The euro area crisis
CHAPTER 1: introduction
1. The euro area crisis is a complex blend of
financial, economic, political and institutional problems. Over
the past year, developments in these interwoven elements have
dominated the political and news agenda. Despite repeated attempts
by European leaders, a solution has proved elusive. This Committee
has observed these events with growing concern. In March 2011
we published a wide-ranging report on The future of economic
governance in the EU. As the crisis deepened, we conducted
a follow-up inquiry to examine how the crisis has evolved and
how the response of European leaders has developed. This report
is the result of that inquiry.
2. In chapter 2 the report examines the development
of the crisis over the past year. We then assess in chapters 3
and 4 the policy responses relating to the financial and economic
aspects of the crisis; and in chapter 5 we address the institutional
aspects of the crisis—concentrating on the controversial
proposed treaty based on a ''fiscal compact'' for budgetary discipline.
Though the focus of the report is on shorter term measures to
deal with the crisis, in the final chapter we highlight the importance
of economic growth.
The March 2011 report on The future
of economic governance in the EU
3. Our March 2011 report on The future of
economic governance in the EU examined how the banking crisis
in 2008 triggered a crisis of confidence in the financial health
of Member States within the euro area. At the time the report
was written, concerns over the level of Greece's public deficit
and debt had widened to include other euro area countries, notably
Ireland, Portugal and Spain. One of the findings of the report
was that the crisis had revealed shortcomings in the original
architecture of the Economic and Monetary Union (EMU). An asymmetry
between a centralised monetary policy and decentralised fiscal
and supply-side policies, combined with a build-up of competitiveness
imbalances among Member States, had left the future stability
of the euro area in doubt. These problems had been exacerbated
by a failure of the markets, and Member States themselves, to
comprehend the implications of the way the euro area had been
constructed. Until the crisis broke, the markets treated the euro
area as a single entity without appreciating, and thus acting
on, the financial health of individual Member States.[1]
4. The report considered a series of legislative
proposals brought forward by the European Commission, which focused
on two elements: fiscal discipline and macroeconomic stability.
The Committee found that, though these proposals did not constitute
"the full fiscal union in the euro area that some of our
witnesses suggested was necessary, the design of these measures
is a step in the right direction." However, the Committee
expressed doubts whether the proposals would be implemented effectively,
noting that previous attempts to enforce fiscal discipline in
the euro area through the Stability and Growth Pact had proved
ineffective.[2]
5. The Committee also supported the establishment
of the permanent crisis resolution mechanism, the European Stability
Mechanism (ESM), to be created and funded by euro area Member
States. The report concluded that "the problems in the euro
area have, so far, been contained and no Member State has yet
defaulted on its sovereign debt. However, the threat remains and
the period until the new crisis resolution mechanism is introduced
in 2013 is likely to be fraught despite reassurances from EU leaders.
In particular, the willingness of taxpayers in countries subject
to the most acute pressures to continue to shoulder the burden
of adjustment cannot be taken for granted. If economic growth
does not ease this burden they may be tempted to demand that bond-holders
share the pain of adjustment, a prospect that could result in
fresh financial turmoil."[3]
Background to this report
6. The period since the report was published
has showed this judgement to be prescient. Over the past year
the euro area crisis has escalated at an alarming rate. Prospects
in Greece continued to decline, to the point that a restructuring
of its debt became inevitable. The crisis threatened not only
smaller nations such as Portugal and Ireland, but also Spain and
now Italy. With the fourth and third largest economies in the
euro area under increasing strain, the entire euro area project
was seen to be vulnerable. In November 2011 the German Chancellor
Angela Merkel acknowledged that Europe is facing its biggest crisis
since the Second World War.[4]
7. The scale and speed of changes present significant
challenges to anyone seeking to understand and respond effectively
to the crisis. There have been major developments while we conducted
our inquiry and prepared this report, including the resignation
of governments in Italy and Greece and their replacement with
cross-party (or no party) administrations under the leadership
of non-party-political Prime Ministers, and the agreement on 9
December for a new ''fiscal compact'' treaty. Almost every day
there are significant developments. While it is inevitable that
events will continue significantly to alter the political and
economic landscape still further, we nonetheless hope that this
report, which was finalised on 7 February 2012, will prove valuable
in assisting understanding of the ongoing euro area crisis.
8. In the second half of 2011 our Sub-Committee
on economic and financial affairs and international trade took
evidence focusing on the agreements at the October EU summit on
Greek debt writedown, bank recapitalisation, and the rescue funds;
and also on other possible policy responses such as further European
Central Bank (ECB) interventions, and the issuance by euro area
states of mutually underwritten debt ('eurobonds'). The Sub-Committee
heard evidence from Georg Boomgaarden, German Ambassador to the
UK; Sharon Bowles MEP, Chair of the European Parliament Economic
and Monetary Affairs (ECON) Committee; Professor Willem Buiter,
Chief Economist, Citigroup; the Financial Secretary to the Treasury,
Mark Hoban MP and Michael Ellam, Director-General for International
and EU Groups, HM Treasury; and from Professor Iain Begg,
European Institute, London School of Economics, and Special Adviser
to the Committee's March report. The members of the Sub-Committee
are listed in Appendix 1, together with the interests declared
for this report by members of the Select Committee and the Sub-Committee.
9. The Select Committee itself took oral evidence
which focused on the institutional aspects of the crisis, from
the Rt Hon David Lidington MP, Minister for Europe, in November
2011 and January 2012; from Edward Carr of The Economist
and Charles Grant of the Centre for European Reform in November
2011; and from Mr Giuliano Amato, former Prime Minister of
Italy, and Professor Paul Craig, Professor of Law, University
of Oxford in January 2012. We are grateful to all our witnesses,
including those who took the time to provide written evidence,
for their assistance. Full details are given in Appendix 2. Appendix
3 includes a glossary defining the technical terms referred to
in the report.
10. We make this report to the House for debate.
1 House of Lords European Union Committee, 12th Report
(2010-11), The future of economic governance in the EU
(HL Paper 124-I), Summary. Back
2
The future of economic governance in the EU, Summary. Back
3
The future of economic governance in the EU, Summary. Back
4
Speech to the CDU party Conference, Leipzig, 14 November 2011.
Back
|
