The Future of European Union
The current Eurozone economic data provides sustainable background for defining it as a financially instable formation. As the arising European economic issues present endogenous dynamics of balance sheet recessions, many experts concentrate on the assessment of the European budget deficit roots. The coming national disturbances resulted in the attempts to find the solution to such a deteriorating state of European Union’s (EU) economy and finances. Richard Koo, Paul de Grauwe, and Yuemei Ji are widely known as the leading specialists in the sphere of today’s European troubled economy. European integration, in spite of its financial promises, gave birth to the deflationary bias in the Eurozone, revealing axiomatic design failures. Koo, De Grauwe and Ji undermine the solutions offered by the Europe’s policy makers as the latter have failed to acknowledge that the financial architecture of the zone is in desperate need for fundamental restructuring and recapitalization.
De Grauwe and Ji on the Present and Future of the European Economic Development
The reading “What Future for the Eurozone?” presented by De Grauwe and Ji (2014) argues that the economic crises experienced by the Eurozone in 2010 has evolved into a process of steady growth of its government debts contributing to the increase of the monetary value of money across the Eurozone. According to De Grauwe and Ji, the primary resolution of the corrupt economic development of Europe is seen in the implementation of major restrictions in its fiscal policies along with rigorous supervision over the “macroeconomic imbalances and the banking union” of the region (De Grauwe & Ji, 2014, p.16). The authors highlight the role of the ECB (European Central Bank) in the economic recuperation of the EU and its announcement of OMT (Outright Monetary Transactions) program in 2012 (De Grauwe & Ji, 2014).
The latter became the guarantor of European macroeconomic adjustments and played the role of a precautionary mechanism aimed at European financial stability. Nonetheless, ECB’s commitment to ensure the provision of extensive amounts of liquidity to the EU markets did not eliminate the budgetary and economic dictatorship patterns performed by the Eurozone creditor nations. As stated, the account deficits and account surpluses are unevenly distributed throughout the northern and southern countries of the EU. Generally speaking, De Grauwe and Ji underline the fact that in concordance with the distribution patterns, such southern periphery countries as Greece, Spain, Italy, Portugal, and Ireland have asserted the supreme rule of such European countries as Austria, France, Finland, Netherlands, Belgium and Germany. The authors focus on the financial dependence of the northern countries of the Eurozone and define it as efficient tool applied by the creditor nations to enforce their special interests concerned with the expected full repay from the southern Eurozone countries.
The reading provides criticism of austerity as the priority mechanism of safeguarding the interests of the involved creditor nations causing the misbalance in the relations between the creditor and debtor members of the EU. De Grauwe and Ji (2014) present the forenamed interior depreciations as the major precondition of the low employment and output rates currently observed in the debtor countries creating a “deflationary bias” (p.19). The latter has greatly contributed to the Eurozone recession and the inflation decrease reaching the critical number of less than 1 percent in the present year. The resulting labour cost decline and the reduction of the market competitiveness of the southern Eurozone members works as an expenditure reducing system. The latter stimulates the progression of the imbalances in the Eurozone manifested exclusively by the obligors of the outer boundary of the Eurozone. De Grauwe and Ji (2014) provide an economic forecast of the Eurozone future throughout the current preconditions of its economic development: creditor-dictated governance and two major Eurozone design failures – the endogenous dynamics of booms and busts and the absence of economic stabilizers. As mentioned before, the authors highlight the role of the ECB presenting it as the lender of last resort of positive macroeconomic changes in the Eurozone. In addition, De Grauwe and Ji accentuate the fact that the EU can survive only under the condition of embedding the zone into a fiscal and political union whose influence would prevail over the dictatorship of ECB.
Richard Koo on the Balance Sheet Recession
The reading “The World in Balance Sheet Recession: Causes, Cure, and Politics” presented by Richard Koo (2011) provides an in-depth assessment of the Western economies from the positioned vector of Japan-like development. The author expresses a concern regardless the balance sheet recession patterns of the United States as well as provides the analysis of the current Eurozone crisis. According to Koo (2011), the “deflationary spiral” is the major reason Western economies are forced in balanced sheet recessions (p.21). The forenamed deflationary spiral forms as the result of the deleveraging of the private sector irrespective of zero interest rates. As a result, the private sector suffers a monetary policy crisis agonizing in its attempts to conduct a repair in its balance sheet. Koo presents fiscal consolidation as the driving force for obtaining decreased deficit and increased growth patterns within the private sector. The impairment of the latter provokes untimely withdrawal of “fiscal stimulus” evolving in the forenamed deficit (Koo, 2011, p. 25). The development of the fiscal stimulus is a fundamental element in terms of preventing the money supply and the GDP from destabilizing during balance sheet recession. In particular, Koo presents the implementation of the fiscal stimulus as the basic requirement to equalize the economy. The author emphasizes the necessity of the United States and other Western formations such as the Eurozone to learn from the Japanese economic bitter lesson of 15 years (1990-2005) to scramble out of its own balance sheet recession (Koo, 2011). Koo argues that the general publicity reveals the tendency to criticize the integration of a fiscal stimulus into the economy due to its incapability to properly asses the expedience of the spent money. In democratic society, such purblindness results in public political distrust grounded on the assumption that the money was used on futile projects stimulating strong deficit. Koo highlights that ineffectiveness of the monetary policy in terms of the economic recovery from the bubble burst socks outlived by Japan in 1992 and in the U.S. in the year 2007 and traces it to the economic condition of the Eurozone.
