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Better to Suffer Inside the Eurozone

Better to Suffer Inside the Eurozone

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This policy brief argues that Southern European countries need to stay within the eurozone.
This policy brief argues that Southern European countries need to stay within the eurozone.

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Categories:Types, Research
Published by: German Marshall Fund of the United States on May 29, 2013
Copyright:Attribution Non-commercial


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For SouthernEurope, integration into anever-deepening European Unionhas historically gone hand-in-hand with democratization andeconomic modernization. Whilethe euro crisis and the policiesof austerity, seen as imposedprescriptions, are undermining the pro-European stance of Southern European societies,in spite of all of the associatedshortcomings and suffering,there is still a high level of support for the euro and thepermanence of the Economicand Monetary Union (EMU)among Southern Europeans. Aeuro exit would have tremendouscosts for these countries andtheir societies, particularly forthe middle classes. People,governments, and businessesacross Southern Europe haveconcluded that even if it is coldinside the eurozone, it might befreezing outside.
Better to Sufer Inside the Eurozone
For the South, Europe is Still the Solution
by Andrés Ortega
1744 R Street NWWashington, DC 200091 202 683 2650F 1 202 265 1662E ino@gmus.org
May 2013
Paper Series
TheEuroFuture Project
For Southern Europe, integration intoan ever-deepening European Unionhas historically gone hand-in-handwith democratization and economicmodernization. “Spain is the problem,and Europe the solution,” the Spanishphilosopher José Ortega y Gassetamously wrote in 1910, a dictum thatcould have been be applied to Italy (and Germany) aer World War IIand to Greece, Portugal, and Spainwith the end o the dictatorships inthe 1970s. But is it still applicableto the region today? Te euro crisisand the policies o austerity, seen asimposed prescriptions, are under-mining the pro-European stance o Southern European societies. But, inspite o all o the associated short-comings and suering, there is stilla high level o support or the euroand the permanence o the Economicand Monetary Union (EMU) amongSouthern Europeans. A euro exitwould have tremendous costs orthese countries and their societies,particularly or the middle classes.People, governments, and busi-nesses across Southern Europe haveconcluded that even i it is cold insidethe eurozone, it might be reezingoutside.
Divergence Machine
For the Southern European countries,and especially or Spain, the story — until 2008 — was one o success,characterized by a convergence interms o real GDP per capita withthe core countries o the EU, in partdue to transers through Europeancohesion unds. Underneath thesurace, however, there was a growingdivergence in terms o productivity,competitiveness, and current accountbalances, due to a number o actors.Although not as visible during theboom years, integration into the EMUdid not produce real convergence,but rather resulted in a divergencebetween North and South, core andperipheral economies. At rst glance,the euro appeared to be a great levelerwhen in act the divergence resultingrom the single currency proved to beunsustainable.Low interest rates that came withthe introduction o the euro wereinitially perceived as a bonus, butthey became a curse as they uelledhousing bubbles in Spain and othercountries. Tey also led to the privateaccumulation o debt during theboom, resulting in negative conse-quences or public nances ollowingthe bust and the resulting bank bailouts. While Spain and Greece thrivedduring those rst years o the euro
TheEuroFuture Project
There is an increasing tensionbetween those who lend moneyand make decisions, and thosewho receive bailout funds andobey the former’s instructions.
and Cyprus ourished as an oshore nancial center, thesame could not be said o Portugal, which did not experi-ence signicant growth, nor o Italy, which remained miredin seemingly permanent economic difculties.Tis supposed “convergence machine” has now “brutally stopped in the Southern part o the EU — and has movedinto reverse in Greece, Portugal, and Spain, with littlechance o short-term improvement. Italy, meanwhile, hasbeen alling behind since the early 1990s,
according toa Bruegel report by Zsolt Darwas and Jean Pisani-Ferry.Darwas and Pisani-Ferry note that peripheral countries’real exchange rates diverged by between 20 to 40 percentcompared to that o Germany,
and current account posi-tions in decit countries reached 10 percent o GDP in2008.
Te introduction o austerity policies was perceived to beimposed rom Berlin, Brussels, and the markets. Tesepolicies, combined with the 2010 banking crisis, thebail-outs or Greece in 2010 and Portugal in 2011, andthe assistance to Spain’s nancial sector in 2012, urtherexacerbated the situation. Te convergence in living stan-dards came to a sudden, even brutal, end without a sign o recovery on the horizon. In addition, while the dierencein interest rates charged on sovereign debt was very low at the start o the EMU, by 2013, Germany was at timesnancing itsel at negative interest rates, while Spain andItaly each aced interest rates o over 5 percent.
Signi-cantly, Greece and Portugal did not even have access to themarkets.Te problems o these countries led to another kind o divergence, one that is more political in nature and thathas a bearing on the uture o the European project: adivide not only between creditor and debtor countries, butbetween decision-makers” and decision-takers”
in theEU, and in particular in the eurozone, that could impinge
1 Z. Darvas and J. Pisani-Ferry, “Europe’s Growth Emergency,” Bruegel, October
2 Ibid, p. 19.
3 Ibid, p. 12.
