The Crisis 

Starting from end of 2009, the Eurozone sovereign debt crisis slowly unfolds when Greece’s finance minister has revealed the country’s huge financial trouble. Along with Greece, a few member countries of EU, i.e. Ireland, Portugal and Cyprus were unable to repay their government debts. Even though only a few countries were heavily indebted, but it was a contagion issue which could pose as a financial risk to other EU countries. Hence, bailout decision was made (Investopedia, 2011; SPIEGEL, 2011; The European Crisis Timeline, 2016). However, the bailout agreement was a bitter pill to swallow. Tough austerity measures were demanded in these countries. With huge cuts on government expenditure and leaps on taxes, the Greece economies escalated into further recession. Inevitably, it resulted in social unrest in the country (BBC, 2015a).

On the other hand, the bailout money did not fall from sky, but it was contributed by some other stronger EU countries to the International Monetary Fund (IMF). Then, through the assistance from IMF and European Central Bank (ECB), the indebted countries can be bailed out (Beattie, 2011). Nevertheless, the stronger countries such as Germany which alone has contributed €45billion, were feeling unhappy about it (Steinherr, 2012).

At the end of 2013 and during year 2014, Ireland, Spain and Portugal had completed their bailout programmes. But the recovery was very fragile. Deep structural problems including high unemployment rates, weak banking systems, extremely high debt levels and rigid labor markets still exist (Alessi and McBride, 2016). In the meantime, Greece still suffers from the social unrest, and has its third bailout in 2015 (BBC, 2015b).

Euroscepticism 

The economic slowdown in Eurozone that has been staggering for years has led to the rise of Euroscepticism (Hargitai, 2013). To make things worse, the EU’s mismanagement of refugee crisis has created chaos in several member countries, Germany, Sweden, Hungary, France and etc (BBC, 2016; Khalaf et al., 2016). At the beginning of 2016, George Soros even warned that the Eurozone is on the “verge of collapse” (Solomon, 2016).

Following in June 2016, Brits voted to leave EU. Contingency plans were developed to prevent “contagion” and stop the EU from breaking apart. Even so, the next biggest worry is France. A recent survey showed that Eurosceptic forces are even stronger in France than in U.K. (Foster, 2016).

Structural Reform 

Even emergency measures such as setting up bailout programmes, giving financial aids and arranging emergency funding programmes were taken, the economy recovery was not profound. Economists argued that the root of Eurozone crisis is that the countries do not have a fiscal union. Throughout the EU countries, monetary policy which controls the supply of money by adjusting interest rate is governed under ECB. It is a tool for stimulating or slowing down growth. Fiscal policy is another tool works closely with monetary policy to achieve economic goals by adjusting government expenditure and tax rates. Problem arises when there is an incoherent monetary and fiscal policy. For example, before the crisis, Greek took advantage of the low borrowing costs in the Eurozone due to expansionary monetary policy. High amounts of private debts and sovereign debt was used to finance irresponsible expenditure. When the 2007-08 financial crisis happens, the property bubble triggered the collapse of financial institutions and set off the Eurozone crisis.

Thus, economists proposed the integration of EU fiscal policy by the creation of a European Treasury which has the power to raise taxes across the Eurozone, coordinate and control national fiscal policies and perform all functions of a federal treasury. Second proposal is to strengthen the role of the ECB. The ECB should be empowered to control the banking system without constraints and, in exchange, operate without inhibitions as the lender of last resort for both financial institutions and national treasuries. But both the proposals would sacrifice the sovereignty of the Eurozone members (Skouras, 2011).

Thus, as an alternative, structural reforms that can encourage business cycle synchronization is suggested. Since a currency union requires a “one-size-fits-all” monetary policy, cyclical shocks need to be symmetric across countries and the member countries should exhibit similar business cycles for the smooth management of a currency union. In other words, when hit by shocks, one country should not be substantially worse off while others are booming. To be exact, structural reforms are measures that aim to increase productivity by improving the technical efficiency of markets and institutional structures, or by reducing obstructions to the efficient allocation of resources. These measures include banking supervision and property right laws reforms, changes in tariff rates or rules on employment and etc.

Euro Plus Pact which was implemented in 2011, is a first step to structural reform in Eurozone. It was intended as the “new momentum for Structural Reforms” (European Political Strategy Centre, 2015). It aims to guarantee the stability of the Eurozone and also allows for non-euro area countries to participate on a voluntary basis. It has 4 key focus areas, i.e. competitiveness, employment, sustainability of public finances, financial stability reinforcement and tax policy coordination (Eurofound, 2016). Under the pact, several measures are undertaken, such as reducing labour costs, increasing labour participation and labour competition, constant monitoring over financial status of country and etc (European Political Strategy Centre, 2015).

Even the plan has been criticised for entrenching the sovereignty of countries, as its authority to set policy includes areas that were previously under national sovereignty, the policy did work for the financially distressed countries. Unemployment rates are falling and the EU economy was starting to have positive growth. In short, the Eurozone’s economy has started to regain the ground that was lost during the crisis (Schmieding, 2015; Trading Economics, 2016). However, as the IMF suggested that Eurozone has new challenges, which is the population ageing crisis coming ahead, and that the Eurozone is having stagnant growth, the president of ECB, Mario Draghi has stepped up and called for more structural reforms that would spur higher growth potential and create more jobs (Jones, 2016; Prensa Latina, 2016).

Again, the issue of closer integration of Eurozone was voiced up. Nevertheless, there are criticisms towards the so-called structural reforms that would solve the problem of stagnant growth in the Eurozone. First, adopting an integrated or converged reform is complex. As the Eurozone is dominated by a few agents, mainly German, ECB and Economic and Financial Affairs Council (ECOFIN), it is difficult to set a “common interests” that fits all. Second, these reforms would incur high costs, in which some countries which are still heavily indebted would be unable to afford these costs. Lastly, the reforms were proposed to allow quick recoveries from adverse shocks. But mustn’t good structural policies be in place before a crisis hits? (Pinto, 2016; Regan, 2014)

Indeed, Eurozone needs reforms to improve growth potential and to prevent economic crisis as in 2009 from happening. Furthermore, higher growth potential may able to reduce the Euroscepticism forces and keep the Euro from breaking apart. However, the structural reforms proposed is still incomplete and there are barriers to its implementation.

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Eurozone Reform

References

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Prepared by H.P. Kam Kai Xin