Latviski English По-русски
Saturday 21.10.2017 | Name days: Severīns, Urzula

Bloomberg: The eurozone must be split to save EU

(No Ratings Yet)

On the eve of the American Civil War, Abraham Lincoln famously said that «a house divided cannot stand.» Today, the European Union — committed for decades to the quest for ever closer union — must confront an agonizing truth. Lincoln’s maxim must be inverted. For the EU to survive, the euro must divide, according to Bloomberg.

Author: PantherMedia/SCANPIXThe economic crisis in southern Europe shows that the euro system, at least in its current form, has instead become a mortal threat to both.

Greece, Spain, Portugal, Italy and Cyprus are trapped in a recession and cannot restore their competitiveness by devaluing their currencies. The euro area’s northern economies have had to join in repeated bailouts and put aside their notions of prudent finance. A vicious circle of resentment and populism in the south and strengthening nationalism in the north is tearing the union apart.

And the crisis isn’t yet abating. France, Europe’s second-largest economy, is now sinking into a grave economic slump. Like the southern countries, it must restore its competitiveness; like them, as part of the euro system, it lacks the means. Because of its size and because of the guiding role it has played in the EU’s development, France will be crucial in breaking the vicious circle.

The single currency entrenched — indeed, worsened — the competitiveness gap caused by differences in inflation rates and unit labor costs.

With devaluation ruled out, these imbalances can be addressed in only two ways — through cross-border transfers or “internal devaluation.”

Internal devaluation means that deficit countries try to restore competitiveness by reducing government expenditure and increasing taxes, which they hope will lower prices and wages. The short-term effect will be to weaken domestic demand.

Latvia and Iceland show how steep the economic and social costs of internal devaluation can be, compared with the costs of external devaluation. From 2008 to 2010, GDP contracted only half as much in Iceland (external devaluation) as in Latvia (internal devaluation).

The main alternative is transfers. Deficit countries can cushion their contraction with transfers from surplus countries, rather than internal devaluation. The problem is that such transfers will no longer be painless.

Before 2008, they took the form of cross-border private lending to governments and banks, which in many cases lent the money on to borrowers offering real estate as collateral. Since the credit bubble burst in 2008, these private financial flows have been replaced by state budget transfers, ballooning budget deficits and growth in the implicit liabilities of peripheral countries in the European Central Bank’s settlement system (known as Target2). The fiscal position of many uncompetitive euro-area economies has become unsustainable without transfers from Germany and the others.

Such transfers will be of taxpayers’ money — provided either directly through the European Stability Mechanism or indirectly via banks in the creditor countries.

This prospect is political dynamite. Such transfers are therefore made conditional on strict budgetary discipline and structural reform. Despite that tough conditionality, taxpayers/voters in creditor countries such as Germany might never be reconciled to the idea, creating the risk of an anti-EU backlash. Such a backlash would become certain in the all-too-likely event that the rules were bent or shelved.

Many debtor governments would prefer their transfers in the form of money printed by the ECB — with fewer, if any, strings attached.

So the outlook for the euro-area debtor nations is one of relentless fiscal tightening and years of deficient demand. This will result in shrinking or, at best, stagnating output and living standards. Meanwhile, anti-EU and specifically anti-German sentiment is building — witness the scenes on the streets of Nicosia after Cyprus fell into crisis.

Could a United States of Europe save the day? Some early proponents of the euro acknowledged in the late 1990s that the project involved “economics getting ahead of politics.” They saw the single currency as a way to put the continent on an irreversible course to full political union — a goal that Europe’s electorates would have rejected had it been put to them directly.

Greater labor mobility might be one feature of such a union. One could imagine the populations of depressed countries such as Greece, Portugal, Spain and Italy migrating to rich Germany and Finland. In this scenario, whole countries could end up resembling depopulated rural regions — such as those in France, which the young and well-educated largely abandoned in the postwar years, moving to the cities and leaving behind an aging population heavily reliant on social insurance. Language and cultural barriers make this form of economic adjustment unlikely, however.

Bloomberg says that something has to give — and it will have to be the euro system itself. To preserve the EU, the monetary union must be dismantled. The all-too-relevant historical parallel is the defense of the gold standard in the interwar period, which came close to destroying democracy all across the world. Only one country can plausibly take the lead in advocating a controlled segmentation of the euro system by means of a jointly agreed exit of the most competitive countries. That country is France.

A splitting of the euro system would be in the best interests of both France and Europe because it would speed the EU’s return to economic growth — the only sure guarantee of European stability and unity.


Leave a reply

  1. Rod says:

    What a wise man Lincoln was! this article is so right…divided is Europe and country by country the EU will fall.

    Thumb up 0 Thumb down 0

Professor: by taking money away from science, the state shoots itself in the foot

The matter regarding insufficient funding for science has recently become more topical in the public space. President of Latvian Academy of Sciences Ojārs Spārītis is rather critical of the situation: Latvia has lied to the European Union and European Commission about making sure that funding for science reaches 1.5% of GDP by 2020.

To prevent fraud, audit of MPC recipients to be performed in Latvia

Latvian Economy Ministry intends to perform an audit of mandatory procurement component recipients and use new regulations to combat fraudulent activities, as confirmed by Economy Minister Arvils Ašeradens.

Rail Baltic procurements to be processed using Electronic Procurements System

Following the changes to Latvian Republic’s Public Procurements Law, all new procurements for Rail Baltica administered by RB RAIL will be processed using a free electronic information system and its e-contest subsystem.

