Future of Eurozone looking bleak without reforms

Europe’s prospects continue to look bleak.  With some youth unemployment rates around 50%, it’s hard to imagine how a new generation of European workers will participate in any recovery.  Europe’s overall unemployment figures are still well higher than in the US, even considering that US numbers are not a true reflection of real unemployment in the US.  Project Syndicate explains in a Guardian article how the only way to fix the Eurozone crisis is to accept the current model is not working, and adopt several key policies:

It has been three years since the outbreak of the euro crisis, and only an inveterate optimist would say that the worst is definitely over.

Some, noting that the eurozone’s double-dip recession has ended, conclude that the austerity medicine has worked. But try telling that to those in countries that are still in depression, with per capita GDP still below pre-2008 levels, unemployment rates above 20% and youth unemployment at more than 50%. At the current pace of “recovery” no return to normality can be expected until well into the next decade.

forex

A recent study by Federal Reserve economists concluded that America’s protracted high unemployment will have serious adverse effects on GDP growth for years to come. If that is true in the United States, where unemployment is 40% lower than in Europe, the prospects for European growth appear bleak indeed.

What is needed, above all, is fundamental reform in the structure of the eurozone. By now, there is a fairly clear understanding of what is required:

• A real banking union, with common supervision, common deposit insurance, and common resolution; without this, money will continue to flow from the weakest countries to the strongest.

• Some form of debt mutualisation, such as Eurobonds: with Europe’s debt/GDP ratio lower than that of the US, the eurozone could borrow at negative real interest rates, as the US does. The lower interest rates would free money to stimulate the economy, breaking the crisis-hit countries’ vicious circle whereby austerity increases the debt burden, making debt less sustainable, by shrinking GDP.

• Industrial policies to enable the laggard countries to catch up; this implies revising current strictures, which bar such policies as unacceptable interventions in free markets.

• A central bank that focuses not only on inflation, but also on growth, employment, and financial stability

• Replacing anti-growth austerity policies with pro-growth policies focusing on investments in people, technology, and infrastructure.

Further Reading

http://www.project-syndicate.org/

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