Economic Crisis in Europe

Scarcely any day passes without the international community discussing ways to prevent the world economy from slowing down. Regarded as a significant economic risk, the European economy has been a major issue not only at frequently held meetings of European leaders, and the like, but also at the IMF/World Bank Annual Meetings held in Tokyo this October. The European economic crisis is an unsolved issue. The international community has much interest in the future of the euro-the unified currency of the EU-and the future of European integration. This can be regarded as the most difficult period for the euro since its introduction.

In Europe, when countries were about to recover from the financial crisis that originated in the U.S., the possibility of a Greek default on its sovereign debt triggered chain reactions in Portugal, Italy, Ireland, Spain and other countries, in what came to be known as the sovereign debt crisis. The EU has seen its economic pendulum swing between good and bad situations, with credit expanded excessively to expose it to instantaneously responsive global markets. Discussions on the possible exit of Greece and others from the euro, as well as its disintegration have yet to be ended.

Introduction of the Euro

The euro was introduced before its structural foundations had been firmly established. There are many advantages in expanding markets under a single currency. On the other hand, while monetary policy has been given to one authority, fiscal policy remains in the purview of each national government. There have been questions from the start as to whether member economies-which vary widely in terms of competitiveness, employment conditions, welfare systems, and the like-could smoothly move in the direction of convergence under the single currency. The introduction of the euro was decided with the numerical targets for the budget deficit and government debt in each country as well as obliging each country to promote structural reform to enhance competitiveness; this was, however, without sufficient discussion as to how to deal with underperformance, and without giving the EU and the ECB a sufficient mandate to tackle an emergency situation. As for the background of the significant political decision, there must have been the recognition that market expansion under a single currency would be necessary in order for the EU to enhance competitiveness vis-à-vis the U.S., Japan, emerging economies, and others, at the same time that deepening of European economic integration would be required to keep a united Germany-which was expected to become stronger economically-under the European roof The stagnant European economy initially turned to improve after the introduction of the euro. This improvement resulted from: in Germany and other nations, progress in structural reform in the labor market and the like improved competitiveness; increased participants in the EU and the currency of euro expanded markets; and even in less competitive countries, investment increased due to easier fund raising made possible by the credibility of the euro. It appears that because of the introduction of the euro, optimistic views about the future of the EU economy have been widespread, elements of the bubble economy overlooked, and discussions on strengthening the foundations stalled.

EU Response

Strengthening the foundations of the euro has become a pressing issue. The EU is now discussing the reinforcement of discipline over the fiscal policy of member countries from the viewpoint of the overall EU (which not only includes revision of member countries' constitution and domestic laws for the purpose of achieving a balanced budget, but it also stipulates the legal framework to impose penalties on countries which fail to achieve the target for budget deficit reduction), strengthening of the EU's fiscal monitoring function, reinforcement of discipline over private banks and its standardization, formation of the banking union, increase in size and reinforced functions of the fund for emergency financial support, and the like.

Reinforcement of the foundations has an economic rationale. Nonetheless, it warrants much attention as to whether it will proceed smoothly. Until now, the EU has often discussed the so-called Democratic Deficit. This is expressed through concerns such as: based on the idea that we accept the idea of EU integration but do not want to lose the identities of individual countries and regions and want to maintain our own characteristics and interests while belonging to Europe, if power is concentrated in the EU-or in other words, in Brussels-decisions made in faraway places will be imposed on us-without democratically reflecting our own opinion-and this may not be sufficient from the standpoint of democratic control in spite of the effort to strengthen the European parliament, which is chosen by direct voting, and to reinforce relationships such as those between the parliaments of member countries and the EU.

Democratic Surplus vs. Democratic Deficit

The EU's responses to the current situation have been delayed again and again; as a result, timely and sufficient measures have not been taken. Domestic affairs in member countries were the culprit. Things did not seem to move easily, because decisions at the EU level were dragged by domestic affairs in member countries, including elections and changes of government in many of them. Describing the concern about these phenomena, some call it a Democratic Surplus or Abundance of Democracy this time, in contrast to the Democratic Deficit. In order to prevent them, some people propose to accelerate European integration by further transferring the sovereignty of member countries to the EU in order to strengthen the EU's unifying force. This would mean giving the EU the mandate to proceed with social and economic structural changes-including fiscal consolidation by a tighter budget and tax increase, a review of social welfare, and wage cuts-as well as an increase of contributions from member countries. It would also entail significant pain in the individual countries. Given the heightened opposition movements in many member countries, this has become an increasingly difficult problem in terms of dealing with the claim of a Democratic Deficit.

Future of the Euro, and Future of European Integration

Many people discussing the future of the EU conclude with optimism, by saying that Europe has reached its current position by overcoming a great many difficulties, and it will surely overcome its current difficulties as well. Everyone hopes that this will be the case. Nevertheless, now that the integration has deepened to such an extent, resistance to a further transfer of sovereignty will be much stronger than it has been. In addition, many people argue that an exit from or disintegration of the euro would entail a substantial risk to any country, and therefore, it will not happen. However, we need to brace for the unexpected developments that are caused by the volatile and unruly movements of the financial markets, and the like.

We should continue to keep our eyes on the future of the euro and the future of European integration.