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Published on January 23rd, 2013 | by Katharina Obermeier
Image © [caption id="" align="alignnone" width="566"]European Commission © (Sébastien Bertrand/Flickr), European Commission[/caption]   José Manuel Barroso, the President of the European Commission, decided to start the new year with a bang by making the unfortunate statement that “the existential threat to the euro is essentially over”, which was viciously pounced on by the media and commentators. Much less reported, but in fact even more provoking, was a paper published by leading economists at the IMF which essentially argues that mistakes were made when urging crisis-struck countries to focus on cutting spending as quickly as possible. While seemingly unrelated, these two stories together say a lot about the current status of the crisis, and offer an outlook for the future. It is not uncommon for media outlets to portray an event or a speech inaccurately – but the scope of misrepresentation of Barroso’s words in most reports was staggering. Journalists claimed that the President had said that “the euro crisis is a thing of the past”, inciting angry comments (rightfully) pointing out that Greek, Spanish and Portuguese citizens would disagree with that assessment and accusing Barroso of ignoring the effects of the crisis on unemployment and social services. However, a look at the transcript of the actual speech reveals that he only said that the threat to the continued existence of the single currency was over, not the economic crisis or recession itself. In fact, he went on to say “far be it from me to suggest that all the problems of financial stability have been solved. Far be it from me to seek to ignore the economic and social difficulties being felt in so many European countries.” To anyone with even a cursory understanding of the current situation in Europe, it should be clear that he was differentiating between markets’ confidence in the euro as a currency on the one hand, and the continuing sovereign debt problems and recession. This distinction is useful when discussing progress in the eurozone to date. As Barroso indicated, financial markets are much calmer now than they were a year or two ago, and with good reason. EU leaders have demonstrated that they have the political will and the funds to issue guarantees for heavily indebted member states, and are working on improved regulations for the European financial sector to help secure it against further crises. While this is indeed cause for celebration, the situation for European citizens has not improved, with unemployment in the eurozone hitting new record highs last November. This is where the recent paper published by IMF economists Olivier Blanchard and Daniel Leigh comes into play, as it helps explain why EU member states are not recovering as quickly as anticipated, now that the situation has stabilised. The economists acknowledge that earlier forecasts underestimated the negative impact austerity measures would have on growth and employment in the countries in crisis. They argue that while fiscal consolidation – debt reduction – is still necessary in countries struggling with high levels of debt, it is important to consider a myriad of factors for each country in determining how rapid this consolidation, and how harsh the austerity measures, should be in order to bring stability to the country’s finances with the minimum reduction in economic growth. While this type of research paper does not officially represent the IMF’s views, it is still an important indicator of the thought processes behind the scenes. So, all in all, 2013 does find the eurozone significantly more secure than it has been for the last few years, but it is unlikely to be a year of concrete improvements in the economic situation of European citizens. Analysts predict that the area will return to only a very weak growth during the next twelve months, though the outlook for 2014 is a bit more positive. Hopefully, IMF as well as EU leaders have learnt valuable lessons from the mistakes made so far during the crisis, and will keep their new year’s resolutions to develop more targeted policy prescriptions for troubled member states and not forget the social side of the crisis.

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New Year’s Resolutions for the Euro Crisis?

European Commission

© (Sébastien Bertrand/Flickr), European Commission

 

José Manuel Barroso, the President of the European Commission, decided to start the new year with a bang by making the unfortunate statement that “the existential threat to the euro is essentially over”, which was viciously pounced on by the media and commentators. Much less reported, but in fact even more provoking, was a paper published by leading economists at the IMF which essentially argues that mistakes were made when urging crisis-struck countries to focus on cutting spending as quickly as possible. While seemingly unrelated, these two stories together say a lot about the current status of the crisis, and offer an outlook for the future.

It is not uncommon for media outlets to portray an event or a speech inaccurately – but the scope of misrepresentation of Barroso’s words in most reports was staggering. Journalists claimed that the President had said that “the euro crisis is a thing of the past”, inciting angry comments (rightfully) pointing out that Greek, Spanish and Portuguese citizens would disagree with that assessment and accusing Barroso of ignoring the effects of the crisis on unemployment and social services. However, a look at the transcript of the actual speech reveals that he only said that the threat to the continued existence of the single currency was over, not the economic crisis or recession itself. In fact, he went on to say “far be it from me to suggest that all the problems of financial stability have been solved. Far be it from me to seek to ignore the economic and social difficulties being felt in so many European countries.” To anyone with even a cursory understanding of the current situation in Europe, it should be clear that he was differentiating between markets’ confidence in the euro as a currency on the one hand, and the continuing sovereign debt problems and recession. This distinction is useful when discussing progress in the eurozone to date.

As Barroso indicated, financial markets are much calmer now than they were a year or two ago, and with good reason. EU leaders have demonstrated that they have the political will and the funds to issue guarantees for heavily indebted member states, and are working on improved regulations for the European financial sector to help secure it against further crises. While this is indeed cause for celebration, the situation for European citizens has not improved, with unemployment in the eurozone hitting new record highs last November. This is where the recent paper published by IMF economists Olivier Blanchard and Daniel Leigh comes into play, as it helps explain why EU member states are not recovering as quickly as anticipated, now that the situation has stabilised. The economists acknowledge that earlier forecasts underestimated the negative impact austerity measures would have on growth and employment in the countries in crisis. They argue that while fiscal consolidation – debt reduction – is still necessary in countries struggling with high levels of debt, it is important to consider a myriad of factors for each country in determining how rapid this consolidation, and how harsh the austerity measures, should be in order to bring stability to the country’s finances with the minimum reduction in economic growth. While this type of research paper does not officially represent the IMF’s views, it is still an important indicator of the thought processes behind the scenes.

So, all in all, 2013 does find the eurozone significantly more secure than it has been for the last few years, but it is unlikely to be a year of concrete improvements in the economic situation of European citizens. Analysts predict that the area will return to only a very weak growth during the next twelve months, though the outlook for 2014 is a bit more positive. Hopefully, IMF as well as EU leaders have learnt valuable lessons from the mistakes made so far during the crisis, and will keep their new year’s resolutions to develop more targeted policy prescriptions for troubled member states and not forget the social side of the crisis.

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About the Author

Katharina Obermeier

Katharina considers herself a German-Canadian hybrid. She grew up in Germany and completed her BA in International Relations at the University of British Columbia in Vancouver, Canada. Politics, especially in relation to concepts of nationality, have always fascinated her, and she is particularly interested in international political economy. During her studies, she was an avid participant at Model United Nations conferences, and helped welcome international exchange students to her university. She is currently completing an internship at a Brussels-based trade association and hopes to work in European affairs in the future. In her political writing, Katharina marries social democratic principles with a keen interest in the European Union and its implications for European politics and identity. She writes to counteract simplistic ideas about politics and economics, continuously attempting to expose the nuances and complexities involved in these subjects.



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