Estonian construction price index pushed up by wages

The construction price index in Estonia has in July-September of 2017 increased by 0.9% in comparison to second quarter this year and by 1.7% from July-September of 2016, Estonian statisticians have estimated.

Surplus of Latvia’s government budget reached 9.5 million euros in 2016

In 2016 general government budget surplus accounted for EUR 9.5 million or 0.04 % of the Gross Domestic Product, whereas general government consolidated gross debt amounted to EUR 10 091.6 million or 40.6 % of the GDP.

Latvia to invest EUR 5.9 million into formation of unified port network

Ports of Riga planning region and Kurzeme planning region have commenced an important tourism project. The goal of this project is creating a unified yacht port network in Latvia and Estonia with quality services that would allow developing sailing tourism and attract foreign sailing enthusiasts in the future, reports the regions’ representative Inese Ozoliņa.

Graft-suspected Tartu deputy mayors resign

In Estonia's second largest city, Tartu, Deputy Mayors Artjom Suvorov and Valvo Semilarski have stepped down from office, Estonian press reported, after the politicians were arrested under suspicion of graft.

Expert: workers of Latvia’s NGO sector have high ‘burnout’ risk

Workers of Latvia’s NGO sector have a high burnout risk, said once the director of Providus Dace Akule in an interview to Latvijas Radio.

Producer: many young people come to work in the film industry

Latvia’s film industry has been steadily growing these past several years, and it is especially gratifying that many young people are coming to work in the industry, says director and producer, representative of Film Angels Productions Jānis Kalējs.

Pollution blamed for every sixth premature death globally

Nine million premature deaths globally in 2015 are said to be related to pollution, a study has found pointing to presence of harmful matter in air, water and workplace as the three main risk factors.

Infectologist: influenza kills biologically the weakest, including children and pregnant women

Influenza is an infection that affects both children and adults. However, it kills those who are biologically weak, says Immunization State Council chairperson and infectologist of Children’s Vaccination Centre Dace Zavadska.

Investor activity made easier between Latvia and Vietnam

An intergovernmental agreement has been signed between the Republic of Latvia and Socialist Republic of Vietnam on prevention of double taxation and tax avoidance in relation to income tax.

Colder masses of air to enter Latvia in coming days; precipitation to be limited

Although high atmospheric pressure will be present above Latvia in the coming days, southern regions in Latvia will experience short-term precipitation on Saturday, 12 October, caused by the cyclone active above Poland. Colder masses of air will enter Latvia in the coming days.

Maltese journalist said to be killed by remotely-controlled explosive

Officials in Malta have unveiled it is assumed that investigative journalist Daphne Caruana Galizia was murdered by an explosive places under her car, which was detonated remotely.

Prime Minister: Latvia cannot accept additional asylum seekers

Latvia cannot afford to resettle additional asylum seekers, said Prime Minister Māris Kučinskis during his meeting with European Commission President Jean-Claude Juncker on Thursday, 19 October.

Scandinavians purchase tourism company in Lithuania; changes expected in Latvia too

Dutch Otravo online travel organization has expanded and has purchased Lithuanian online travel agency Interno Partneris, thereby entering the Baltic market.

Ombudsman: non-citizen status matter should be resolved in next decade

The next ten years may be the transition period to ‘put an end’ to the non-citizen status in Latvia, said ombudsman Juris Jansons in an interview to LTV programme Rīta panorama.

Swedish Foreign Minister: harassment exists at highest political level

The Foreign Affairs Minister of Sweden, Margot Wallström, has commended the current sexual assault and harassment awareness campaign in social media and urged to fellow politicians to address the problem.

Latvenergo recognized as Latvia’s most valuable company for tenth time

Latvenergo has been recognized as Latvia’s most valuable company in 2017. Its value grew 34% in comparison with 2016, according to the TOP 101 list of Latvia’s most valuable companies compiled by Prudentia and Nasdaq Riga.

Number of births and number of deaths decline in Latvia

During the first nine months of this year 15,723 babies were born in Latvia, which is 1,113 children fewer than in the corresponding period of the last year.

CC applies binding conditions for the sale of MTG Broadcasting AB

Latvian Competition Council has decided to permit Bite Lietuva to purchase MTG Broadcasting AB group’s businesses in Latvia. CC has applied several binding conditions to prevent a possible impact on competition on the television services and advertisement market.

Eesti Energia warns: Limiting CO2 emissions on capacity could endanger energy supply

Estonian energy giant Eesti Energia has evaluated that a plan under discussion in the European Union to introduce a carbon dioxide release limit for capacity mechanisms to qualify for subsidies could adversely affect the security of supply in Estonia and the Baltic states.

Solidarity tax norm recognized as non-compliant with Latvia’s Constitution

On Thursday, 19 October, the Constitutional Court of the Republic of Latvia declared the Solidarity tax norm as non-compliant with the country’s Constitution.

Survey: Riga residents go to the doctor’s the most often

34% of residents undergo regular health checks, according to Mana Aptieka & Apotheka health index. In addition, women are twice as serious about health checks as men.

LG cozies up with idea of rebuilding railway tracks to Reņģe, Latvia

Lithuania‘s Lietuvos Geležinkeliai has sent a mixed message as to what it intends to do next following an EC fine of nearly 28 million against it over the dismantling a 19-km railway stretch with the Latvian village of Rengė.