Business, Economics and Jobs

Is Europe fighting the wrong crisis?


Merkel said EU leaders had agreed on a plan for greater euro zone integration, but key divisions remain over concrete steps.


John Thys

BRUSSELS, Belgium — European Union leaders appeared to think they've wrapped up a year of crisis summitry on a high note at the end of their latest meeting on Friday.

"The conditions for an end to the euro zone crisis are now in place," French President Francois Hollande told reporters. “Europe cannot now be taken by surprise."

The presidents and prime ministers of the 27 member countries agreed to give the European Central Bank sweeping new powers to supervise the continent's banks — a move designed to prevent future financial meltdowns and make it easier to bail out banks currently in trouble.

As the summit opened Thursday, the EU also finally approved a $64 billion slice of bailout money for Greece, which Athens says is vital for keeping its economy afloat after four years of crisis.

Prime Minister Antonis Samaras said the go-ahead laid to rest any fear the crisis would force his country out of the European currency union.

"Grexit is dead," Samaras told reporters. "Today is not only a new day for Greece, it is indeed a new day for Europe."

The money gives Greece some financial breathing space, while the new controls on European banks provide an important building block for Europe's efforts to erect defenses against future crises. Reckless lending by poorly supervised banks — particularly in Ireland and Spain — was a major factor in the euro zone's decent into debt.

However, with deep divisions remaining over concrete steps to greater euro zone integration next year, concern is growing among economists in Europe that this week’s summit, and wider EU policy, is now focused on the wrong crisis.

"I do not believe there is a euro crisis. There is an economic crisis, but it is a growth and jobs crisis," said Hans Martens, chief executive of the European Policy Center, a Brussels think-tank. "The problem is not now about debt. We have overemphasized the austerity side."

Martens contends that the risk of struggling euro zone countries such as Greece, Portugal and Spain going bankrupt due to heavy debt payments ended in September when the European Central Bank committed to use its huge financial firepower, if needed, to buy up their bonds.

Since then, he says, the real danger facing Europe has been depression as economies contract and push unemployment levels to more than 25 percent in Spain and Greece and to a record 11.7 percent across the 17-country euro area.

Unless action is taken to revive growth and get people back to work, the social fabric of European nations risks unraveling amid a rise of political extremism, Martens warned.

He's far from alone.

"We have a fetish in the euro zone with fiscal austerity," complained Bart Van Craeynes, chief economist of the Belgian-based financial group Petercam. "I for one would forget about fiscal tightening in the short term."

Instead, Europe needs to focus on reforms to boost growth and economic competitiveness, he told reporters.

The 12-page statement released by EU leaders after the summit ended contains their routine pledge that "economic policies must be fully geared toward promoting strong, sustainable and inclusive economic growth."

However, the statement's main focus is a proposal for more new measures over the coming year to tighten cooperation among euro zone economies with the goal of ensuring budget discipline or an orderly wind-up of insolvent banks.

But few concrete measures offer hope to the EU’s 26 million unemployed, or do anything to reverse the economic downturn that saw the euro zone economy slip into recession last quarter, or revive economic activity in stricken southern European nations. Greece, the worst case, has seen its economy shrink by 23 percent since 2009.

Hollande acknowledged that despite progress on tackling the debt crisis in recent months, more attention needs to be focused on the real economy in 2013. "What's not been dealt with?" he asked at a post-summit news conference. "Unemployment, weak growth, recession in some countries."

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Behind the scenes however, EU officials acknowledge that significant pro-growth proposals such as EU-wide bonds, a Marshall Plan-style investment program or a "redemption fund" that could free up money for investment by alleviating southern European debt levels, are likely to be shelved until after German parliamentary elections scheduled for next September.

German money would have to underpin any such plan and Chancellor Angela Merkel, who’s favored to win re-election, isn’t ready to open up the coffers of the EU's richest nation.

"We have tough times ahead of us that can't just be solved with one big step," she told reporters. "There has been lots of talk about that one step, like a debt haircut, euro bonds or some other measure that will solve everything. That won't be the case."