As stated earlier, the Eurozone limited its capacity to weather potential crises by pursuing the politically facile hybrid of a monetary union lacking full political or fiscal integration. In attempting to redress the disparities between core and peripheral economies, policymakers placed the undue burden of adjustment on the peripheral economies, which would prolong recovery from the crisis. This section of the paper discusses policy measures that individual member economies should consider as well as reforms on the supranational level.
Eurozone member countries should consider implementing reforms to target the export composition of countries with current account deficits. In the earliest stages of the Eurozone crisis, Europeans taunted the Greeks with barbs about “selling their islands” or selling off the Acropolis to generate funds to cover their debt. Callow as these remarks were, they pointed to a fundamental shortcoming in the Greek economy. Greece’s economy is not highly sophisticated or dynamic in the way that Germany’s is. Most of Greece’s exports consist of “…low-tech exports for which world markets are growing at a below-average rate.”[i] For example, in 2011, refined petroleum oil represented about a quarter (23%) of Greece’s export revenues.[ii] Greece’s dependence on low-tech exports leaves it vulnerable to competition with other producers of unsophisticated exports, like China. Furthermore, it should avoid further developing its tourism sector, as the employment it provides is predominantly temporary. Germany’s export regime should function as a model for Greece: Germany produces high-tech exports for which world market demand is increasing: agricultural implements and industrial machinery. Greece should thus strive to move up the export complexity chain in order to reduce disparities between its economy and core economies.
For policymakers in the Eurozone to consider in the long-term: the Eurozone needs to adopt measures to more fully integrate its member economies or else eject the dissimilar economies. While contagion from the American Great Recession was perhaps inevitable, the Eurozone crisis could have been avoided had the Euro initially addressed the structural disparities among its members. Alternatively, considering fears about a potential domino effect, the Eurozone should begin moving toward fiscal union. A monetary union without a mechanism for fiscal relief barely weathered the Eurozone crisis. Centuries of progress toward the Euro demonstrated the political will for a united Europe and adopting a fiscal union could be the next visionary European project. Centralization of economic decision-making would check moral hazard and perhaps introduce greater harmony among Europeans. Fiscal consolidation would result in the representation of all interests as one; precluding the implementation of policy that reinforces lines of conflict.
[i] Servaas Storm and C.W.M. Naastepad. 2014. “Europe’s Hunger Games: Income Distribution, Cost Competitiveness and Crisis.” Cambridge Journal of Economics. 39 (September), pg. 969. doi:10.1093/cje/beu037.
[ii] “The Atlas of Economic Complexity,” Center for International Development at Harvard University, http://www.atlas.cid.harvard.edu