- 2021-01-02
The euro zone ushered in an opportunity for reform
The Eurozone has survived the impact of two crises, one was the global financial crisis from 2007 to 2009, and the other was its own crisis from 2010 to 2012. Now the Eurozone is recovering strongly. However, this is not a reason for complacency: the actual per capita output in the euro area has suffered a "lost decade." Regardless of whether it is at the national level or at the eurozone level, recovery is an opportunity for reform. The question is which reforms to choose.
This year's real GDP per capita in the Eurozone will finally exceed its 2007 level. Since 2013, per capita output in the Eurozone has been growing at a rate similar to that of the United States. The mainstream explanation for this recovery caused by more than normal cyclical forces is that under the leadership of President Mario Draghi, the European Central Bank (ECB) is determined to perform its duties properly.
The decisive moment was Draghi's speech when the sovereign debt market broke out in July 2012: "The European Central Bank is ready to defend the euro at all costs within its mandate. Believe me, this is enough." He was right. The European Central Bank's "Direct Currency Trading" (OMT) project announced in August 2012 transformed its commitments into policy. This changed market views and reduced the high yields of Italian and Spanish sovereign bonds. The European Central Bank cut interest rates sharply and launched an asset purchase program in 2015.
Other measures include the creation of the European Financial Stability Facility (European Financial Stability Facility) and its permanent follow-up mechanism-the European Stability Mechanism (ESM); projects to support countries hit by the crisis have now been successfully completed Four, namely projects for Cyprus, Ireland, Portugal and Spain; countries hit by the crisis are determined to take necessary measures to stay in the euro area; create a single supervisory mechanism to supervise banks (Single Supervisory Mechanism); move towards the establishment of banking and capital markets The direction of the alliance is moving forward. Regardless of the mistakes made during the creation and operation of the Eurozone, the determination of the Eurozone member states to keep the Eurozone running far exceeds the expectations of outsiders (especially in the UK and the US).
However, challenges remain. The International Monetary Fund (IMF) pointed out in a recent analysis of the Eurozone: “The 2007-2008 crisis marked the end of convergence and the beginning of divergence. This situation is only slowly being corrected.” Indeed, Some countries hit by the crisis have shown rapid recovery, especially in Ireland. The real GDP per capita of Portugal and Spain has also returned to the level of 2007. However, Germany's real GDP per capita has increased by 20% relative to Italy in the past 10 years.
Greece's real GDP per capita is still more than 20% below its 2007 level. The unemployment rate in Greece and Spain is still high, and the unemployment rate in Italy is still high.
Public and private debt in many countries remains high. Therefore, it is helpful for the current nominal GDP growth rate to be higher than government bond yields (even in Italy). This is due to the debt burden to a certain extent, but it is also the result of exhaustion of public patience and limited space for policy operations. Another shock may be catastrophic. This recovery must be lasting.
Therefore, the European Central Bank cannot tighten prematurely. After all, the core consumer price index has been below 2% since 2008. In addition, fiscal policies should be introduced where conditions permit, especially in Germany. The weaker economies must also actively implement reforms that support growth and employment.
What about reforms at the euro zone level? I doubt whether Emmanuel Macron's proposal is wise and feasible, especially regarding the idea of substantially enhancing fiscal integration. The result of the German general election will certainly increase the difficulty of introducing such major measures. The banking union does need financial support from the deposit insurance system. But this may only be achieved by fiscal integration.
Adam Lerrick of the American Enterprise Institute proposed a plan to mitigate the effects of asymmetric fiscal shocks without the need for the support of the European Central Bank and continued fiscal transfers. In a crisis, the government bond yields of weaker countries will rise relative to the yields of stronger countries. According to Lyric, during the worst of the Eurozone crisis in 2012, the unexpected rise in relative interest rates caused Spain and Italy to pay more than 5 billion euros in total each year. Calculated on the basis of an average period of 7 years, the impact reached more than 35 billion euros.
If a stronger country temporarily transfers part of this gain to a weaker country, this influence will be weakened. According to Lyric’s suggestion: “Member states that have unexpectedly decreased relative financing costs will put 50% of their proceeds into the Eurozone Financing Cost Stabilisation Account.” These funds will be transferred to the unexpected increase in relative financing costs. Member states to cover 50% of their losses. Once the relative rate of return stabilizes, it will stop the transfer and repay when the relative rate of return reverses. Only countries that comply with fiscal rules are eligible to participate in the project.