The year 2010 is coming to an end. Some might say to its well-deserved end, at least as far as the economic and financial matters are concerned. As one colleague put it, “it’s been a crazy year and I only hope it’s soon over!”
Does 2010 deserve this bad reputation of annus horribilis? Yes and no.
Yes, since parts of Europe plunged to a new and pretty serious stage of the financial crisis, a sovereign debt crisis.
No, because the economic recovery has taken hold in Europe. It is progressing from export growth to domestic demand and, thus, becoming more sturdy and self-sustaining. Besides, the crisis has triggered a fundamental reform of EU economic governance. Not to forget that Estonia is joining the euro on January 1, 2011 because it is convinced of its merits for economic stability.
The word crisis comes from the ancient Greek krisis (choice, decision), deriving from the verb krinein (to decide). Thus, a crisis is a turning point, often a decisive one. It is a test that reveals structural weaknesses. In the absence of a decisive response, any crisis would be wasted and quickly end up in an even worse failure. So, here we are at the end of 2010 with the apparent paradox of a recovery taking hold in the real economy while the financial markets, especially sovereign debt markets, continue being nervous.
Our citizens and the market forces are waiting for a turning point. Empty statements do not work. We are expected, first, to contain the financial forest-fires. Then, we are expected to fix the system.
When the global financial crisis really hit, there was a significant probability of a second Great Depression. It was avoided because, at that crucial moment, the policymakers in the EU, the US and beyond succeeded in coordinating their efforts and deciding on robust fiscal and monetary stimulus to stop the economic free-fall.
Europe faced a similar moment of truth last spring. The imminent threat was the insolvency of Greece. After some hesitation, the euro-area member states could agree on providing, together with the IMF, financial assistance to Greece, conditional on a rigorous reform programme. When the turmoil in the European financial markets continued, a week later an EU financial backstop was created.
Decisive action was taken in November to assist Ireland, where the extraordinary banking problems caused a huge burden on the public finances, which were already suffering from the recessionary impact.
What is then the balance sheet of economic reforms in Europe in 2010? Much has been done to safeguard financial stability and build up our fiscal fire brigade. But much more needs to be done to rebuild the economic architecture to pre-emptively tackle crisis tendencies and create solid foundations for sustainable growth and job creation.
Let’s be honest: the global crisis hit Europe so hard because our fiscal houses were not in order. Despite the Stability and Growth Pact, public finances were vulnerable prior to the crisis and serious macroeconomic imbalances had developed over time.
This is why it is of paramount importance EU member states and the European Parliament will soon conclude the fundamental reform of EU economic governance. It should be done by next summer and it should maintain the high level of ambition of the Commission’s original proposals, without watering them down.
One crucial lesson from the crisis is that we must make preventive budgetary surveillance much more effective and biting than it has been so far. In future, we want to prevent crisis like the Greek case. For that, we need credible sanctions, especially the possibility of deciding them by the reversed majority vote so the Commission’s proposal for sanctions against a member state will take effect unless there is a qualified majority to veto it.
Another lesson is that macroeconomic imbalances can include the seeds of a serious crisis, as we have seen in the Irish case. The reform will enable us to identify these seeds early enough and insist the member state in question take corrective action.
Completing the reform of economic governance with maximum ambition and resisting the short-sighted temptation to water it down is a matter of credibility of the Economic and Monetary Union, both in the short and long term. Prevention is always better than correction, not to speak about crisis resolution. Thus, effective economic governance is the best crisis prevention mechanism and certainly more important than any financial backstop can ever be.
So 2010 has been quite a difficult year. But, in retrospect, it may well be seen as a crucial turning point in Europe’s economic and political integration if we are determined to complete the fire-fighting task of safeguarding financial stability and the architectural task of reinforcing economic governance. These reforms will supplement the monetary union by finally creating a real and functioning economic union. It is high time to do so and make a solid foundation for the euro.
The author is European Commissioner for Economic and Monetary Affairs.