May 28, 2012, by Adrian Mateo

Confronting the Euro crisis

The Integrating Global Society Priority Group and the China Policy Institute held a roundtable to brainstorm the Euro crisis and its implications in May. We examined the issues involved from both European and global perspectives, and reached the following conclusions:

1.  A Greek exit from the Euro is now a real possibility and such an eventuality has significant long term downsides, including inflation within the country, reduced trade, and a high risk of contagion. Much has been done in the last two years to build up ‘firewalls’ to prevent financial risk spreading from a Greek default, or a Greek exit prompting additional withdrawals. But the viability of the ‘firewalls’ remains uncertain. The inherent complexity and scope for the unexpected of any Greek withdrawal should not be overlooked.

2.  The Euro-crisis is primarily ‘Europe’s problem’, even if its ramifications are global in impact. An awareness of the global reach of a full blown Euro crisis is not sufficient to galvanize a global effort to pre-empt it. The political barriers to an American or Chinese intervention are high, and few other countries have the capacity to contribute more than marginally. Even though growth rates in developing countries are high, they are not always reflected in real terms increases in prosperity. Domestic political considerations further limit the scope for developing countries to play a major role. Since the origins of the crisis lay in the Euro’s design flaws, it is incumbent upon Eurozone countries to formulate a solution.

3.  There is no real alternative to Germany taking on the leading role in resolving the current crisis. Without the economic and financial resources of Germany the Eurozone does not have the capacity to sustain the Euro. But domestic politics in Germany makes it difficult for Germany to take on the leadership role and financial costs for defending the Eurozone.  Doubts over Berlin’s determination and commitment to do what it takes will undermine market confidence and reduce the effectiveness of ‘firewalls’ in containing the contagion effect of a Greek departure from the Eurozone.

4.  EU institutions will need to be strengthened to sustain the Euro and steer the Eurozone out of the crisis but this will require a longer timeframe than is available to confront the impending crisis that a Greek departure may trigger in the near term. The EU is at the moment too consumed by the day-to-day events of the Euro crisis to be able to work out a long term strategy to make the fiscal union work as well as boost growth and employment

5.  The EU also has a serious communications problem. Despite the almost daily coverage of the Euro crisis insufficient efforts have been made to explain the crux of the matter to members of the public, or prepare them for considerable re-evaluation of living standards that may come with economic rebalancing and consolidation. The prospect as well as the pros and cons of fiscal transfers within the union as part of the solution in both the short and the long term have not been adequately explained to the general public in the EU.

A full report of the IGS-CPI roundtable summarising the main issues debated and basis for the conclusions drawn is available from either the IGS website or the CPI website. You are welcome to download the report in full for personal, academic or professional use but acknowledgement will be required.

Steve Tsang (Director of the China Policy Institute and Professor of Contemporary Chinese Studies at the University of Nottingham)

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