The EUR-Crisis, the first Results of the Stabilization Policy and possible Outcomes

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The FINANCIAL — The European Monetary Union faces the awful Fear in its young history. 2010-2011 have been the most difficult period for its existence.


The drop of the national incomes in the periphery countries of the Southern Europe (Greece, Italy, Spain, Portugal, but also Ireland and partly France, Belgium and Slovakia as well) led to the testing bay of the financial sector of the whole continent. The depreciation of the private savings, the income-cuts, massive unemployment, the government defaults and even the collapse of the currency union might be listed as usual outcomes of such developments.

The issues around the EUR we have discussed with Dr. Archil Jacobashvili – Business School Professor of Georgian-American University (GAU).


Q. The long-term political crisis in Greece, slight success of Spain and Belgium in the fiscal restrictions, but also the political changes in France fueled the speculations that the European Fiscal Pact, aimed at the survive of the EUR, is expected to fail. Is EUR facing the collapse – how serious are such comments red and heard by the people in the last period?  

A. The talks about the collapse of the single European Currency have an inflated character; they are far from the realities, but near to the wishes of the market speculators.

2010-2011 the EUR underwent the same turmoil as 2007-2009 the US Dollar. Private and public defaults have been expected, but the fiscal strengthening and monetary discipline by the policy makers in the USA protected and promoted the economy, and now there similar developments are observed in the EUR-Area.

In more facts, the EUR has been recognized as third-best-appreciated currency against other currencies, it is lying over the unit parity against the US Dollar and the EUR/USD exchange rate moves stable within the range 1,25-1,35 since the beginning 2012. So, the EUR doesn’t face it’s survive. The member countries, which have been joined in the EUR-Zone with certain reserves, neglected the necessary reforms of own economic structures, and now even they are facing their own survive in EUR-Zone.

The South European Countries have been tested on less resistance of own economies to the exogenous shocks and now they tremble with the remaining in the EUR-Zone. And they should be happy, to be already joined to the European Monetary Union, because even this union is offering operative helping for the economic recovery.


Q. Comparing the USA and EU regarding the policy efficiency in the anti-crisis procedures, we observe the higher level of coordination of fiscal and monetary issues in the USA, than the location of  the responsibilities of the same policy, which  are dispersed through the Europe. The monetary authority seems to be more centralized through the European Central Bank (ECB), whereas the fiscal matters are issued on the national levels. Such constellation might result the fail of the policy interventions… From this view of point, how important are the political risks of the survive of the EUR?

A. If Germany wants, supported by France, Netherlands, Finland, Austria and Luxemburg, the EUR will survive… The comparison of the costs and benefits from the EUR-Zone are to evaluate by each country individually. The common currency includes the unity of the markets for goods and services, for the labor, but first of all the unity of capital markets – imagine, that the industrial projects in one country are financially supported by the investors from the other European country, or the incomes of own population depends on the expenditures by the tourists from other country.

Indeed, the conflicts of interests afflict the implementation of the policy measures, especially when such conflicts have not only institutional but first of all regional characters. The attainment of the fiscal harmonization, i.e. in the form of single European taxation, could work only when the desired level of the fiscal independence might be kept by member countries. Such distributions of the fiscal responsibility exist between the federal government and states in the USA, Canada, Australia, or even the fiscal model of small Switzerland could be considered.

See also  Time Shifting 

Before the fiscal unification in the EUR-Area, which might take some years, even the leading countries, mentioned above, immediately created the necessary helping mechanisms like EFSF (European Financial Stability Facility) 2010, improved into the ESM (European Stability Mechanism) 2011.

So, only the fulfillment of the home works by the concerned countries can save them in the EUR-Zone.  In this direction Ireland, Portugal, this year – also Italy – is making the positive steps. They obligated the implementation of fiscal cutbacks and are holding them until now as promised. Belgium and Spain are making less progress, but Greece remains the biggest worry.

In the end, all these country are the working democracies, and the people have to decide to be or not to be in the EUR-Zone. If the Greek voters support the deficit spending policy, they may do it on their own costs, which might lead to the withdraw of Greece from the EUR-Zone, but not on the costs of Netherlanders or Germans. 2012 the rest of Europe and their industries seems to be less infected by cyclical transmission of Greece-caused recessions, in difference to 2010-2011.

Q. As duscussed by European leaders last week, can be considered the „EUR-Bonds“ as the solution of the regional divergences in order to achieve the multiple growth in the European Union ?

A. The issue of community indebtedness certificates for the EUR-Zone (shortly “EUR-Bonds”) might really come on the agenda only after the fiscal unification among the member countries, which seems today to be theoretically possible but in the reality – impossible regarding actual situation.


