The remaking of Europe needed
By Mauro F. Guillen and Emilio Ontiveros
The world enters the year 2012 awaiting a solution to the European crisis. The decision by the European Central Bank to offer a 36-month liquidity facility for banks, for the first time, and the decision by the European Council to take steps towards tighter fiscal integration have been well received by the financial markets. The twin and interrelated problems of sovereign debt and deteriorating banking assets seem less acute now than a month ago.
If the single currency is to survive, there is little doubt that some form of fiscal unity needs to be accomplished. Such a union would signal to bondholders that they do not need to be so concerned about insolvency in the long run. It also reduces the risk that yet another country will need to be bailed out or to restructure its debt.
The good news on the financial front, however, may not be enough to spare the Eurozone from entering a recession in 2012. In part, the downturn is being caused by excessive fiscal austerity. In spite of the quantitative easing by the European Central Bank, credit conditions have not improved enough to help businesses invest and create jobs. In countries in which households and firms depend on bank credit to a greater extent, the recession will be longer and deeper. Credit is the lifeblood of the market economy. New innovative firms like the ones envisioned by Joseph Schumpeter as the engine of growth cannot play their role without credit.
A European recession will affect the global economy as a whole. The European Union represents some 30 percent of total global output and nearly 35 percent of consumption. Countries that export manufactured goods or natural resources will suffer slower demand and possibly falling prices. Asia, in particular, stands to lose the most, unless major economies like Japan, South Korea and China prop up their domestic consumption.
Europe’s response to the sovereign debt crisis is in part limited by the fact that not all 27 member countries agree on what is needed to overcome the difficulties of the present time. The United Kingdom has already announced that it is not in favor of tighter fiscal and political integration. The parliaments of other member states may also impose limits or simply opt out. Rather than abandon these plans altogether, it would be better for Europe and for the global economy if a core group of countries, those in the monetary union, take steps toward more integration. These important political decisions must be made during a time of crisis, when voters are disillusioned with the functioning of European institutions.
While Europe sorts out its internal problems, the rest of the global economy must think about alternative mechanisms for global growth and ways to encourage the Europeans to overcome their problems sooner rather than later. The global economy needs a renewed commitment to free trade. It also needs the emerging economies to develop their domestic consumption markets faster, allowing their citizens to buy goods and services more freely. Otherwise, Europe’s problems could easily become the world’s.
Mauro F. Guillen is Director of the Lauder Institute at the Wharton School. Emilio Ontiveros is President of AFI and a Professor at Universidad Autonoma de Madrid.