The European Union is facing a crucial crossroad. I am referring to issues which require action not only from the political leaders, but also from the citizens of the continent. I'm not an economist (in any way). I am just trying to think logically, stay informed and hereby I present a series of personal thoughts and logical conclusions.
Where we stand:
All sides (referring to these which envision a common European future), eventually agree on the need for a more stable foundation for the European Union in order to evolve and be able to compete in the forthcoming international fights. The big test of the near future will be on the global redistribution of access to natural resources (materials, energy, food) and economic influence from west to east (this in a later article).
The majority of production processes have been transferred to Asia due to labor costs initially but also because of the immense growth possibilities offered by the local population. The communities in these areas are upgrading rapidly their living standards, but soon will also begin to feel the pressure from the slow down of the demand for their products. This will be mainly due to a decrease in exports but will also gradually affect domestic consumption in these countries. Also the inevitable appreciation of their currencies will contribute even further to the trend. It is obvious that the present economic crisis in western economies will lead to consumption control affecting both the quantity as well as the origin of goods and energy. This environment will result to an obvious decrease of demand for the products of Asian countries, but also for Russia and Germany.
Historically speaking we can observe a swing between a market economy with state supervision (Bretton Woods 1944 agreement - social welfare state) and unlimited power to the forces of markets (President Nixon and abolition of the gold to dollar ratio in August 1971, Prime Minister Thatcher early 80s). The outcome of this balance was the foundation of euro in the early '90s. The markets (banking, funds, currency and commodities trading) have regained their dominant status, as held before the crisis of 1929, thanks to the almost unlimited trading possibilities to 2nd or even 3rd level financial products. Their tools are based on financial-economical products, processes and services and not on the real economy (Production). This was the foundation of the Euro and pushed the new currency to a frantic race taking advantage of these practices. Cheap interstate and interbank loans were made available to all member states, with the turn of a switch!
If we step back and look from a distance, then the fact is that the European Union is facing two roads ahead:
Source: tradingeconomics.com
It is naive to expect from nations like Greece, Portugal, Spain, Italy, and many more, with a turn of the switch to convert from deficit to balanced economies. These countries do not have even the culture or historical example of a period that their balance sheets were... balanced! It is enough just to look at what was happening with their national currencies in the past, and how many times they have been depreciated. Furthermore we should not forget that most of the production activities have been moved out of their territories and they are not likely to return any time soon (to a large extent the same applies for bigger economies like France or England).
It is quite safe to conclude that this scenario has an important factor of instability, and conflict of interests. Especially if we factor in the feelings of nations that had the experience of the eurozone, and then lost it! A violent correction would be very likely. And those in favour of such reshuffling, hoping that after the initial turmoil something better would emerge, should not neglect that this time there are external factors that probably will not make such a "rebirth" so likely. Lets not forget the pending re-arrangement of balances between the West and Asian economies.
Expedited completion of the unification process for the EU
The second path is about European Unification with common economic, labour, tax and trade policies. I will not get into details by trying to describe these policies since it is a huge subject by itself. What is certain is that they should be designed in an appropriate way to address the forthcoming "new deal" with Asian economies and their strong competition. They will most certainly involve changes in the way citizens of E.U. are consuming. It is utopic to believe that E.U. can keep importing products from Asia and rely on its' financial services system to produce the money to pay the bill.
All member countries should agree on a common set of rules. These will be supervised by the central government, since history has taught us that there is no alternative trustworthy method. Local petty political interests have always been undermining the rules at some point. This system should include methods to intervene and reform member states that are not conforming, bur also serve the need to preserve as much as possible from the European lifestyle and quality of life in a realistic way.
I must highlight here that we should not define as problematic only the financial deficit of some states, but also: increased private sector debts, the weakening of healthy social structures (like unions), the low birth rate (which is a bomb in the foundations of all the pension funds) and many other issues that need to be addressed on a European level.
