Since the global financial crisis of 2008, economies all over the world have been struggling to achieve recovery. The Eurozone, in particular, has been slow to bounce back in light of a second economic crisis in the region, which began in 2011. On Monday, October 19, Martin Wolf, CBE; Columbia Global Fellow; and Associate Editor and Chief Economics Commentator for the Financial Times, delivered a lecture titled Is the Eurozone Crisis Over? After Mr. Wolf’s remarks was a panel discussion, which included Merit E. Janow, Dean, SIPA; Professor of Professional Practice in International Economic Law and International Affairs; Jan Svejnar, James T. Shotwell Professor of Global Political Economy and Director of the Center on Global Economic Governance at SIPA; and Adam Tooze, Kathryn and Shelby Cullom Davis Professor of History and Director of the European Institute at Columbia University. The discussion was organized by the Center on Global Economic Governance as part of the SIPA Investcorp Lecture Series on International Finance and Business.
Martin Wolf began by discussing the state of affairs in the Eurozone which lead to the topic of this lecture. He noted that “it looks as though the crisis part, the panic part, of this story is now over, at least for now.” He stressed that this doesn’t mean that the end of recession is in sight, since there is likely a long, slow path ahead for Europe to realize full recovery. To delve more deeply into this issue, the presentation was organized into four sections: 1) An illusory recovery, 2) A German Eurozone, 3) Running to stand still, and 4) Still a bad marriage.
In terms of the “illusory recovery”, Mr. Wolf explained that although the crisis has stopped getting worse, data show that output and employment are very weak in the Eurozone, especially in crisis hit countries. He noted that this very weak growth and clear disinflationary pressures with a very long period of sub-target inflation all are consistent with saying that this economy is in chronic depression. In looking at how the European Central Bank responded to this, Mr. Wolf stated that they were very late to the game and this likely had negative impacts on the Eurozone. For example, everyone slashed interest rates upon seeing the issues in 2008/2009, but somehow the ECB, after initially lowering rates, chose to raise rates again in 2011 to 1.5 percent, which badly hurt the process of recovery.
Next, Mr. Wolf discussed the concept of a “German Eurozone.” By this he meant not only is Germany one of the countries at the helm of the Eurozone leadership, but also how this has translated to nearly all countries in the region to mimic Germany’s economic profile. For example, prior to the crisis countries stood at varying levels of surplus and deficit, with Germany being one of the few very high surplus countries. In light of the crisis and the ensuing policies to facilitate a recovery, there is now only one deficit country in the region, France, which was not even a crisis hit country.
Mr. Wolf then went on to his section on “running to stand still”, which discussed whether or not the vast policies that have been implemented or discussed have actually had the desired impact. He noted that most of the crisis hit countries are growing, but despite this all of them are still in recession. Italy, Greece, Ireland, Portugal, and Spain all currently have GDP per head below 2007 levels and for these countries both unemployment and youth unemployment are still incredibly high. In terms of the response to help break this cycle, Mr. Wolf noted that possibly the most successful monetary policy in the Eurozone after the crisis was the Outright Monetary Transactions (OMT) program, or a commitment by the ECB to purchase government bonds, and they have not actually had to use it yet. It was just announcing this program that helped to calm the markets and spur improvements in the crisis hit countries.
Lastly, Mr. Wolf discussed why “the Eurozone is a bad marriage, but one from which divorce is too costly to contemplate.” Due to the structure of the Eurozone, there is no way for it to become a federal union in the future as countries, such as Germany, have indicated that they are set against the concept of increased risk sharing. There is also the issue that the European Stability Mechanism (ESM) is actually too small to respond to crises in large countries, as was proven when the crisis hit Spain. Finally, he noted that the ECB is important, but not important enough to effectively implement policies that can counteract crises and recessions. With all of these issues, Mr. Wolf contemplated whether or not the Eurozone can last forever to which he responds “maybe” depending on how the fragile structure can handle future crises.
- Samantha Weinberg, MPA '16