Op-Ed: Now is the time to address the EU’s structural problems

Op-Ed: Now is the time to address the EU’s structural problems

Southern Europe is now the target of easy criticism of its work ethic. But the region’s problems are not necessarily a consequence of bad economic management, but of wider structural issues of the European Union.

An increasingly popular take on the Europe’s crisis reads like the famous tale of the Trojan horse. The EU provided enormous subsidies to the Southern states over the last decades of the 20th century. At one point in the early 90s, one third of all regional subsidies went to Spain. The EU projected a demand based economy on the south, while the north would take on a more supply side approach to its economy. The OECD and the IMF approved the increased liberalisation of the Spanish market, praising it as an example for Italy to follow. Southern Europe, and particular Spain, seemed en route to becoming a more dynamic, economically speaking. People admired the great horse.

However, this approach to economics mixed with the EU’s limited powers to act constantly and consistently in the dynamics of certain countries meant that it could not outdo some of the structural features of the Southern European countries. In his comparative study of Italy and Spain, Jonathan Hopkin has found that Italy, by holding on to its archaic and sluggish structural economic dynamics, is in fact in what can only be described as a less bad situation than Spain. Hopkin points out that “the protectionist instincts exhibited by Italian politician and business elites may have contributed to containing the effects of global instability for Italy, whilst Spain’s more enthusiastic embrace of financial integration exposed it to the bubble dynamics generated by unrestrained and unregulated capital movements.”

This is hardly praise for Italy, it rather points towards an endemic problem of the EU, which is its inconsistent and ambivalent involvement in the homogenisation of economic models across countries. Hopkin argues that it is blaming the victims of the crisis deflects attention from the failings of the debtor nations, particularly the weak management of its financial institutions of financial surplus, and it also draws attention away from the need for greater regulation, which European leaders seem “reluctant to address.”

To some, the Trojan horse that revealed its true intentions as a liberal message allowing Southern Europe and particularly Spain to experience a great boom over the 90s is now being used against those very countries, in a counterproductive way. To others, the metaphor fails to capture that this approach to the southern regions was probably not planned from the start, but that just points toward the lack of coherence of the EU.

Bob Hancké has explained that greater austerity measures in Spain do much to boost productivity growth, but this must be accompanied by economic growth to have a substantial effect on the economy. There are deeper structural issues such as the high rate of temporary contracts or wage bargaining in Spain which have simply not been positively resolved by reforms. Both Spain and the EU need to face their own structural issues instead of trimming at the edges.

The EU is tiptoeing along an almost oxymoronic line based on a mixture of centrally planned federalism and low levels of regulation. It requires a clear message and a sturdier resolve, and should accept its limitations and address them on their terms, and that means some of the stronger countries admitting their systems benefit more from the structural arrangements of the EU than other countries do.

Spain has followed the European economic guidelines, and its current deficiencies are not the fault of its potential backwardness or sluggishness, but precisely of this liberalising push. More importantly, the north and the south are much more interlinked because of the North’s loans to the South, than the two regions were before the crisis. The EU cannot move on without the south, unless it were to extirpate it, which would increase the price of the euro and make exports harder for countries like Germany. If the EU does not solve these issues at this stage, it could end up rising out of the economic crisis only to find that it has not solved its real structural challenges.

Categories: Economics, Europe

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