4 Country Risk Premium: Spain,http://countryeconomy.com/risk-premium/spain.5 I. Molina, “After bottoming out: A new European policy for Spain,” Real Instituto
on the support or democracy as national governmentsand parliaments lose relevance. In other words, there is anincreasing tension between those who lend money (lessand less so as the case o Cyprus has shown) and makedecisions, and those who receive bailout unds and obey the ormer’s instructions. Te only positive convergencebrought on by the crisis and the “internal devaluation(mainly in salaries) that became inevitable in the monetary union could be observed in Spain in the important realmo labor unit costs, which dropped by 5.1 percent romthe end o 2007 to the end o 2012, while growing by 3.1percent on average in the euro area during the same periodo time.
Te reduction in labor unit cost has also createdcondence that has lead to increased direct investmentsin Spain. It has allowed the country to improve its currentaccount balance.
More Europe, Fewer Europeans
Tere is also an observable divergence in public opinion.Te Southern European societies, in particular Portugal,Spain, and Greece, are the most demoralized in the EU. Telack o condence in politics and democracy — a generaltrend in the EU as a whole — is growing at an alarmingpace in the region. Tus, in Spain, the latest Eurobarom-eter (the regular opinion poll conducted by the EuropeanCommission) rom autumn 2012 shows that 91 percent o Spaniards do not trust political parties (compared to 84percent in 2011; EU average 80 percent), and 86 percent donot trust government.
Te support or the main institu-tions has been diminishing very quickly. Te same trend is
6 J. Diaz, “Los costes laborales españoles, los que más bajan de la UE,” Expansión.com,February 28, 2013,http://www.expansion.com/2013/02/28/economia/1362074175.
html.7 “Key Indicator Results for Spain,” Eurobarometer Autumn 2012,http://ec.europa.eu/
TheEuroFuture Project
In spite of the loss of condence
in the EU, Italians want more, notless, Europe.
present all over Europe, but is more acute in the Southernregion.
Te support in Italy or Beppe Grillo and his Five-StarMovement, not a party in the traditional sense, whichplaced third in the recent Italian elections, has been inter-preted as a vote against the euro. However, this interpreta-tion is too simplistic, even though Grillo himsel has askedor a reerendum on the single currency in his country.According to a poll published by 
Il Corriere della Sera
,69 percent o Italians think a reerendum on Italy’s euromembership would be “a negative thing.”
I the reer-endum were to take place, 74 percent o Italians would vote to stay in the euro – including 73 percent o Five-StarMovement voters – with only 16 percent in avor o leavingthe euro.
In spite o the loss o condence in the EU,Italians want more, not less, Europe. But that also meansthat more integration has to go hand-in-hand with moresolidarity.Te Italian vote in February 2013 was clearly directedagainst the policies o austerity and against excessivesacrices, despite the act that both the Partito Democrataand Silvio Berlusconi’s People o Freedom party supportedausterity measures in the previous Parliament. But it isclear that Grillo voters were signaling their dissatisactionwith austerity, as were the voters or Syriza in Greece, andor Izquierda Unida in Spain. However, it is also importantto note that Greece is the only country so ar that has seena simultaneous rise o extremist political parties, on the arle as well as the ar right.
8 Ibid.
9 G. Jones, “Italians say no to referendum on euro membership — poll,” Reuters, March
10 Ibid.
Furthermore, Spanish mistrust in the EU has grown to72 percent, 10 points more than a year earlier.
But it issignicant that 67 percent
support the idea o staying inthe euro. Such seemingly contradictory positions partially stem rom the act that citizens mistrust their own nationalinstitutions even more than the EU. Tis phenomenon alsoexplains why those countries were among the most pro-European in the EU beore the crisis. Now, however, thereappears to be a growing negative consensus on Europe inthese societies.Tere is room to recover public trust in Europe i the EUmanages to successully overcome the crisis, and to avoidrepeating what happened in Cyprus in early 2013. Paradox-ically, or those countries that have suered the most romthe euro crisis, the euro might serve as the ramework orrecovery o their aith in Europe. Te support or the eurois strong, as the latest report rom the Pew Research Survey shows,
but it is the overall trust in the EU that is slipping.I these countries see that the EMU progresses towards areal banking, scal, and economic union, and the EU doesmore to ght unemployment, especially youth unemploy-ment, then Europe will be seen again as part o the solutionto their national problems.Yet, or the moment, there is a clear deterioration o support toward the EU throughout the peripheral coun-tries. wo out o three Spaniards expressed high condencein the EU in 2007. Tis result is in stark contrast to thending rom the all o 2012, when 72 percent expressed amistrust o the Union.
Only 20 percent o Spanish citizenstrusted the EU (although it should be noted that only 11percent trusted their national government).
In general,trust in national government is lower in the Southerncountries (Italy, 17 percent; Spain, 11 percent; Greece,7 percent; Portugal, 22 percent; and Cyprus, 6 percent),
11 “Key Indicator Results for Spain,” Eurobarometer Autumn 2012,http://ec.europa.eu/
public_opinion/archives/eb/eb78/eb78_fact_es_en.pdf , pg. 2.12 According to the most recent Pew Research Global Attitudes Project poll, when asked
whether they wanted to keep the euro as their currency, 67 percent in Spain agreed,
13 http://www.pewglobal.org/2013/05/13/the-new-sick-man-of-europe-the-european-
union/14 “Key Indicator Results for Spain,” Eurobarometer Autumn 2012,http://ec.europa.eu/
15 Ibid.

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