More than 130 students and lecturers from Universidad Jorge Tadeo Lozano in Colombia gathered for a videoconference presentation on the euro-zone crisis March 20.
The presentation was delivered by Alfredo Calcagno, Head of the Macroeconomic and Development Policies Branch in UNCTAD's Division on Globalization and Development Strategies.
"Although the 2007-2008 crisis did not originate in Europe, this is currently the region that presents the most relevant and worrying problems of the international economy," Calcagno said.
The US experienced a sharp fall in 2009, while the EU’s more developed social systems played a stabilizing role. Interestingly, the US and the United Kingdom recovered faster, and the EU relapsed into a double-dip crisis in the fourth quarter of 2011.
Within the euro-zone, Greece, Portugal, Spain and Italy have been the most affected and therefore became the target of speculators, but even Germany experienced a fall in GDP growth, showing its economic dependence on the rest of Europe.
An important social problem for Europe is the high level of unemployment -- in particular youth unemployment -- and a growing precariousness of the employment that is still available. The resulting fall in household demand is one of the reasons for the lagging growth of the European economy.
While there are differences between Northern Europe (unemployment of around 5 percent) and Southern Europe (around 15 percent, but almost 20 and 25 percent in Greece and Spain, respectively), "overall unemployment is very high in historical terms for Europe," stressed Calcagno.
Important differences among countries also exist in unit labour costs. Since 1999, these costs have increased the most in Ireland, Italy, Spain, Greece and Portugal, reducing the international competitiveness of these countries. On the other extreme, Germany boosted its competitiveness by a deliberate policy of wage moderation.
Europe has also been struggling with high fiscal deficits and government debt. UNCTAD maintains that these deficits are not the cause of the 2007-2008 crisis, but one of its consequences. The crisis reduced governments’ revenues while increasing their expenses - to bail out financial institutions, shoulder the costs of social programmes, and replace falling private investment with stimulation packages.
Consequently, the euro-zone countries moved from almost balanced government budgets in 2007 to fiscal deficits exceeding, on average, 5 percent of GDP in 2009-2010, including some spectacular spikes like in Ireland where a 3 percent surplus in 2006 turned into a deficit of more than 30 percent in 2010.
This was mirrored by developments in government debt, which increased dramatically between 2007 and 2010 in some countries, such as Ireland, where it quadrupled. Some of the euro-zone members (Greece, Italy, Portugal, Ireland) have exceeded the 80 percent share of government debt in GDP and have huge financing needs to cover current fiscal deficits and public debt coming to maturity (between 17 and 24 percent of GDP in 2011). At these levels, it becomes difficult to refinance the countries' debt in international financial markets, thus increasing the risk of insolvency.
"We are in a vicious circle in Europe," Calcagno said. "Economic stagnation negatively affects banks' balance sheets and strangles the provision of credit. At the same time, governments try to reduce their deficits through cuts in expenditures. Reduced supply of credit and lower public expenditure affects the economic performance of euro-zone countries. This further deteriorates banks balance sheets and fiscal revenues, prompting a new round of credit restriction and fiscal austerity."
Policies to cope with this situation currently follow neo-liberal prescriptions. According to them, countries should conduct structural reforms to increase the flexibility of their labour markets, reduce fiscal deficit and enhance the countries' competitiveness. This kind of adjustment is asymmetric, focusing solely on the countries with deficits.
"Competitiveness is a relative concept," Calcagno said. "If one euro-zone country reduces its salaries and all its neighbours do the same, nobody will gain in terms of competitiveness."
UNCTAD believes that adjustment in the euro-zone has to rely more on economic stimulus in surplus countries.
Debt should be reduced gradually through economic growth, even at the expense of slightly higher inflation. During this process, countries should carefully consider the composition of their revenue and expenditure and favor those expenses and taxes that have a multiplier effect on the economy, such as investment in infrastructure.
UNCTAD also recommends that surplus countries, such as Germany, should increase the level of salaries. The euro-zone members should then aim, in the long run, to reflect the gains in productivity in salaries, with a view to stimulating demand.
In addition to its current large-scale refinancing policy for banks, the European Central Bank should become the lender of last resort for the public sector. A clear statement that it would not let any euro-zone country default could solve the problem of speculation on sovereign default. Euro-bonds could then help finance investment needed to increase the competitiveness of peripheral countries of the zone.