Last month, Nobel prize-winning economist Sir Christopher Pissarides gave a keynote speech at the portfolio institutional awards on the outlook for Europe’s economy. Read his speech in full below.
The eurozone before and during the debt crisis
The European Union is the outcome of many treaties and compromises reached by European nations after the Second World War in order to bring lasting peace to Europe. The idea was that economic cooperation would bring countries together and from there political cooperation and peace would follow. The founding fathers thought that with economic integration war would not only be impossible but it would be unthinkable. Times proved them right.
Economic cooperation started from a small scale with the Coal and Steel Community formed by the Treaty of Paris in 1951, signed by the six original members, West Germany, France, Italy and Benelux. Agreements were guided by the “Schuman Declaration” which set up supra-national bodies to run a common market for French and German coal and steel. The first treaty, the Treaty of Rome, effectively set up a Customs Union with four supra-national institutions and a President, just like today, but with no executive powers to the supra-national institutions. From there and through several treaty extensions and entry of new members – in particular Britain, Ireland and Denmark in 1973 –the first big step towards closer cooperation was reached, the single market of 1986. The next big step was the single currency, with efforts that started in the 1990s and concluded in 1999, with the introduction of the euro.
Currently there are 28 members in the EU and integration is as close as it has ever been. With the very large number of members inside the Union and with the requirement that any major reform has to be incorporated in a new Treaty that has to be approved by each and every Parliament, it is becoming increasingly difficult to approve new treaties about anything other than uncontroversial matters. We have examples of reform failures, such as the attempt to introduce a Constitution that was rejected by the French and Dutch Parliaments in 2005. In my view the design of the euro was another failure, especially the failure to see that it required a Banking Union and closer fiscal coordination, which are resisted.
The admission of Greece in 1981 and several former Soviet-controlled countries from 2004 onwards was to a large extent made on political grounds, to support democratic institutions in those countries. In that respect they succeeded but going soft on the economic criteria cost the Union a lot.
Economists agree that free trade is a good thing and the free trade agreements of the early years have benefited European nations. The Single Market is also perceived as a big success. This involves freedom of movement of capital and labour, common standards for industry and services (although the single market for services is not yet complete) and common treatment of European Union citizens in each country member. The Single Market has enabled the European Union to act as a single unit in international agreements, especially those involving trade, to its benefit. The move to a single currency in 1999, however, although perceived to be a success in the first few years of global economic calm, was clearly rushed in light of the problems exposed in the Great Recession and the Debt Crisis.
The debt crisis set the process of European integration back and indirectly it is partly responsible for the shambles of the immigration crisis, which is threatening the stability of the Union. Some countries are questioning some of the key requirements of the single market, especially the freedom of movement – once poorer nations like Bulgaria and Romania have been admitted, migration became an issue. But EU is unlikely to restrict it. The euro, however, has not made Europe stronger. The obvious benefit is that if the European Union was to trade as a single block, it would appear inconceivable on paper that it would do so with 28 different currencies. The downside is that having a common currency requires common monetary policy and common monetary policy requires banking union and better fiscal coordination.
