In the previous blog entries I focussed on how good
governance is a desirable public good but that it is tremendously difficult to
export. Effective demand requires domestic political will and often it is in
difficult times of austerity that sacred (policy) cows are sacrificed to the
alter of balanced-budgets and sovereign de-ratings. And this equally true in
developed mature economies.
Which brings me back to the challenges of governance back in
the EU which often preaches developing and would-be EU entrants on the morality
of good governance.
We are now in the 5th year since the onset of the
financial crisis in 2007. And nowhere near the end of the pain. The news from
Spain grows ever-more grim: unemployment is now 1 in 4 and the yields on its debt
beginning to inch up. The new government of Rajoy has been in power since
November and is in a governance-bind: its domestic political mandate is in
effect hostage to the Eurozone agreement for greater austerity to balance books
through the Fiscal-Compact .
And pretty much the same picture facing other so-called core
Eurozoners: domestic audiences want to see growth: prosperity and jobs in their
cities and countries from Finland to Portugual and from Ireland to Slovenia,
irrespective of what is agreed for other places.
And this places the current Eurozone framework and, in the
absence of a common fiscal policy, the intended 2nd best fiscal
co-ordination through mechanisms such as common surveillance and fiscal rules
with binding restraints, in a very sticky situation.
In the same way as donors call the shots in the development
world since its their money, it is broadly true also for the Eurozone with the
creditors doing the same - be they via
the writeoffs of Greek or Irish debt or explicit transfers in the form of EU
Structural Funds.
What is different now in 2012 is that domestic EU politics
is now taking centre stage and slightly away from the economics/financial
debate of what is now the “new norm” of negative or low-growth trajectories for
almost all economies aside from Germany and the Scandanavian countries – and even
here the dynamics of political economy have changed as Finland has highlighted
of late.
How will this play out at the Eurozone level? I expect increased
volatility as populist sentiment of pre-electoral phase leads to a more centripetal
trend within each of the countries facing elections as simple self-interest
comes to the fore. In this sense every Eurozone as well as other non-Eurozone
EU countries are in the same boat.
There is already a whiff of this as EU politicians feel
the political winds and adjust their antennae accordingly – whispers of a more
growth-enhancing focus have quickly matured to Euro-speak and the rather boringly
termed Growth Compact that needs to be incorporated as a complement to the Fiscal Compact.
In the end it will still come down to who is the net
creditor and Germany will continue to be the ring-master but expect a
continuity of EU salami-style economic decision making with gradual weakening
of German resolve for pooling sovereign risk and the weakening the Fiscal
Compact deficit limits as the new government heads – most likely led by the
equally soporific-looking would-be new French president Hollande – gang up.
Expect a continuing policy of loose monetary policy under the stewardship of Mr
Draghi to soothe bank balance sheets. The EC as the EU’s executive already has
off-the-shelf papers ready to be launched if and when we see something like the
Growth Compact emerge.
In the meantime, there will be some rocky moments still
ahead including the always entertaining Referendums in Ireland – this time on
the Fiscal Compact on May 31st coupled with a possible tail risk that the apple cart of
political stability is genuinely toppled through the election of extremists
bent on fighting the EU diktat, leading to a possible exit from the Eurozone.
Folk have previously discussed the possibility of Greece
exiting the Eurozone, but what probability of say Holland or another core
country doing so?
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