All these issues must be addressed along with the financial figures which of course are important. Solutions must be provided not only to the economic problems but also to structural deficiencies. So this path involves:
- Interview of Frank Walter Steinmeier to Bild (BILD-Interview mit SPD-Fraktionschef Frank-Walter Steinmeier - Politik Inland - Bild.de)Where we stand:
All sides (referring to these which envision a common European future), eventually agree on the need for a more stable foundation for the European Union in order to evolve and be able to compete in the forthcoming international fights. The big test of the near future will be on the global redistribution of access to natural resources (materials, energy, food) and economic influence from west to east (this in a later article).
The majority of production processes have been transferred to Asia due to labor costs initially but also because of the immense growth possibilities offered by the local population. The communities in these areas are upgrading rapidly their living standards, but soon will also begin to feel the pressure from the slow down of the demand for their products. This will be mainly due to a decrease in exports but will also gradually affect domestic consumption in these countries. Also the inevitable appreciation of their currencies will contribute even further to the trend. It is obvious that the present economic crisis in western economies will lead to consumption control affecting both the quantity as well as the origin of goods and energy. This environment will result to an obvious decrease of demand for the products of Asian countries, but also for Russia and Germany.
Historically speaking we can observe a swing between a market economy with state supervision (Bretton Woods 1944 agreement - social welfare state) and unlimited power to the forces of markets (President Nixon and abolition of the gold to dollar ratio in August 1971, Prime Minister Thatcher early 80s). The outcome of this balance was the foundation of euro in the early '90s. The markets (banking, funds, currency and commodities trading) have regained their dominant status, as held before the crisis of 1929, thanks to the almost unlimited trading possibilities to 2nd or even 3rd level financial products. Their tools are based on financial-economical products, processes and services and not on the real economy (Production). This was the foundation of the Euro and pushed the new currency to a frantic race taking advantage of these practices. Cheap interstate and interbank loans were made available to all member states, with the turn of a switch!
If we step back and look from a distance, then the fact is that the European Union is facing two roads ahead:
- Insist on testing the tolerance of the Euro as a currency unit for a union of heterogeneous sovereign states. The contradiction in this situation is that even though the Euro was born following the demand of the markets, these same markets are now predicting its' doom! This path assumes that any country unable to comply with the driving forces of the market will be either expelled from the common currency or at least placed under strict economic custody to minimize the influence.
- Strengthening of the political foundations of the European Union, in order to achieve a centralized governance and backing of the common currency.
Source: tradingeconomics.com
- Separate national currencies. This is the least probable scenario because the strong economies of northern Europe will suffer back to back blows in their competitiveness and exports. It will constitute a spectacular cancellation of the path followed since the '50s. I believe that the cost for the European economies to get back to this status, would be exceeding the cost to try to balance the current situation by supporting the deficit economies!
- Groups of countries with common currency. The groups would be formed by countries with similar structure and competitive levels. At the same time the peripheral economies would either join a different common currency, or more likely return to national currencies, since their needs are varying in many ways. This is a method to minimize the effect in the financial activity of the surplus countries.
- Intermediate situation where national currencies would be introduced but with locked margins of fluctuation to a central currency unit. Much like the situation with the ECU of the '90s. This way, local variations will be possible, while giving at the same time a central reference point for transactions and trading.
It is naive to expect from nations like Greece, Portugal, Spain, Italy, and many more, with a turn of the switch to convert from deficit to balanced economies. These countries do not have even the culture or historical example of a period that their balance sheets were... balanced! It is enough just to look at what was happening with their national currencies in the past, and how many times they have been depreciated. Furthermore we should not forget that most of the production activities have been moved out of their territories and they are not likely to return any time soon (to a large extent the same applies for bigger economies like France or England).
