Is a scenario of the collapse of European economy possible?

Economic forecast for ages

Most consensus forecasts agree that in the next two years there will be no sustainable recovery in the global economy and trade, the “flight from risks” will continue, and a number of EU member states will plunge into recession and recession. The global and regional imbalances were so deep that in the current institutional framework, quick and painless solutions cannot be found. In the second half of 2012 and during 2013, the probability of materializing risks remains the highest in the euro area, the preservation of which has become one of the most important not only economic, but also political tasks.

For the third year now, the EU and IMF authorities have been implementing financial investments of unprecedented scale and in a hurry to launch long-overdue structural reforms aimed at saving the single European currency. In order to tighten fiscal discipline, a Budget Pact has been developed, which has already been ratified by most EU member states. Fundamental agreements have been reached on the creation of a single treasury and banking union for the EU. Emergency financial assistance received five countries - members of the eurozone. The volumes of refinancing by the European Central Bank - the ECB, which, contrary to its ideology, began to issue loans to commercial banks for up to three years, were significantly increased. In July 2012, in order to stimulate the lending process, the ECB lowered the base rate from 1 to 0.75%, and the deposit rate from 0.25 to 0%.

Despite the steps taken to maintain the common European currency, the yield on 10-year government securities of Portugal, Italy, Spain and Ireland periodically reaches 6% or more, which is close to critical values of 7% or more, after which the burden of debt servicing becomes unbearable for the country. The financial assistance provided did not lead to an improvement in the economic situation in the recipient countries, and the austerity policies prescribed by donors increased unemployment and social tensions, further undermining investor confidence in their obligations. Greece is in a state of undeclared default, which, in all likelihood, will not be able to fulfill the financial recovery plan prescribed by it, which will result in either all kinds of deferrals or bankruptcy of the country. But both are bad.

Delays will serve as a bad example for other countries, and bankruptcy can have shocking political consequences. It is possible that Italy, which is the second holder of the state debt of the eurozone member countries after Germany, will seek financial help, which will further increase tension in the EU.

By the middle of this year, the need for additional measures to strengthen the European integration mechanism became apparent. On June 28-29, 2012, the EU summit took place, the 18th in a row since the onset of problems in the eurozone. At the meeting, a 10-year plan “The Path to an Economic and Monetary Union” was adopted, which provides for the creation of a single treasury, which is entrusted with the control over the implementation of a single union and national budgets. Treasury decisions will be binding on all EU member states. In accordance with this plan, a single banking union is being created, as well as the Agency for Supervision of the 25 largest banks, accountable to the ECB, the remaining banks remain accountable to the national central banks. At the same time, no agreement was reached on the issue of pan-European bonds, which Germany and several other countries strongly objected to. The prospects for the formation of a single banking union are not entirely clear, since Germany is unlikely to agree to joint deposit insurance and the creation of a common fund for the restructuring of troubled banks.

Efforts to strengthen the integration mechanism, including the launch of the European Stabilization Fund on July 1, 2012, will certainly have a positive effect. However, they are not able to eliminate the underlying causes that gave rise to the eurozone crisis. The main one is that when creating a single European currency, a systemic error was laid when, under the auspices of the euro, states with different levels of labor costs per unit of production, and hence competitiveness, were united. Those countries whose national currencies were revalued before the euro was created became more competitive due to their hidden devaluation, and countries with underestimated national currencies were even less competitive because they actually revalued. A direct consequence of this was the aggravation of the dis proportionality of the balance of payments on the current account.

It has been estimated that since the introduction of the euro, Spain’s competitiveness has declined by 28% and Italy’s by 35%. This also applies to other “peripheral” countries of the Eurozone, the reduction of the debt burden of which through austerity regime and partial restructuring does not solve the problem of their lack of competitiveness. Examples are examples of countries in Northern Europe. Finland, which has abandoned the national currency in favor of the euro, has a negative current account balance of payments, despite significant export opportunities. At the same time, Denmark and Sweden, which retained their national currency, set the opposite example. Norway's example is even more striking, although oil and gas exports play a prominent role here.

