Updated: Feb 23
The financial and economic crisis may have come to its end or showing signs of significant deterioration but it has taken its toll in terms of an unprecedented drop in economic activity in the post-war period.
But the fact remains. Europe is back in the game. Having suffered the worst financial and economic crisis of the last 80 years, Europe took decisive action to improve its public finances, push through deep reforms, and establish new institutions to manage and prevent crises better. The changes are structural, long-lasting and make Europe more competitive. Europe is stronger, better equipped and in the midst of ambitious new financial and economic initiatives.
Europe is stronger than you think
The global crisis hit Europe twice. The first strike came from abroad in 2007. In the United States, markets had ignored credit risk in subprime mortgage markets. A lack of financial supervision allowed opaque financial instruments to flourish, aggravating the problem. As a result, the U.S. banking system underwent a dramatic bail-out in September 2008. European banks suffered in the fallout. Two years later, a second crisis erupted in the euro area. Years of unsustainable government policies had caused deficits and debt burdens to mushroom and bloated pre-crisis wages and housing prices. As the situation worsened, Europe took courageous decisions to put the continent back on firm footing. Reforms and strategic mechanisms were required in order to maintain the stability within the European Union while addressing fiscal issues outside the European territory.
Five key responses combined to steer Europe out of the crisis.
First, crisis-hit countries like Ireland and Spain pushed through badly needed reforms, improving public finances and increasing competitiveness.
Second, EU economic governance was strengthened. The European Commission received new powers to enforce the Stability and Growth Pact, issue country-specific recommendations (the ‘European semester’), and underline obstacles that need to be removed to foster growth. Eurostat, Europe’s statistical agency, became more powerful in cross-checking and challenging the data received from each country. These qualitative and quantitative data were the primary source of information regarding numerical financial data collected.
Third, euro zone countries created the European Stability Mechanism (ESM), and its predecessor the European Financial Stability Facility. These institutions were a great success: no country was forced to leave the euro area, the cash-for-reform approach was actually working, and growth accelerated in countries that implemented reforms. The ESM raises the funds needed in capital markets through highly-rated bonds, and passes on the low funding cost to program countries at rates today of around 1-2%. This approach produces budget savings for program countries, particularly Greece, which would pay much more if it were to tap capital markets independently.
Fourth, the European Central Bank’s unconventional and sometimes radical measures were of help. The ECB expanded its balance sheet like the FED, Bank of Japan and Bank of England, provided unlimited liquidity for banks, started a bond purchasing program to avoid low inflation, which also made it easier for banks to lend and boost investor sentiment. The euro weakened which helped to increase exports.
Finally, the Banking Union was established: new institutions were created to monitor macro-prudential risks and supervise banks, securities markets and insurance companies. The Single Supervisory Mechanism is the centerpiece of this initiative as it oversees the 130 largest euro zone banks. During the crisis, EU banks also padded out their capital, increasing their capital base by €600 billion since 2008.
What is the outcome?
The results are impressive. The crisis-hit countries implemented radical reforms. They now head multiple international rankings, earning the sobriquet ‘reform champions’. Many of Europe’s crisis countries – Greece, Ireland, Portugal, and Spain – ended up in the top five of 34 OECD members (a club for the most developed countries) in recognition of their structural reforms. They accomplished that by improving their public finances, reducing their deficits, and cutting labor costs to become more competitive. The euro zone outperformed the US, Japan and the UK in fiscal terms: the aggregate euro area budget deficit was significantly smaller than these three peers. And finally, some of the crisis countries are becoming growth leaders. In 2015, Ireland hit a record high 6.9% GDP growth and Spain 3.2%. Ireland’s growth matched China’s, while Spain’s is almost a third again as high as the US’s (2.5%) over the same period.
A bright future
Europe not only endured the last crisis, it capitalized upon it. Europe’s five key policy responses meant the continent emerged stronger, with the results, being impressive. Completing the Banking Union, deepening the Capital Markets Union, and strengthening Economic and Monetary Union will make Europe’s economy more competitive, diverse, and robust. Europe has put together the building blocks for a bright future; its citizens can justly be proud of these achievements. Realizing this ambitious agenda will make Europe stronger, more influential, and ensure it maintains its position as an economic powerhouse. (https://www.weforum.org/agenda/2016/03/how-the-financial-crisis-made-europe-stronger/)
In conclusion, every bit of change in the global economic order entails the redistribution of international responsibility as well as international power. Emerging powers, should encourage a perspective that tolerates development. Cultivation of core values will help emerging powers undertake international responsibilities proportionate to their current national strength and prevent them from being trusted with responsibilities and obligations beyond their capacity. At the same time, such an attitude toward the development of other countries will also demand that developed countries undertake their responsibilities, fulfill their commitments, and pay more attention to the reasonable demands of less-developed countries. This will certainly have a global impact and will translate into a more inclusive global economic order in the near future.