As evidenced by the meeting of G20 nations in Paris, global concern over economic instability in the Eurozone is growing. As the international political economy becomes ever more closely integrated, weak or non-existent growth in the European Union has major ramifications from Brazil to Japan, particularly given ongoing problems to kick-start the world’s second biggest economic entity, the United States. Yet as global financial institutions struggle to contain European economic decrepitude, the soft underbelly of the European project continues to creak like a ship in a storm.
Despite relatively modest public debt levels, Standard & Poor’s followed in the footsteps of Fitch by cutting Spain’s credit rating, in this instance from AA to AA-, as a result of high levels of private sector debt and weak growth. Ireland will take a generation to recover from its collapse; Greece remains as far from economic sanity as ever and traders show no let up in dragging Italy into the mix. The credit ratings on a host of major international banks have been cut, most recently on UBS, Lloyds and Royal Bank of Scotland. As long as the EU’s more prosperous states fail to provide the engine for more rapid growth, the European fringe will continue to struggle.
In return for greater financial support, northern European governments are insisting on greater accountability from their southern counterparts, particularly in Athens. EU and IMF officials postponed a €8 billion payment to the Greek government in September on the grounds that insufficient effort had been made to boost tax revenue and cut spending. As a result, popular protests are only likely to gain in intensity. There is already a perception in Athens and Madrid that painful social spending cuts are being implemented by foreign governments and such distrust can only tear further at the fabric of European international cohesion.
The unwieldy nature of current European structures was underlined by the struggle to sanction increased support for the Eurozone’s economic casualties through the European Financial Stability Facility (EFSF). Negotiations on boosting the level of financial aid to southern Europe took several weeks to complete and even then one government after another had to sanction the deal until eventually Slovakia put pen to paper on the agreement.
To return to our shipping analogy, a steady hand is required on the tiller of economic progress at all times, but any economy needs to take evasive action during a storm. Europe in the guise of the Eurozone has thus far shown itself to be too cumbersome to negotiate current financial difficulties. There is nothing intrinsically wrong with international economic integration. It can promote peace, co-operation and trade, creating stability and prosperity for the many as well as the few within a democratic context. Yet the levers of economic control must be adapted to fit these new circumstances and the chasm between economic and political integration has left the euro project wide open to instability.