How do we save ourselves?
This is how we save the EU
Whether it was the euro crisis almost ten years ago or the current corona crisis - whenever the mostly southern European countries are on the brink of debt collapse, the states that have managed well in the meantime step in. The EU has long since degenerated into a pure transfer union. How long can the monetary union be kept alive with these constant attempts at revitalization? And above all: how long will the economically halfway strong member states go along with this? Because structurally little has changed in the affected countries since the euro crisis, most of the problems from then are more virulent today than ever before. Or did the debts in the ailing EU countries sink? Or did unemployment decrease significantly in Italy, Spain or France?
Corona disguises what Europe is suffering from
After days of struggle, the heads of state and government of the EU agreed on a 750 billion rescue fund in the summer - long before the second wave of the corona pandemic. The economic stimulus and investment program includes 390 billion euros in non-repayable grants and 360 billion euros in loans. The EU takes on common debt for the reconstruction program. So far this has been forbidden. The new fund undermines the protective mechanisms of the European Stability Mechanism (ESM) from 2012, which Germany largely enforced at the time.
The money goes mainly to Spain and Italy. Spain's Prime Minister Pedro Sánchez can look forward to 140 billion euros, 72 billion euros of which as non-repayable subsidies. For Italy, the gigantic sum of a total of 209 billion euros is planned.
Example Italy: demographic crisis and reform backlog
Will the common record debt of the EU be enough to mitigate the economic consequences of the corona crisis in chronically low-growth countries like Italy or even to generate a little growth there? So far, Italy has not given any sustainable aid from Brussels: the bureaucracy was already unproductive before the Corona, the companies were mostly inefficient, and the workers in the "retiree paradise" are still retiring much too early at the expense of the indebted pension fund - the men at 62, women at 58. Almost ten percent of Italians were unemployed before the pandemic, and among 15 to 24-year-olds the rate was an unbelievable 36.5 percent. One reason for this demographic crisis is an underdeveloped education system, which prepares young Italians less and less for a professional life. Even now, Italy will probably only use the aid funds to service current expenditure instead of tackling economic reforms and a restructuring of the sluggish state apparatus.
No wonder Italy is sinking into debt swamp. In its spring forecast, the EU Commission had already predicted a debt ratio of 158.9 percent of economic output for the country in 2020. Only Greece, which missed its state bankruptcy a few years ago, had a higher value in the euro zone at 196.4 percent in its forecast, which is now likely to be wasted again.
The new aid programs once again hide the problems the EU has been putting off for a long time and are repeatedly whitewashed with new financial aid and state financing via the printing press. What if all efforts don't help again? What other aid programs is the EU considering when the corona crisis is over and the economy in the heavily indebted countries still does not start? Because unfortunately that is relatively likely: The constant transfer payments to the far too expensive producing and therefore uncompetitive countries have long led to incorrect relative prices there. No more money will help here either, but rather makes the situation worse.
Way out: recovery cure for debtor states
Rather, the countries that are not competitive within the EU should be given the opportunity to temporarily leave the monetary union until they are competitive again. With the return to their own currency and the possibility of devaluing it, the states could massively lower their relative prices - the goods they produce would be cheaper abroad, which would increase demand and competitiveness. The state budget would also regain its equilibrium, because an exit state could start its own printing press to settle wages and pensions. After a few years of the “recovery process”, returning to the EU would then be an option again.
In any case, constantly taking on new debt together as the EU does not eliminate the EU's fundamental problems. Another short-term solution is radical debt cuts at the expense of the holders of the government bonds concerned. Because let's be honest: Why should the EU always step in as fully comprehensive insurance for speculators? Anyone who is looking for a return in government bonds of limited countries must also take the risk. In the past two years, the yield on ten-year Italian bonds was around 3.6 percent, and the risk premium - i.e. the yield premium over German government bonds - was at least 3.2 percentage points. Return without risk, because the EU always prevents total failure - this is a dream that investors have long lived.
Debt haircuts are a common practice. Since the Second World War, there have been more than 180 politically induced debt waivers worldwide - including in Greece in 2012. For indebted states, haircuts are anything but pleasant, especially in view of the then mostly threatened flight of capital. But these side effects can also be brought under control with capital controls, Greece has already shown it successfully.
Author Thorsten Beckmann is the managing director of the international communications agency achtung!
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