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politics | pimedia.org.uk


Why is there a crisis?


Agnes Norris Keiller


ANOTHER week and the euro lives on. Unfortunately, the eurozone crisis does too. But what actually is the eurozone crisis and where has it come from? The eurozone is currently


suffering from a crisis of confidence which has developed from a deeper competitiveness problem. EMU (Economic and Monetary


Union) countries were too economically different when the euro was introduced, and so the common interest rate set by the ECB (European Central Bank) was too high for some countries and too low for the periphery of Spain, Portugal, Ireland and Greece. This led to relatively high inflation


in the periphery, making wages rise at a faster rate than elsewhere in the EMU. As a result, competitive imbalances emerged between EMU countries. A lack of competitiveness


translates into high trade deficits which must be financed by either public or private sector borrowing. Large amounts of such private debt were nationalised in the aftermath of the 2008 financial crisis through government bank bailouts, and the weaker eurozone economies found themselves in a public debt crisis. Both the International Monetary


Fund and the ECB responded by prescribing policies dogmatically, each turning to their preferred economic doctrines. The IMF, being opposed to state intervention, demanded austerity, while the ECB, being in constant fear of inflation, raised interest rates. The result has been stagnation. For a country outside the


eurozone, stagnation would lead to a drop in the exchange rate, thus boosting competition and triggering export-led growth. For a country in the euro, this does not happen; stagnation has only led to more stagnation. This is scaring the markets because an absence of growth makes it harder to pay off debts. Greece has by far the largest total


public sector debt, and so prolonged stagnation has made investors sceptical that any loans made to the Greek government will be paid back in full, causing investors to demand higher interest rates on Greek debts. This makes public debt even more


Responding to the Eurozone crisis


The governments of Italy and Greece have fallen and the eurozone crisis shows no sign of abating. We hear two different views on the crisis


expensive and results in default being even more likely. It is a vicious cycle in which an initial fear of the possibility of default makes default more likely. An EMU-wide enthusiasm for


austerity has resulted in growth rates slowing. The lack of confidence has now spread to other eurozone countries, namely Italy. The very same vicious cycle applies, although this time it is a lot more serious as the EFSF (European Financial Stability Facility) would not have enough money to help were Italian debt to become too expensive. Under such circumstances, Italy would have to default and, as so many global banks hold so much Italian debt, everything would turn rather nasty. Were the ECB to step in and


purchase Italian debt, the vicious cycle could be halted as this would bring down interest rates on government debt and stop the financial markets blindly panicking. However, as the ECB does not want to play lender- of-last-resort, this looks unlikely. Similarly, an agreement to expand


the value of the EFSF would mitigate the fallout were Italy to default but political sclerosis has thus far led negotiations nowhere. Therefore, the crisis has its


roots in the creation of a monetary union between countries that were just too economically different. Such a union was bound to be unstable. The 2008 financial crisis exposed and exacerbated the instability while international institutions, designed to solve such problems, followed their preferred economic doctrines and in fact made the situation worse by stunting growth and sparking a confidence crisis. This confidence crisis now


threatens to send the whole European project crashing down. It is sad that the EMU, designed to unite Europe, may eventually lead to the end of the EU. This isn’t inevitable. It is necessary that Mario Draghi and the politicians in Europe get their act together. For the sake of the UK, the EU and the wider global economy, let’s hope they do.


What price democracy?


ON JUNE 6 1975, Britain vote to enter the European Community. At the time, 67 per cent of voters supported the cross-party campaign to stay in the EEC; the Prime Minister, Harold Wilson hailed the result an “historic decision”. The leader of the Opposition, Margaret Thatcher, having held her position for little over a year, announced her support for Europe, maintaining that a ‘Yes’ vote would not have happened without her backing. Given that nearly 36 years have


passed since that initial vote and given the extent of the total reshaping of the economic, political and cultural landscape since then, it is hard to imagine a Britain that would vote so resoundingly in favour of the European Union today. However, the British people


of today have been denied that one fundamental right, that undeniable freedom of self-determination which is so essential for the fairness of any state. Notwithstanding that I am someone who appreciates the benefits of the EU, the removal of trading tolls, freedom and ease of movement between member states, and a more stable economy thanks to bail-out agreements (imagine an Ireland or Greece without EU help), the value of purely democratic principles does not escape me, and nor should it escape anybody. The fact is that, just over a month


ago, a five-hour House of Commons debate on the potential referendum on


EU membership was prompted after over 100,000 people signed a petition. David Cameron ultimately defeated the call, but did so having taken the blow of the largest rebellion against a Tory prime minister over Europe, at 81 rebel votes. The Prime Minister, on the negation


of the referendum said: “amid an economic crisis the timing is wrong and Britain’s national interest is to be part of the EU… When your neighbour’s house is on fire, your first impulse should be to help them to put out the flames - not least to stop the flames reaching your own house.” But what better time to hold


a referendum? At a time when membership requires us to be at our most generous through our contribution to bail-out packages, when the EU asks the most from us and when it tests our affiliation to its limits, isn’t it unfair that we are to be denied a say when it most affects us? Perhaps parliamentary democracy


is dead. Indeed, a couple of whips in the House of Commons can turn the tide on the self-determination of an entire country. Perhaps we should bring back the model of government the Athenians in Ancient Greece provided – direct democracy – and let the entire British electorate enter Westminster and make the vote. Maybe then we’d get that inalienable right our forefathers fought to preserve.


Alan Fookes


December 2011 | Pi Newspaper politics@pimedia.org.uk


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