Do not give up on Europe （Qiu Yuanlun）-中国社会科学院欧洲研究所

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Do not give up on Europe （Qiu Yuanlun）

Author：Qiu Yuanlun From：Site author Update：2023-03-13 14:14:01

The 27 EU Finance ministers agreed a 750 billion euro bailout plan on 10 May 2010 in an effort to rescue euro-area economies from financial difficulties and stop

Greece

's debt crisis from spreading. The funding of "the European Financial Stability Mechanism" would consist of 440 billion euros of loans offered by a "Special Purpose Vehicle" (SPV) guaranteed by euro area governments, 60 billion euros from an EU emergency fund, and 250 billion euros from the International Monetary Fund.

At the same time, the European Central Bank (ECB) agreed to go back on their decision not to purchase government bonds and other stocks in order to put the stock market right. The giant bailout package triggered instant results sending the stock market rocketing and increasing the exchange rate of euro to US dollars. However, the excitement only lasted for 24 hours before the market returned to sluggishness. Investors believe that it is unrealistic for euro area countries in difficulty to take austerity measures and that the prospect of the whole economy remains uncertain. Moreover, skepticism towards the euro, the euro area and even the European Union continues to rise. Much like the famous saying that “Rome wasn’t built in a day”, there are many reasons that have lead to the debt crisis. Both the international situation and serious internal reasons are responsible for the crisis. It is argued, however, that we should not give up on Europe. The Europeans must remain loyal to their own culture and rationality and revive their spirit of solidarity, innovation and reform, and then the old continent will have a bright future.

Decline of the west, and lack of confidence in Europe

2009-2010 are the years of the relative decline of both Europe and the US's international status due to the financial crisis and economic downturn in the western world. Such decline, however, did not begin during these two years, but originated from the year of the collapse of the former Soviet Union and Eastern Europe from 1989-1991 and even from the timing of reform and the opening up of China at the end of 1978. One of the main factors is the erroneous judgment of both Europe and America towards the international situation of recent twenty to thirty years and the prospects. The rise of emerging countries is another contributing factor.

At the time of the collapse between 1989 and 1991, the western world believed that western-style capitalism would dominate the globe and as a consequence, that they could do as they wish. The Americans concentrated on three things in the past two to three decades. First, they made enjoyment of life their only goal, leading to increased consumption above production and huge internal and external debt. Second, they promoted an American style liberal democracy through peaceful change, Colour Revolution and war which drove the US into the mire. Third, a number of wars, especially the wars in Afghanistan and Iraq cost huge human, material and financial resources. At the same time, the Europeans also busied themselves with three things. First, they wholly improved their quality of life but suffered from a lack of growth, making the European model unsustainable. Second, they established economic rules. Although they did not introduce any economic theory to lead the world forward, the EU created a large number of economic rules which were equivalent to world economic rules. Third, the EU is increasingly deepening and widening which is a double edged sword. On one hand, the enlargement is far-reaching. On the other, it becomes increasingly difficult for 27 Member States to act together.

Economic globalisation is the other misjudgment of America and European countries. That the free movement of goods, services, capital and people in the world increasing with a high speed, especially a new labour force of around 2 billion joining the global economic competition after the Cold War make developed countries less competitive and have a negative effect on their economy and employment. Economic globalisation leads to interest re-allocation. The confidence in the western world is declining while the new emerging countries are becoming the main factors to shape the new world order. But the new world economic and political order is still underway. We should not undervalue the western countries. In fact, the liberal economy has died many times and Europe still has advantages in the world. The Europeans are not declining aristocracies but world pioneers. The Europeans should take this financial crisis, economic recession and recent debt crisis seriously and draw concrete lessons.

Stagnant economic growth and a large number of problems

It may seem that the European debt crisis in

Greece

happened suddenly, but in reality it was driven by a series of internal and external factors. A large number of long-standing economic and social problems were among them. First, the stagnant economic growth had a far-reaching influence: it not only shook the foundation of the European Model, the core of which is a social welfare system, but also forced Europe's competiveness and international status into decline. Second, the ratio of financial spending to GDP in many European countries was increasing and the ratio of financial revenue was declining because of the stagnant growth while welfare spending (mainly on medical care, pensions and unemployment) and other public expenditure were increasing. As a result, financial deficits and government debt were soaring. Making matters worse, the international financial crisis and economic recession due to the credit crunch in the US in 2007 deteriorated the weak European economy and financial situation, massively increasing the financial deficits and government debt in most European countries in 2009, which will not recover before the coming two to three years. Third, America and their policy towards US dollars gave terrible blows to Europe. For instance, American ratings agency cut Greece’s debt to junk level compounding one disaster with another.