In this regard, the thesis about the budget "wastefulness" of the peripheral countries of the eurozone only partially explains the causes of the emergence and development of the debt crisis. Of course, strict adherence to the principles of the Maastricht Treaty and the timely creation of the Union Treasury would help to contain the avalanche-like growth of sovereign debt, but this would not solve the problem of external imbalances and gaps in the competitiveness of various groups of eurozone countries. Under the current conditions, countries in distress are deprived of the opportunity to carry out macroeconomic adjustments through external devaluation and are forced to resort to internal, lower labor costs, reduced employment and austerity policies. However, here the range of possible solutions is very limited, including for sociopolitical reasons. According to the OECD, to date, there are almost 25 million unemployed in the EU countries, more than 11% of the working population, which is 2 million more than in 2011. In Greece and Spain, unemployment reaches almost 25%, and among able-bodied citizens under 25 years of age, more than half of them are unemployed in these countries.

In order to maintain a single European currency, EU authorities use measures of both medium and short term nature. But the whole question is whether they can be implemented in full, and whether there will be enough time for this. Despite the validity of medium-term measures, the creation of a union treasury and a banking union, there are doubts about the willingness and desire of a number of EU member states to make the necessary institutional changes. As you know, the Maastricht Treaty was universally approved at one time, which did not prevent it from being “quietly” violated.

As for short-term measures, if they are applied successively, the exit of individual countries from the euro area will become even more likely. Austerity regime leads to a decrease in consumer and investment demand, maintaining high unemployment and falling GDP growth rates. All this undermines the tax base and leads to an increase in the cost of borrowing, which again may raise the question of obtaining additional financial assistance. In the current situation, the problem of increasing economic growth cannot be solved by the fiscal stimulation methods already tested in the past. A further increase in the debt burden will be followed by a decrease in sovereign ratings and, again, an increase in the cost of borrowing, and this will lead to the need for austerity measures. The circle thus closes, and the problems of the eurozone seem to be pulled together into a knot that is increasingly reminiscent of the Gordian.

TheproblemsoftheEuropeaneconomy

The problems of the European economy
Most consensus forecasts agree that in the next two years there will be no sustainable recovery in the global economy and trade, the “flight from risks” will continue, and a number of EU member states will plunge into recession and recession. The global and regional imbalances were so deep that in the current institutional framework, quick and painless solutions cannot be found. In the second half of 2012 and during 2013, the probability of materializing risks remains the highest in the euro area, the preservation of which has become one of the most important not only economic, but also political tasks.

For the third year now, the EU and IMF authorities have been implementing financial investments of unprecedented scale and in a hurry to launch long-overdue structural reforms aimed at saving the single European currency. In order to tighten fiscal discipline, a Budget Pact has been developed, which has already been ratified by most EU member states. Fundamental agreements have been reached on the creation of a single treasury and banking union for the EU. Emergency financial assistance received five countries - members of the eurozone. The volumes of refinancing by the European Central Bank - the ECB, which, contrary to its ideology, began to issue loans to commercial banks for up to three years, were significantly increased. In July 2012, in order to stimulate the lending process, the ECB lowered the base rate from 1 to 0.75%, and the deposit rate from 0.25 to 0%.

Despite the steps taken to maintain the common European currency, the yield on 10-year government securities of Portugal, Italy, Spain and Ireland periodically reaches 6% or more, which is close to critical values of 7% or more, after which the burden of debt servicing becomes unbearable for the country. The financial assistance provided did not lead to an improvement in the economic situation in the recipient countries, and the austerity policies prescribed by donors increased unemployment and social tensions, further undermining investor confidence in their obligations. Greece is in a state of undeclared default, which, in all likelihood, will not be able to fulfill the financial recovery plan prescribed by it, which will result in either all kinds of deferrals or bankruptcy of the country. But both are bad.

Delays will serve as a bad example for other countries, and bankruptcy can have shocking political consequences. It is possible that Italy, which is the second holder of the state debt of the eurozone member countries after Germany, will seek financial help, which will further increase tension in the EU.

