BY KIMBERLY ELSHAM, RACHEL LANDEN AND PREETI UPADHYAYA
Americans know as well as anyone how politics can get in the way of progress. For the Eurozone, it’s same song, different verse.
At a meeting of the European Parliament committee meeting on May 31, Mario Draghi, European Central Bank president, called the Eurozone “unsustainable.” During the same meeting, International Monetary Fund leader Christine Lagarde denied that a bailout was being prepared for Spain, while Spain’s economy minister, Luis de Guindos called for Berlin’s help. All this came after a seemingly staid meeting of the world’s top economic powers at the G8 summit in May.
The release of the Camp David Declaration following the summit indicated the member countries’ philosophical shift toward growth measures for a European economic recovery. In fact, the word “growth” appeared 10 times in the document’s 500-word section on the economy.
It seemed that Germany, previously the strongest proponent of European austerity, had taken a revised stance.
“The G8 summit has really marked an important moment highlighting the change in position,” said Domenico Laurenti, senior fellow at The Brookings Institution. Angela Merkel’s “fiscal consolidation policies are being contradicted.”
To some economists, the G8 summit’s conclusions seemed to only treat the symptoms rather than the infection itself. The proximity of the NATO summit overshadowed much of what the G8 needed to accomplish.
“It seemed to me while NATO was fiddling, Greece was burning,” said Sean Kay, an Ohio Wesleyan University professor and author who specializes in international politics. “These two large meetings produced almost nothing for one of the most serious crises.”
“In a European context, growth versus austerity is a non-argument,” said Steve Dunaway, an adjunct senior fellow for the Council on Foreign Relations. “A lot of economists have strongly urged growth versus austerity. It’s easy to say that when it’s other people’s money financing growth.”
No country knows that better than Ireland, which recently voted to ratify the deficit-fighting European Fiscal Treaty Referendum. Passing with a 60 percent vote on June 1, the treaty will add to the already dire straits of the Irish people, who are already taking a huge tax hit as an attempt to keep the country from going bankrupt.
If Europe is to truly spark the growth called for in the Camp David Declaration, investments will have to be made, and that money will need to come from somewhere. The declaration underscores the need for boosting the Eurozone countries’ private sectors, as well as increasing public-private partnerships.
While this won’t necessarily mean the Acropolis would become the Coca-Cola Acropolis, EU leaders will have to find new ways to dig themselves out of debt.
“You can’t, with conventional means, pursue both austerity and growth,” said Alan Deardorff, associate dean and economics professor at the University of Michigan who has consulted for several international economic and trade organizations. “There’s an inherent contradiction in the two objectives they have in mind.”
He explained that the obvious way to stimulate growth is to spend more or tax less, both of which increase deficits. This would be the exact opposite of austerity. Deardorff said there are attainable fixes such as removing barriers for trade and reducing friction in labor markets, but that’s where politics get in the way.
“What’s important to keep in mind is the lack of physical integration in the EU,” said Jakob Thomas, research analyst at the Milken Institute, an economics think tank in Santa Monica, Calif., highlighting the fundamental differences in economic makeup for each of the European Union member countries. “There needs to be some other equalizer.”
Some ideas on the table include: issuing Eurobonds, a consolidated debt instrument sold by the EU as a means to fund the Eurozone; increasing lending from the European Investment Bank to boost the private sector and infrastructure projects; and lifting regulatory barriers that limit hiring and firing abilities, adding flexibility to the labor market.
The Eurozone member countries were having to wait until the next EU summit on June 28 and 29 to see if there will be any political muscle behind these ideas.
And economic experts aren’t optimistic about any quick movement forward.
“I don’t see the G8 doing much,” said Mark Weisbrot, co-director for the Center on Economic and Policy Research. “It’s really up to the European authorities — i.e. the Troika [the EU, IMF and ECB] — to put an end to this mess, and they are moving quite slowly at present.”
