Rally ‘Round the Flag

By Tevfik Murat Yildirim. Originally published on 2012/07/08

The EU should be fed up with gloomy news coming from weak links in the chain, but still, there appears to be much to contend with. It seems dubious to argue that the European problem can be solved in a financial way. Structural problems need to be treated more collectively and they require more tolerance. Exiting the euro, which makes the strength of single currency questionable, will never be the solution.

One of the most crucial questions to be raised should be about perception. No matter what others think, leading EU states should focus more on “how we survive as a whole” rather than “who will be out”. This is because, there will always be some weak links and these weak links should not be the only ones held responsible. Thinking collectively and acting individually will be vital in decision making; however, domestic expectations must be ignored in order to make precise decisions.

Trade as a win-win game

After the gloomy news, we saw German Chancellor Merkel speaking of “the weak links” in the system. From her speeches, it is interpreted that Germany is no longer supportive for the ‘problem’ EU members. Unfruitful elections in Greece brought new fears about the system, more specifically, raised the question: “Will Greece exit the Euro?” Merkel remained unresponsive and kept urging Greece to stabilize its economic and political conditions. But how? Some columnists lend support to the view that Greece and other problem members are not the only sinners. Some others argue that Germany is as guilty as the others; Greece, Spain and Italy. Although this claim seems to be an extreme one, it has some truth to it.

We were taught was that “trade makes everyone better off”. Indeed, In most cases, it can; but not necessarily so. To be more precise, according to the principles of economics, countries focus their attention on products they can produce with lower costs. By doing so, everyone will be better off at the end. This makes sense. However, trade does not make everyone better off in the European Union due to the single currency. In some economic analysis, it is stressed that Germany should balance its trade surplus to prevent the ‘weak’ from collapsing. More than 50 per cent of Germany’s export goes to the EU states. Therefore, it could be argued that Germany might actually be hit harder by a future euro crisis than other countries. In case one of the member states exits the Euro zone, the local currency will depreciate and this will result in more expensive German products.

In the end, German export will undoubtedly diminish harshly, which also means a reduction in employment level. In a nutshell, Germany as a hidden beneficiary is expected to contribute as much as it gains. An increase in German trade surplus will inevitably mean an increase in the others’ deficit. In other words, Germany will always be worried about the future of EU, whatever Chancellor Merkel says.

The way out

The discussion concerning the European economic problem continues with another point. Many journals and columnists lend support one view: the EU should grow in order to make the debt more bearable. Although the EU is still the world’s biggest economic area, growth rates of its members are not promising. Especially the black sheep; Spain, Greece and Italy should grow much faster. According to the World Bank data, growth rates in 2010 were 0, 2 and -4 per cent, respectively. On the other hand, gross external debt / GNP ratios were 173.9 per cent, 171.5 per cent, and 115 percent respectively. More importantly, these numbers are much higher than in the last decades.

From this point of view, diminishing growth rates together with heavier debt burdens will definitely pose a problem of financing, not only for these states, but also for the other member states. The problem should be treated as though it is a problem of all member states. As it is stated in some analysis, exporter states should lower their exports not to cause unavoidable problems in ‘consumer’ member states. If they are not able to narrow the gap between export and import, Germany itself should take action even if it would hamper its own growth rate. The question is: what would Germany do if its main market collapses when ‘consumer’ states exit the euro? This is very clear. Germany knows the result and will probably choose to save the problem members in order to secure its stable and long lasting growth.

The solution of the European problem lies at the heart of economic progress, and the economy itself is too complicated to be left in politicians’ hands. This problem requires media, credit rating agencies, public institutions of member states and civil society actively taking part in the discussion to bring about a change in perception and expectations about the EU’s future. The single market is a gift and it should be improved rather than being criticized.