By the middle of this year, the need for additional measures to strengthen the European integration mechanism became apparent. On June 28-29, 2012, the EU summit took place, the 18th in a row since the onset of problems in the eurozone. At the meeting, a 10-year plan “The Path to an Economic and Monetary Union” was adopted, which provides for the creation of a single treasury, which is entrusted with the control over the implementation of a single union and national budgets. Treasury decisions will be binding on all EU member states. In accordance with this plan, a single banking union is being created, as well as the Agency for Supervision of the 25 largest banks, accountable to the ECB, the remaining banks remain accountable to the national central banks. At the same time, no agreement was reached on the issue of pan-European bonds, which Germany and several other countries strongly objected to. The prospects for the formation of a single banking union are not entirely clear, since Germany is unlikely to agree to joint deposit insurance and the creation of a common fund for the restructuring of troubled banks.

Efforts to strengthen the integration mechanism, including the launch of the European Stabilization Fund on July 1, 2012, will certainly have a positive effect. However, they are not able to eliminate the underlying causes that gave rise to the eurozone crisis. The main one is that when creating a single European currency, a systemic error was laid when, under the auspices of the euro, states with different levels of labor costs per unit of production, and hence competitiveness, were united. Those countries whose national currencies were revalued before the euro was created became more competitive due to their hidden devaluation, and countries with underestimated national currencies were even less competitive because they actually revalued. A direct consequence of this was the aggravation of the dis proportionality of the balance of payments on the current account.

It has been estimated that since the introduction of the euro, Spain’s competitiveness has declined by 28% and Italy’s by 35%. This also applies to other “peripheral” countries of the Eurozone, the reduction of the debt burden of which through austerity regime and partial restructuring does not solve the problem of their lack of competitiveness. Examples are examples of countries in Northern Europe. Finland, which has abandoned the national currency in favor of the euro, has a negative current account balance of payments, despite significant export opportunities. At the same time, Denmark and Sweden, which retained their national currency, set the opposite example. Norway's example is even more striking, although oil and gas exports play a prominent role here.

In this regard, the thesis about the budget "wastefulness" of the peripheral countries of the eurozone only partially explains the causes of the emergence and development of the debt crisis. Of course, strict adherence to the principles of the Maastricht Treaty and the timely creation of the Union Treasury would help to contain the avalanche-like growth of sovereign debt, but this would not solve the problem of external imbalances and gaps in the competitiveness of various groups of eurozone countries. Under the current conditions, countries in distress are deprived of the opportunity to carry out macroeconomic adjustments through external devaluation and are forced to resort to internal, lower labor costs, reduced employment and austerity policies. However, here the range of possible solutions is very limited, including for sociopolitical reasons. According to the OECD, to date, there are almost 25 million unemployed in the EU countries, more than 11% of the working population, which is 2 million more than in 2011. In Greece and Spain, unemployment reaches almost 25%, and among able-bodied citizens under 25 years of age, more than half of them are unemployed in these countries.

In order to maintain a single European currency, EU authorities use measures of both medium and short term nature. But the whole question is whether they can be implemented in full, and whether there will be enough time for this. Despite the validity of medium-term measures, the creation of a union treasury and a banking union, there are doubts about the willingness and desire of a number of EU member states to make the necessary institutional changes. As you know, the Maastricht Treaty was universally approved at one time, which did not prevent it from being “quietly” violated.

As for short-term measures, if they are applied successively, the exit of individual countries from the euro area will become even more likely. Austerity regime leads to a decrease in consumer and investment demand, maintaining high unemployment and falling GDP growth rates. All this undermines the tax base and leads to an increase in the cost of borrowing, which again may raise the question of obtaining additional financial assistance. In the current situation, the problem of increasing economic growth cannot be solved by the fiscal stimulation methods already tested in the past. A further increase in the debt burden will be followed by a decrease in sovereign ratings and, again, an increase in the cost of borrowing, and this will lead to the need for austerity measures. The circle thus closes, and the problems of the eurozone seem to be pulled together into a knot that is increasingly reminiscent of the Gordian.