The EuroMemorandum group expresses its critique that the European Union response to the crisis is an attack on the state and salaries and not an attack on the financial institutions. Institutions that caused the crisis in the first place.
Since the 1980′s the financial sector has grown dramatically in power and size. It began in the US and Britain and continued on to Germany and France and other countries in the 1990′s. In 1999, with the introduction of the common currency, the EU Commission set about creating an integrated financial system in the European Union modelled after the US financial system. At the time, the promise of high returns in the US propelled many of the big European banks to expand their business in the US market. The result of this is that when the crisis hit Wall Street in 2007, European banks have been equally affected.
The EU focus on fiscal deficit is completely mistaken.
They are the result of the crisis and not the cause. With the exception of Greece, no other country in the EU had a deficit of over 3 per cent. Countries like Spain even had a surplus. But then what happened was:
- Governments decided to rescue banks and that cost (them and us) a lot of money.
- The financial crisis led to a collapse of credit in Europe resulting in a major downturn in European economies. Governments sought to increase their spending in 2009 to counter the recession.
- Because of the recession, tax income revenue fell sharply.
These led to a sharp increase in country deficits—the result of the crisis, not the cause.
The crisis in Europe is mitigated by the monetary union.
The severity of the crisis is largely due to the architecture of the monetary union which led to the emergence of major imbalances in the euro area. These imbalances resulted from having a common monetary policy but no common fiscal policy or coordinated wage policy.
Through the common currency, Germany has been able to amass massive trade surplus which would not have been possible otherwise. Spain, Portugal and Greece on the other hand ran big trade deficits that steadily increased over the years. The deficit of the Southern European economies very strongly mirrors the surplus of Germany and other northern countries. At a time when demand in Germany was low, with wages kept flat, banks from Germany and France lent money to the southern economies so they can keep buying Germany exports. This model has been extremely profitable for Germany, at the expense of German workers and Southern European economies.
Moreover, in the current set up of the monetary union, the European Central Bank does not intervene in the government bond market. While it does intervene to rescue the banks, it does not function like central banks in other countries in this regard. The current response to the crisis is highly undemocratic and are mostly the results of negotiations between two countries with a focus on fiscal discipline. The pressure is on countries with a deficit to adjust with no comparable obligation on the other (northern) European countries. The strict austerity programmes imposed on Ireland, Greece, Spain and Portugal have now created a recession. Under these conditions, countries like Spain will not be able to service their debt commitments, and the EU is unable to rescue big economies, like Spain and Italy. On top of this, credit is expected to contract this year despite the ECB´s 1-trillion loans to banks, which have not been used to buy government bonds as intended. What is evident yet again is that the policy of the ECB has concentrated on rescuing the banks and it is contributing nothing to addressing the deep recession that will hit all the European countries this year, with particularly savage effects on the countries of the European periphery.
Author: Trevor Evans, http://www.tni.org