the difficulties of the European Union to respond as a sovereign economic power and a cohesive block ;

Yet one could reasonably entertain the hope that the Union, after five decades of economic integration and ten years of monetary union, could become the laboratory of international cooperation in the crisis.

But obvious unwillingness of member states to coordinate within the euro area, economic heart of Europe; obvious lack of European solidarity towards the new member states, and more generally the periphery;

In all, the European response to the crisis was late and timid to a crisis that Europe first denied: the crisis caught up with Europe. The euro area is paying the (high) price of complacency.

European integration or politics repressed

Europe "alive and organized« , a project launched by Jean Monnet and Robert Schuman (May 9, 1950) on a fundamental idea: Sharing the raw materials of war to render it materially impossible.

The European Coal and Steel Community (ECSC April 18, 1951) was the first step, technical in appearance, eminently political;

Schuman: "Europe will not happen at once, or in a single plan: it will be built through concrete achievements which first create a de facto solidarity.".Declaration of 9 May 1950: declaration of interdependence. The Rome Treaty, extending the logic of peace by the market;

Political power is suspect in Europe, it must be tamed and disguised; there is a deliberate empty space of sovereignty, a non-European government: that logic is at the heart of the current crisis.

Maastricht or the nominal illusion

Under the auspice of this logic, the Maastricht Treaty has defined a new economic constitution for Europe, which is still in place;

The Treaty of Rome (EEC, 1957) put at the top of the constitutional order the principle of “free and undistorted competition”; the Maastricht Treaty (EU, 1992) crowns the principle of “price stability”;

A new hierarchy is born whose apex is Article 105, the ECB and the Stability and growth Pact: “economic governance” by rules not “economic government” by political authorities .

Source : Laurent, 2006.

The European economic constitution

The euro, 10 years on

What is the record of this system, of ten years of euro? The comparison with the EU 15 countries that have not adopted the single currency reveals serious deficiencies. First, the standard of living, real GDP growth per capita, has declined in the euro area since the single currency. It has progressed more slowly in 1999-2008 than in Sweden, the United Kingdom and Denmark.

The rate of economic growth was also reduced in the euro zone from 1989-1998 to 1999-2008, when it has stepped up in the three EU 15 countries taken as a benchmark. The growth of labor productivity has also been reduced by half in the euro area between 1989-1998 and 1999-2008, whereas it was almost maintained in Sweden, the United Kingdom and Denmark.

Yes, inflation fell from 3.3% to 2.2% in countries that have adopted the euro, but it fell to 1.7% in European countries which have retained their currency (the rate of long term interests have been reduced in exactly the same proportions). Deficits and debt have also been further reduced in Sweden, the United Kingdom and Denmark than in the euro area. Comparison with the United States, the only economic region of comparable size, is hardly more flattering;

More importantly regarding the current crisis, real divergence between member states of the euro area has widened.

Source : Fitoussi and Laurent (2009).

The nominal success

Prices and costs lowering and stabilization in the euro area annual growth, in %

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-1

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7

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Unit labour cost Infl ation

Source : European Commission.

Euro area vs UE-non euro

Source : Commission européenne.

Euro area vs US

Source : Fitoussi and Laurent, 2009.

Real divergence

Tax and social competition

The overall performance of countries in the euro area is not good, but it also conceals very different situations;

That raises the question of the quality of cooperation between member States of the euro area. It looks like economic governance, by rules, has lead to a deceiving culture of discipline but not to a true culture of cooperation;

The adoption of non-cooperative economic strategies in the euro area (tax and social competition) is particularly damaging in terms of cohesion and economic efficiency. It was first practiced by the smaller countries in the euro area (Ireland), but since 2000 the biggest economy of the region, Germany, has fallen for it;

Germany has regained its position as the leading world exporter, but this growth strategy has resulted in a continued weakness in German domestic demand and thus a weaker contribution to the growth of the euro area.

Tax and social competition is an EU problem, but it is most damaging for euro area countries since they share the same currency and can not use the exchange rate. Divergence in competitiveness will threaten the monetary union.

Source : Commission européenne.

Tax competition

Source : Commission européenne.

The German small country growth strategy

Trade openness and unit labour cost in Germany, 1987-2007

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25

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45

1987

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2007

-3-2-1012

345678

Trade openess (left scale) Unit labour cost, business sector (right scale)

Source : Laurent and Le Cacheux, 2010.

Germany vs. « Club Med »

How to exit the European crisis?

Barely a teenager, the euro is now a currency in suspension: it has a few years - two, maybe three - to demonstrate its viability. If this period is not being used to initiate profound institutional reforms, there is no doubt that the euro area will disintegrate under the weight of its contradictions, triggering a global crisis far more violent than the fall of 2008.

Designed to address the immediate liquidity problems, the ESF saves time to implement real reforms. The ESF has been established for a period of three years, corresponding to the horizon set by the Commission for the return of the States under the 3% of GDP that the Stability Pact imposes on public deficit.

The Franco-German dialogue is very difficult and nothing is done in the purely disciplinary or the idea of cooperation to resolve problems of competitiveness of member countries and to enhance prospects for growth in the euro area. Without mechanism for mutually beneficial cooperation, strengthening the discipline lacks credibility.

We should establish a "sustainable federalism" based on three pillars: strengthening macroeconomic discipline not only on deficits but also on public and private debt and competitiveness of States, applying intelligent penalties to states that do not respect the common rules (“carbon surtax” which proceeds would go to the EU budget; re-direct EU resources withing the “EU 2020” strategy to a large "green" economy conversion of Southern Europe countries in order to restore their competitiveness.

Three long term scenarios

The “empty Empire”: first scenario closest to what Europe is today. Europe has become an "empire of the rule.“: human rights and the market. Historic achievement but gradually the imbalance between market and democracy becomes unbearable: the power of rules occupies the political center of the empire so that it becomes hollow as it is extends; the economic cost of non-Europe becomes higher;

The “return of city-states”: The EU is a small Globalization, regional GDP per capita in 2005 is 24% of the average of 27 in north-eastern Romania to 303% of the average in Central London : 1 to 13. The marked regional disparities could threaten national unity in each EU country; The effects of concentration and agglomeration related to the success of the Single Market brought back cities to center stage, parallel with city-states of the Middle Age (Italy and Netherlands);

The “European Renaissance”: “European public goods”; “European Community for environment, energy and research”.