With the foundation of the economic integration is somehow problematic, the question is not will a crisis occurs but when the crisis will occur. In this case, it happened in 2009. Knowing that a high possibility of default and collapse of financial institutions existed in PIIGS countries, the ECB was quick to the rescue by a series of financial supports through European Stability Mechanism/European Financial Stability Facility (ESM/EFSF).
However, the ESM/EFSF is not free. In order to get the needed bailouts, the ECB requested the respective countries to accept reform packages that contain strict austerity measures, decided by none other than the ECB itself. Although the measures are negotiable, it did not help very much to avoid a massive cut on state pension funds and some subsidies, a raise on taxes, privatization of state-owned enterprises, and the sale of national assets. In the case of Greece, whose amount of government debt are the highest among the five countries mentioned before, not only the government put Athens’ airport up for sale, they also enforced a limit on cash withdrawal from banks of 60 Euros a week and other cash transactions needs to be approved by the government for a period of time. These measures were proved to be unpopular for majority of the people, causing a change in the political climate in PIIGS countries.
Actually, Greece and other countries did not have to experience the severe austerity measures. All that those countries need to do, if we put in a simple way, is just to devalue their currency. By lowering the value of the currency to a right number, their exports could be competitive because the products’ price will be cheap, allowing them to get competitive advantage among competitors. With the advantage in hand, the needed cash will soon be flowing to the state budget and then, starts to repay the debts.
However, such thing would never happen in the all the mentioned countries considering the fact that those countries are just a part of Eurozone. Because they use the common Euro, they cannot devalue Euro as much as they need. Devaluing Euro is solely the decision of the ECB. It is because the ECB want to keep Eurozone’s inflation rate under 3% per year, since an inflation that is higher than 3% might destabilize two Eurozone’s economic powerhouses, which are Germany and France – a risk that is too heavy for ECB to carry.[3]
Although the discussion may be far from over and there are other factors as well, this might be enough to show some pitfalls inside the EU system itself, which could be partly blamed for the current situation of the EU.
First things first, a monetary union would look like a joke if it is does not followed by a fiscal union as well. It is like giving someone a pen without the ink inside. Second, the EU need to stop turning a blind eye of the differences that exists in standards between more advanced countries and the less advanced countries. Tough common standard and its strict implementation need to be enforce in order to make a union works. Third, it is also not too wise to implement a common interest rate when in the same time there are countries who look more to growth and there are countries who eyed more on stability. If the EU did not address this issues as soon as possible, sooner or later, the EU itself might be doomed.
By: Marcel S. Kriekhoff | Staff Divisi Kajian | Ilmu Ekonomi 2015
[1] Eurozone is a group of 19 EU members that uses Euro as their currency. It also important to note that being a member of the EU doesn’t necessarily means being a member of the Eurozone although it is legally binding to be the member of the Eurozone once a country join the EU.
[2] Economic Bubble is a rapid economy growth that may be cause by an excessive monetary policy, such as an extremely low interest rate, that might increase the demand for assets and made them being traded in a price that is much higher that the assets’ intrinsic value.
[3] Although devaluation could increase the competitiveness of a country, it also leads to inflation (an increase in overall price level) and this will create economic instability in a country with strong economy (in this case, France and Germany). According to Forbes, it is proven that a country with strong economy slipped in high inflation rate. Of course, the EU would not like to see Germany’s and France’s economy but this hurts weaker economies such as PIIGS countries.