After the recovery period from 1950 to 1973, the European economic growth rate is in decline. The average growth rate of GDP in 27 EU member states and 16 euro area countries has been declining since the 1990’s with the exception of 2006-2007 and the predicted growth rate in 2010 will not be beyond 1 %. Many economic and social problems are on the increase, such as a lack of economic vitality, an unsustainable welfare system, social fragmentation, a deteriorating political environment, unemployment, declining international competiveness and setbacks in further European integration. In the euro area, the average ratio of government spending to GDP increased from 46% in 2007 to 50.7% in 2009, in Greece from 44.7% to 50.5%, in Spain from 39.2% to 45.9% and in Portugal from 45.7% to 51.0%. Meanwhile, government revenue was decreasing. The average ratio of revenue to GDP declined from 45.4% in 2007 to 44.4% in 2009, in Greece from 39.7% to 36.9%, Spain from 41.1% to 34.7% and in Portugal from 43.2% to 41.6%. As a result, the financial deficits and debt in the 16 euro area countries and 27 EU Member States, regardless of their financial situation, were rising. The average ratio of government deficits to GDP in the euro area went up from 66.0% in 2007 to 84.7% in 2010. The lesson should be learnt that the so called 'good life' with income inadequate to meet expense is unsustainable for individuals, for families or for governments.

The Europeans need to revive their spirit of solidarity, innovation and reform

Although the 750 billion euro bailout rescue plan to stop the

Greece

debt crisis becoming a European debt crisis was audacious, many concerns still remain. How will this fund, an amount equivalent to 6% EU GDP, be used? There are many divergences between EU Member States, not only among the euro area countries but also from those outside the euro zone. In recent years, confidence in the euro, the euro area and even the EU has been declining and there is a concern that the Greece crisis would spread across Europe and even to the whole world. Many European governments are in the dilemma that both financial retrenchment and economic growth are their goals. Concerns over the European Model, the core of which is a social welfare system and seeking balance between efficiency and justice are rising. It seems that there are flaws in the EU institutional design. How to treat two separate walls, the fragmentation of currency sovereignty and financial sovereignty and the ECB concerning itself with inflation rather than the internal financial affairs of the Member States is a quite outstanding problem. Indeed, Europe is currently facing many tough problems. Nevertheless it is worth considering the fundamental advantages of the EU, including the first economic scale in the world, advanced technology, a profound and rich history, an invaluable culture, great achievement of integration and European knowledge and rationality, the outlook for Europe is not pessimistic. The Europeans need to ensure they continue to follow the previously winding but ongoing road of European integration of the last 60 years and revive their spirit of solidarity, innovation and reform to make a change.

The Europeans need to be more united. Firstly, priority should be given to solidarity among citizens inside the EU Member States and especially the Greeks should make concerted efforts to tackle all the problems in their home country. Secondly, the gap between rich and poor regions widened after the enlargement in 2007 making it difficult for EU Member States to work together. But European integration has knitted a delicate and firm network for all the countries. And this bailout plan is in line with the interests of those states in a less serious situation including Germany. Last but not least, EU Member States should strengthen surveillance then reach a consensus for financial and fiscal system reform. On 12 May the European Commission proposed to establish a permanent mechanism to support EU Member States in difficulty. An early peer review at EU level of the broad budgetary guidelines of each Member States will be given before they adopt their national budget and Member States which breach fiscal rules and have excessive deficits or debt will suffer punishment, including suspension of the Cohesion Fund.

The Europeans need the spirit of innovation. One of the key reasons for sluggish economic growth is Europeans' lack of vitality for innovation which is the final result of a combination of idleness due to the European social welfare system and a number of other factors. For instance, the ratio of R & D investment to GDP in Europe was 2%, lower than America’s at 3%. In terms of education level, 13% of the total

workforce has elementary education, 49% for secondary education, 38% for higher education. While the equivalent number for European is 32%, 42% and 26% respectively. The European labour market also demonstrates a lack of flexibility and there are divergences among financial markets where each Member State established setbacks for others. It is urgent for Europe to find new economic growth priorities. They should vigorously promote all kinds of green industries, make the traditional pillar industries more advanced such as machinery, electrical appliances and electronics, chemistry and chemical engineering, and the automobile manufacturing industry, further develop information and technology industry and support the service industry especially logistics, finance and leasing industries. In summary, Europe needs to encourage an innovative spirit in all areas.

The Europeans needs to reform. Firstly, the social welfare system needs readjustment. As the core of the European model, the welfare system is meant to keep the balance between efficiency and justice. But reform is inevitable since rational assumptions once held about the labour market have changed. It is no longer the case that that the whole economic process from production to market can be carried out in one country, neighbouring countries or even in western countries and that labour agreements can be established and workable without considering the external world. Secondly, some articles of the Treaties need revision or a new explanation, such as the no-bailout principle in the Maastricht Treaty, the Stability and Growth Pact, and the Treaty of Lisbon.

All in all, the euro, the euro area and the EU are in a difficult situation which probably will last some years or even longer. It is believed that Europe will not be the same Europe any more after the crisis. The Treaty of Lisbon will come into force completely in 2014. It is possible that the euro area is changing into a euro-state. The 60 years of European integration full of ups and downs tells us that we should have positive expectations for the future of Europe.

(Translated by Zhang Lei)

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