At the moment, the European integration in the fiscal matters can be called as the transfer union, but not the fiscal union. The transfer union, actually in terms of EFSF-Bonds (Precursor of the Future EUR-Bonds) includes the partial financial support (for example from Germany and Netherlands to Spain and Greece) through and on the capital markets. The supporters are making money from the interest rate differences, and the governments of support taking countries benefit from the lower yields of the EFSF-Bonds, economizing the interest rate expenditures on their national government bonds. The functioning of the transfer union doesn’t demand the fiscal unification and the common budgetary and taxation system, even the benefits of the participants from such mechanism are reciprocal. 

Excepting of the tax harmonization, as the necessary precondition for the introducing of EUR-Bonds, in the case of fiscal union would be the yield burdens to distribute proportionally among the participants. Such kind of fiscal relationship are known only within (federal states, autonomy regions, Cantons) but not between the national states.

In the view, for Example, of the German tax payers, which on the short and medium segments are paying the negative real yields on their national bonds at the moment, they have to contribute more to the debt services, which are the difficult mediation for the German government to their population.

The second type of challenge before the Introducing of the EUR-Bonds should be the control of public expenditures and the efficiency of the centralized control mechanism. Currently EUR 140 billion are at the disposal of the European Commission (Data: 2011), and, as known, it does very difficult to manage effectively these Sources. Comparing the total size of the public sector in the EU (ca. EUR 5500 billion – 45% of the whole GDP), is simple to imagine the bargain of its efficient management.

See also  Time Shifting 

I still consider the structure reforms, which could positively influence on the efficient allocation of capitals, as the best recipe for the sustainable growth, and at the same time – rigidity in the stabilization policy, as pleaded by the conservative government of Germany, but not the search of any formulas for the intertwining of the common indebtedness.

Q. The Opponents criticize the fiscal pact, as the biased document, which obligates the EU-Zone countries only to the fiscal restrictions, strong keeping of Maastricht Criteria, but without any stimulus for the economic growth. How effective might be the change of political paradigm, which enabled pump priming of the industries in the concerned countries with positive effect for budget revenues and debt reductions?

A. The Objective of the policies should ensure the efficient allocation of capitals and labor. On this way the deficit spending policy should be wrong choice. So, I think such policy (demand-side pushing), especially on behalf of new indebtedness, could bring positive influence maximally on the short perspective, but with the new challenges and difficulties on the longer time. Instead of stimulus packages there were recommended the simplification of the national taxations, the reform of labor markets, the denationalization of social systems, privatizations of the municipal manufactures and deregulations of government supported oligopolies. 


For example, all the concerned countries are plagued by the high unemployment of the young people (Spain: 30% ; Italy: 25%; Greece: 40%; also France: 20%). The only solution of the problem of youth unemployment goes to the change of labor code and cancelation of minimal wage laws there. Despite all warnings the concerned countries don’t implement such recommendations yet, whereas the German and Dutch conservative governments distance from the introduction of the minimal wage laws, even though taking the loss of some voters in the population and under the massive pressure from the left opposition.

The new French government, which promised more national accents for the stimulus pact during the election campaign, might circumvent very careful with the softening of the fiscal agreement, which has been reached by the predecessor government within The EUR-Zone and especially with Germany.

Q. How safe could be concerned EUR and which Outcomes are expected for the private and public Savings in EUR?  Which Aspects are important for the People here in Georgia, when they are funding the Time or Demand Deposits in the European Currency?

A. The main sources of the private inflows in EUR are the family transfers of those Georgians, who live and work in the EUR-Area. The total exposure of the EUR-denominated deposits remains stable at around 20% among the foreign currencies and should remain stable on this level. The most popular foreign currency is US Dollar in Georgia, because even the emigrants from EUR-Area are transferring US Dollars.     
In my opinion, the Georgians might be well-advised to hold the Savings in the national currency first of all. The Georgian Lari becomes the success story, despite some exogenous turbulence 2008, but remembering the preconditions of its introduction 17 years ago. I think, even in the period of currency tensions in the world economy, the Georgian Lari might offer the domestic good opportunities, particularly competitive rates and higher liquidity of the commercial banks in the Lari. 

For the public sector there are other priorities, like debt services and government loans, important for the currency composition of the official international reserves. As known, 2008-2009 many Asian central banks switched the part of official reserves from USD into EUR, but didn’t act reverse 2010-2011. They are the stylized facts pro EUR, that its holding doesn’t contain of any dramatic danger.



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