The reading uses the growth of the monetary base providing the examples of Japan’s, the United States’, and the United Kingdom’s drastic liquidity injection which failed to increase money supply (Koo, 2011, p.20). The Japanese balance sheet recession example demonstrated by Koo plainly identifies three main reasons for losing the GDP percentage: paying debt, zero borrowing and zero spending, which consequently induce the deflationary spiral development. In other words, the multiple years of debt repay have taught the Japanese private sector to refuse from borrowing money. In its turn, the latter prevented the country’s economy from achieving its full financial potential. Koo provides solution to the forenamed recession to ensure that the Western countries do not lose decades to restore from the economic crisis using the parallel between house price movements in the U.S. today and in Japan 15 years ago (Koo, 2011). The expert provides the evidence contributing to the comprehension of the fact that the entire Eurozone is currently facing a critical economic period, which coincides with the previously suggested EU failures.
Consideration of Common Issues
“The World in Balance Sheet Recession: Causes, Cure, and Politics” presented by Richard Koo support the key role of the private sector as a net saver, as seen in “What Future for the Eurozone?” presented by De Grauwe and Ji. Both of the analyzed readings present a call for the application of fiscal intervention within the Eurozone. The latter intervention is the major requirement highlighted by De Grauwe, Ji and Koo as the main tool of reducing the balance sheet recession bubbles. The EU balance sheet argument stated by Koo along with the fiscal crisis disclosed by De Grauwe and Ji both lead to the conclusion that the worst effort to be implemented is fiscal consolidation at the time when the European private sector is downplaying debt. According to Koo, this has led the EU to the deflationary spiral patterns, which De Grauwe and Ji identify as the tendency to deleverage significantly. Much of the discussion displayed by the authors is concentrated on what national governments are expected to do in order to avoid divergent development in a set of macroeconomic indexes such as competitiveness and current account measures. Koo, De Grauwe, and Ji emphasize the role of the monetary authority of the ECB as the primary instrument for stimulating positive macroeconomic dynamics within the Eurozone. The analyzed works provide an assessment of the divergences among the EU members, which consequently trigger a vast credit expansion and contraction. According to the presented data, EU design failures and the latter divergences are exclusively present by the debtor southern periphery of the Eurozone explaining EU recession observed since 2012. Koo, De Grauwe, and Ji stress the inevitable nature of the Eurozone economic crisis under the condition of failure to apply symmetric budgetary policies such as fiscal stimulus and the creation of a fiscal union. The fragility of the Eurozone depicted by the two readings comes from the EU’s inability to regulate its relations with the ECB in terms of its support of the southern part of the Eurozone in extreme financial stress by means of buying out the holders of government bonds. The failure of the member-states to overcome the forenamed obstacles is very likely to result in the EU’s sovereign solvency issues along with weak investment. It is hard to underestimate the role of the ECB in terms of guaranteeing the survival and consequent recovery of the monetary union.
As stated in “The World in Balance Sheet Recession: Causes, Cure, and Politics” by Richard Koo and “What Future for the Eurozone?” by De Grauwe and Ji, the Eurozone resulted to be a construct loaded with design failures. Both of the writings provide the possible ways of fixing the forename design failures concerning the government debts crisis, which nearly collapsed the European monetary union. Generally, the root cause of the balance sheet recession lies in the incapacity of the EU’s leaders to arrange appropriate functioning of the Eurozone’s governance. The latter has erupted due to an unsustainable debt accumulation manifested by the private sector. The dictatorship of the EU’s creditor nations has led to major macroeconomic divergences stimulating the boom and bust dynamics throughout the zone. Both of the works provide credible sustainable evidence of the fact that the movement of the Eurozone is to be monitored by such monetary authorities as the ECB. Better EU governance along with credible measurements has the capacity of maintaining the fiscal discipline across the Eurozone. Finally, the ideas presented by Robert Koo, Paul de Grauwe, and Yuemei Ji may become the anti-crisis manual of the Eurozone stimulating the national governments to stop the downward deflationary spiral in economic activity.