The doomsday prophets have got it all wrong. Europe and the euro will survive the current financial crisis. The EU’s handling of the crisis, mainly through tough austerity measures, is starting to bear fruit, Finland’s Minister for European Affairs and Foreign Trade, Alexander Stubb, says.
“Never underestimate the capacity of the EU to take tough decisions when it has its back to the wall,” Stubb, a key figure in fighting the crisis, told economists at UCT on a recent visit to South Africa.
When the crisis was over, the EU would have made big strides towards the economic union, which it had so far lacked but which was vital to make its monetary union work.
Stubb based his optimism on five positive indicators:
n The decision of the European Central Bank (ECB) to buy the government bonds of struggling member countries like Italy, Spain, Portugal and Ireland if they were unable to sell them elsewhere. That immediately drove down the cost of borrowing for those countries from about 7 percent or more to about 5 percent, enabling them to finance more of their government spending.
n The victory of the pro-Europe parties in last year’s Dutch elections.
n The European Commission’s proposal for a banking union. “If you have a common financial market you need some financial controls and I think a banking union is a key element in this.”
n Ireland and Portugal, which had been taken out of the financial market and given rescue packages, were slowly coming back onto the market, selling their own bonds, “which shows basically that the system is working.”
n The EU’s “biggest bazooka” for rescuing troubled member states, the European Stability Mechanism, worth e500 billion (R5.6 trillion), was now in place.
Stubb said the roots of the current crisis, which erupted in 2008, went back to the early 1990s when the EU created the Economic and Monetary Union (EMU). “We created basically the monetary part of the EMU but not the economic union. We said we’ll pool the money but we won’t pool how we handle the money. But you cannot have monetary union without economic union.”
The EU had made an attempt at greater economic union back then with its stability and growth pact, which set limits on public spending in member states.
“But these were only guidelines… And unfortunately two of our biggest countries broke the pact in 2003: France and Germany. And once that happened a lot of the smaller players followed suit.”
Credit rating agencies aggravated the problem by treating all euro zone members the same, recommending low interest rates: cheap money, for the Greeks and the Finns alike.
“So, things were running out of hand and there was too much free or cheap money available. And once the pack of cards started to collapse, we all ran into trouble and ever since, we have been trying to manage this crisis in one way or another.”
Finland, and Stubb himself, have been in the vanguard in tackling the crisis.
“Finland is a small country of 5.4 million people up in the northern corner of Europe. Yet, right now we are in the institutional core of Europe. Why? Because we have managed our public finances well, because we fulfil the euro criteria and because we are triple-A rated.
“Finland has been pushing the tough austerity line. It’s basically Finland, Germany and the Netherlands in the euro zone who are the bad cops of Europe. We say, listen, we give you money, but it has to be conditional and the conditions are these and these and these.”
Stubb admitted that it was a bit uncomfortable for Finland to discipline much bigger countries like France and Spain. He also acknowledged that too much austerity could jeopardise Greece’s rather fragile democracy.
Yet, he countered that his government was also weathering a political backlash at home for lending Greece e1bn out of an economy of e55bn.
Finns were saying: “Here you have this Greek teacher who is making 10 times more than a Finnish teacher. Something is wrong. It cannot be possible that they are not able to collect taxes… the system is corrupt. Something needs to change.”
However, he also acknowledged that Finland and the other “bad cops” were ultimately acting in their own interests, because it was cheaper in the long run for them to save troubled countries than allow the euro to collapse.
Finland had lost about e40bn since the start of the crisis and had contributed about e12bn or e13bn to rescue troubled EU countries.
“So the overall calculation… is that we would be much worse off if Greece collapsed. That’s the reason why we have helped them,” Stubb added.
He reminded the “bad cops” that they themselves were in bad shape in the early 1990s with banking crises in Finland and Sweden, Germany diagnosed as the sick man of Europe and Denmark and the Netherlands not competitive at all. But they had all got out of their troubles by managing their public finances better and that was what the likes of Greece and Spain had to do now.
The euro zone could survive the departure of Greece, which represented only 2 percent of the European economy, he said. But not Spain. So far, Europe had pumped e100bn into Spanish banks to keep them afloat.
“So that’s the game changer. That’s where my optimism is a little bit on shaky ground, I fully admit, because Spain is too big for us to bail out. Spain is our Achilles heel.”
Nonetheless, Stubb said he knew all the key ministers in both Greece and Spain and trusted that “they are willing to put their political careers on the line”, to save their countries. “So, that gives me a little bit of optimism.”
Apart from the rescue packages, the EU revisited the stability and growth pact last year and gave it teeth in a brand new financial pact.
Most member states agreed to legislate “debt brakes” obliging them to stop public spending when their debts reached defined limits. Also, an EU court would determine if a member state had breached the agreement and could impose significant fines on offenders.
Stubb acknowledged that such moves towards a closer economic union were putting strain on the EU, and had already proved too much for the UK and Czech Republic, which did not sign the financial pact.
Deeper economic integration would probably require changes to the EU treaties and those in turn might need ratification through national referenda, presenting another major political challenge, Stubb said.
Eurosceptics fear the price of economic union will be too high and that will drag down the monetary union with it.
But as a Europhile, Stubb believes this is the price that the EU must, and will, pay for the EMU. - Peter Fabricius Foreign Editor