On September 26th, the Global Business and Economics Program hosted Erkki Liikanen, Governor of the Bank of Finland and a key leader on the European Central Bank’s Governing Council for a discussion of possible solutions to Europe’s ongoing Euro crisis.
Atlantic Council Board Director and Co-Chair of the Business and Economics Advisory Group Ambassador Stuart Eizenstat moderated the conversation.
The underlying stability of the Euro is not in question. Liikanenpointed to the Euro’s strong exchange rate compared to the dollar or pound.
Europe’s problems stem from the widening divergences between the strength of the core and the periphery. Core European economies (i.e., Germany) are growing (albeit slowly) even as peripheral Europe struggles with deepening structural deficits. In order to restore a semblance of balance across the Eurozone and return the Euro area to growth, Liikanen highlighted 3 steps Europe needs to take immediately:
- Ratify and adopt the July 21 agreements of the European Council which would expand Europe’s rescue fund, the EFSF.
- Continue to implement the fiscal and economic adjustment plans in the peripheral countries to further deregulate and open their economies, and exercise wage restraint in the public sector.
- Recapitalize the banking sector quickly and efficiently following the results of new, credible, stress tests on European banks.
Reports of dissent, acrimony and incoherence, at international economic meetings are overblown. The pressinaccurately characterized “US lecturing” at recent meetings of Eurozone finance ministers in Wroclaw, Poland, as well as at the annual World Bank-IMF meetings here in Washington. Liikanen assured the audience that the crisis is actually inspiring international solidarity and building the necessary levels of consensus to take decisive actions. As he put it, the world is realizing that: “If there’s a problem we (Europe) can’t contain, we will all have a problem soon.” Therefore, the IMF, United States, China, and other emerging markets are working with their European counterparts to share experience in an effort to resolve the crisis.
This crisis represents a potentially existential moment to the European project, and Europe’s leaders need to defend the Euro domestically. Liikanen noted that while it is difficult to explain the economic benefits of European integration and the adoption of the Euro during these hard times, Europe’s leaders must nevertheless do a better job of communicating with their publics. The creation of the single market and monetary union are the two greatest accomplishments of the past 60 years of European integration, and cannot be taken for granted. Liikanen assured the audience that the European Union will successfully resolve this crisis through building up the financial capacity of the EFSF and continued implementation of the peripheral states’ austerity measures.
The global economy is more interdependent now than ever before. We have seen the U.S. government, European Union, and IMF all significantly downgrade global growth prospects for upcoming years, in large measure due to Europe’s inability to get a handle on their sovereign debt crisis. While the European Union’s overall debt sustainability is comparatively good compared with Japan or the United States, the markets and consumers are not confident in the political will of Europe’s leaders to take the necessary steps to intervene and resolve this crisis in an orderly manner. Whether or not Greece or another sovereign ultimately defaults, lack of clear resolve by Europe’s political leadership has dealt a critical blow to the European economy. There is still time, but Europe needs to act quickly, decisively, and soon.
Media Mentions
- ECB’s Liikanen sees downside risks to economy – Marc Jones, Reuters
- ECB’s Liikanen: Downside Risks To Economy Have Grown – Luca Di Leo and Gabriele Parussini, Dow Jones Newswires
The discussion was part of the Mapping the Economic and Financial Future Series, an Atlantic Council series co-hosted with Deutsche Bank that features high-level business leaders and economic policymakers from the U.S. and Europe. The series is a central component of the Council’s Global Business and Economics Program.