Latviski English По-русски
Friday 18.08.2017 | Name days: Liene, Helēna, Elena, Ellena, Liena

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

New mandatory tests in schools to be introduced four years from now

In four years’ time – 2021/2022 school year – it is planned to introduce completely new mandatory tests in schools, as reported by State Education Content Centre Director Guntars Catlaks.

Nearly 9,000 children and their parents got homes thanks to state support programme

In the first half-year of 2017, state support helped 1,527 families in Latvia to buy homes. Compared with last year, families’ demand for state support has grown 6%, as reported by Altum finance institute.

Prediction: Aseradens will likely take control over Unity

Economy Minister Arvils Aseradens will become the head of Unity, Betsafe bookmakers predict. The possibility of Aseradens becoming the head of the party is given 45% probability by Betsafe.

Provisional estimate for next year’s fiscal space in Latvia is EUR 60 million

Next year’s fiscal space has been estimated at EUR 60 million, as noted by Finance Minister Dana Reizniece-Ozola, adding that a more precise estimate will be available at the end of August.

Reconstruction of Vilnius airport runway concludes; aircraft return to Vilnius

On Thursday, 17 August, Vilnius airport’s runway was festively opened. This was the most massive reconstruction for the airport in the past 20 years. It was a unique project for Lithuania and all of Europe, airport representatives say.

Islamic State terrorist group takes responsibility for Barcelona attack

The recent terrorist attack in Barcelona, in which a shuttle bus rammed a crowd of people on La Rambla, killing 13 and injuring at least 100, has become this week’s topic.

Weather in Latvia to be warm but rainy on weekends

The sun will appear every now and then between clouds on Friday, 18 August. Still, some rain is expected, especially in the afternoon in Latvia’s eastern regions, where thunderstorms may appear. Rain is expected to reach the capital in the afternoon. Wind will draw in from the south. Air temperature will reach +21° C… +26° C, according to State Environment, Geology and Meteorology Centre.

Latvia’s export growth was moderately rapid in the first six months of 2017

Compared with the same period of 2016, Latvia experienced a moderately rapid export growth in the first six months of 2017, according to data published by Eurostat on Thursday, 17 August.

Latvia’s annual inflation in July was one of the highest in Europe

Inflation indexes in Latvia and the UK both reached 2.6% in July, which is one of the highest indexes in the European Union, according to data published by Eurostat on Thursday, 17 August.

Kirsis withdraws his candidacy in favour of Aseradens

Riga City Council member Vilnis Kirsis has decided to withdraw his candidacy from the race to become chairman of Unity in favour of a different candidate – Economy Minister Arvils Aseradens.

Rinkevics expresses Latvia’s interest in maintaining political consultations with Palestine

On Thursday, 17 August, Latvia’s Foreign Affairs Minister Edgars Rinkevics met with the leader of Palestine’s diplomatic mission in Latvia, ambassador Taissir Al Adjouri, to discuss mutual relations between Latvia and Palestine and the peace process in the Middle East.

Putin grins to the world’s seven billionth baby, Lithuania wary of border incidents

Russian President Vladimir Putin paid a visit this Wednesday to Kaliningrad, the westernmost point of Russia, but the reports about his trip in the Russian enclave and over the border in Lithuania were strikingly different.

Survey: red considered the safest colour for a car

Most Latvian drivers consider red to be the safest colour for a car. The most popular, however, is black, according to results of a survey by Virši-A fuel trader.

airBaltic’s number of carried passengers reaches a record in second consecutive month

Latvian airBaltic airline carried 393,312 passengers in July 2017, which is 21% more than the same period last year. The number of passengers carried by airBaltic remains the highest it has ever been in the airline’s history, BNN was informed by the company.

Brivais vilnis: nearly all fish processing companies are experiencing losses

Currently nearly all fish processing companies in Latvia are experiencing major or minor losses, says Brivais vilnis chairman Arnols Babris.

American helicopters to perform low-altitude flights within Latvia’s airspace

U.S. Air Force Brigade’s Task Force Phoenix helicopters, which are stationed in Latvia as part of Atlantic Resolve operation, will be performing low-altitude flights from 16:00 to 18:00 from Lielvarde to Dobele on Friday, 18 August.

Healthcare Ministry’s state secretary Karlis Ketners may be replaced

Latvian Healthcare Ministry may replace its state secretary Karlis Ketners. It is possible he will be transferred to work at Finance Ministry, as reported by LTV.

Suspects in Europe's insecticide egg scandal before Dutch court

In the Netherlands, two men have been in court in relation to the scandal of eggs containing banned insecticide that has caused an EU-wide health scare and cost millions of euros of damages.

Indian national with fake documents apprehended on Latvian border

An Indian citizen travelling from Moscow on a bus was caught at Terehovo border control point in Latvia for presenting officers a fake EU family member’s resident card. No criminal process was launched. The person returned to the country he was travelling from.

Latvijas dzelzceļš will not have to pay dividends from last year’s profits

The government decided on Wednesday, 16 August, that Latvijas dzelzceļš will not have to pay dividends from last year’s profits, which were EUR 880,998.

Latvian citizenship provided to 103 people

The Cabinet of Ministers has issued an order to provide Latvian citizenship to 103 people through naturalization.

Estonian Inbank's profits reach EUR 5.7 million in six months

Estonian financial services' provided Inbank made a profit of 5.7 million euros in the first half of 2017, which is a 429.4% increase compared to the respective period in 2016.

Agriculture Ministry invites residents to sign up for measures to support fisheries

From 21 August onward, Rural Support Service plans to start accepting applications for projects to receive support from European Maritime and Fisheries Fund’s action plan for development of fisheries in 2014-2020 as part of projects Innovation, Productive Investments in Aquaculture and Fishing and Aquaculture project processing.

Estonia seeks to improve reputation of state as employer

As the Estonian Ministry of Finance wishes to boost the reputation and brand of the Baltic country's public sector, it has announced a procurement tender aimed at preparing an action plan for reaching these goals.

Warning: there may be short-term problems with Swedbank internet banking functionality

Because of Swedbank’s planned IT modernization work scheduled for the night to Thursday, 17 August, there may be short term problems with payment card and internet banking functionality, the bank warns.