It is quite safe to conclude that this scenario has an important factor of instability, and conflict of interests. Especially if we factor in the feelings of nations that had the experience of the eurozone, and then lost it! A violent correction would be very likely. And those in favour of such reshuffling, hoping that after the initial turmoil something better would emerge, should not neglect that this time there are external factors that probably will not make such a "rebirth" so likely. Lets not forget the pending re-arrangement of balances between the West and Asian economies.
Expedited completion of the unification process for the EU
The second path is about European Unification with common economic, labour, tax and trade policies. I will not get into details by trying to describe these policies since it is a huge subject by itself. What is certain is that they should be designed in an appropriate way to address the forthcoming "new deal" with Asian economies and their strong competition. They will most certainly involve changes in the way citizens of E.U. are consuming. It is utopic to believe that E.U. can keep importing products from Asia and rely on its' financial services system to produce the money to pay the bill.
All member countries should agree on a common set of rules. These will be supervised by the central government, since history has taught us that there is no alternative trustworthy method. Local petty political interests have always been undermining the rules at some point. This system should include methods to intervene and reform member states that are not conforming, bur also serve the need to preserve as much as possible from the European lifestyle and quality of life in a realistic way.
I must highlight here that we should not define as problematic only the financial deficit of some states, but also: increased private sector debts, the weakening of healthy social structures (like unions), the low birth rate (which is a bomb in the foundations of all the pension funds) and many other issues that need to be addressed on a European level.
All these issues must be addressed along with the financial figures which of course are important. Solutions must be provided not only to the economic problems but also to structural deficiencies. So this path involves:
- Agreement on social, political structures for all members
- Local policies should be sacrificed to the common cause for European prosperity on sustainable foundations
- Supervision of the proper application of the policies by a central government. This applies to all member states, even to the ones that are compliant to the agreed set of rules! No state/country should be considered superior to other.
- Control of the central government by the people of the Union on a regular base through elections. The representation achieved through the elections should be such that would allow every part of the continent to express its' will in the central government.
This procedure in order to be accepted by the people of every members state, must be presented as a vision for a common, efficient and realistic future for the whole of Europe. Also the alternative path should be presented very clearly to all. These decisions require daring politicians with high sense of social responsibility in order to resist ethnic reactions and convince for their vision.
- Statement of Jean Claud Trichet (Jean-Claude Trichet calls for European finance ministry | Business | The Guardian)
- EU's Barroso warns about cost of splitting euro zone | Reuters
- The euro zone: Is this really the end? | The Economist
Time is a factor that is very pressing at this point and we cannot afford to overlook the reality that Europe does not have sufficient time to proceed with the necessary changes. My estimation is that the margin available to adapt to this new environment is no later than 2015! Also, other international interests are not compatible with this path and will not make it easy for the Union to work out the differences. We should be aware that in the past, when it came to reshuffling of power, it has always been between two (and not three or more) sides. Europe right now appears to be 3rd side in this tug war.
Citizens of member states should be presented with the necessary measures not as punishment for the past artificial prosperity, but as a evolution towards the common European future. The only future that can offer feasible possibilities to control our lifestyle and modify this where needed in a way that is as much compatible with our culture, as possible. Because the growth models as well as social and government models, as we know them today will have to be adapted to the new reality. To a large extent it has been based to a series of credit - financial products and anticipations that failed! But it is very important that austerity measures should be accompanied by with realistic and long term viable procedures for transfer of wealth, production and resources to weaker members. It is always better to teach the hungry how to fish instead of giving him ready made meals.
Examples in this direction could be, to establish production factories in Greece for aeolian or photovoltaic panels, instead of just covering wide areas of Greece with imported panels!
In the European political system, politicians must present the vision and prospects to the people. Politicians are obliged to serve the common interests of the European societies, according to their political beliefs, but also to analyze and adjust their path based on the knowledge they have access to from their position. By presenting the facts and the possibilities they should establish bonds of confidence and inspire the voters. This is the only way that our governments can guide the people and their lifestyles to wise choices. Because it is the duty of the politicians to dictate the lifestyle and guide the society to the path of survival and balance.