By Jim Leontiades
The Cyprus International Institute of Management
There have been 29 meetings of the Eurogroup to date as the Eurozone leaders try to keep one step ahead of the latest crisis. Many billions have been provided to help member countries survive. Millions of jobs have been lost to “austerity economics”. For the most part, the results have been disappointing. The Eurozone is now entering its seventh consecutive quarter of economic recession, the longest since the Euro was established in 1999. If we consider the European Union and not just the Eurozone, growth of GDP across the 27 countries has been consistently better (or less bad) than in the 17 Eurozone countries. In short, the EU countries outside the Eurozone are growing faster than those inside.
We are all too painfully aware of the many financial defaults and near- defaults among the Euro member states. These have been largely absent in the non-euro countries. The former East bloc countries of Hungary and Estonia received temporary financial assistance from the EU and IMF, but there have been no bail-in /bail-outs among countries of the EU not in the common currency. The EU countries most closely associated with financial disaster are mainly those who have joined the common currency. These have also been the ones who have shown the least signs of recovery from the crisis.
Wasn’t joining the common currency and its various institutions, commitments and sacrifices supposed to improve matters? Indeed, Eurozone officials sensitive to the obvious lack of progress are quick to point to some such instances. Irish government finances are presented as an example of economic recovery. The borrowing costs of Ireland dropped recently on the back of an upgrade from Standard and Poor’s. Surprisingly, Eurozone officials also point to Greece as another example. It has seen major improvements in its export/import balance, hailed as a sign of improved international competitiveness.
PROGRESS THROUGH POVERTY
In the rosy days before the global crisis, Greece was importing much more than it was exporting. The result was a massive balance of payments debt which contributed to its dire economic situation. There has indeed been a marked improvement in the international trade balance of Greece. The reason is obvious and applies to most countries experiencing recession.
Recessions represent a drop in demand. This affects both imports as well as domestically produced goods but imports particularly, since many of these tend to fall in the luxury category. Not only do imports typically drop in a recession, but the lack of demand in the local market pushes producers to look harder for opportunities abroad. Hence, some improvement, though usually less, in exports.
The force behind such improvements is falling domestic demand. The real test is what happens if and when a country recovers. Demand will then increase and put the whole process in reverse. Unless of course, there has been a major improvement in the country’s productivity and international competitiveness -- in which case the improvement may turn out to be permanent. There is scant sign of such improvement in Greek productivity.
MOVING THE GOAL POSTS
The improvement in Ireland’s national finances which recently resulted in lower borrowing costs is of course welcome. Ireland’s improved access to international markets was the reason for the optimism. But official statistics in the Irish Times recently indicate that the country’s economy has just entered its third recession since 2008.The Eurozone has redefined economic recovery in line with its own emphasis on government debt and finances.
Some readers will remember the great fuss that was made some years go about the “fiscal compact” and the commitment of all Euro member countries to a national debt ceiling of 60%. EU statistics show that by 2012 the average debt of countries in the Eurozone has been steadily rising to reach an average debt to GDP ratio of 90% in 2012 (Germany’s national debt in that year was 83%). For the EU as a whole, the national debt ratio was lower at an average of 85% of GDP. Here again, countries within the EU but outside the Euro did better than members of the common currency.
Of course, there is also the fact that since the “rescue” of the Cypriot banks the Euro is no longer a common currency.
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