Managing Sovereign Debt Crisis in Europe - roundtable
Christian Krappitz, European Commission
Since late 2009 the global financial and economic crisis, with its roots in the US sub-prime mortgage crisis, has mutated into a sovereign debt crisis centred on the European Union and its Member States. Concerns regarding the levels of national debt across states and the ability of governments to service these debts have shaken the faith of investors in the Eurozone and raised question marks as to the future sustainability of the Euro. This roundtable seminar sponsored by the School and the European Commission, and organised in association with the Learned Society of Wales, brought together high profile speakers from across the UK and Europe to discuss the sovereign debt crisis, its consequences for different European States and the potential options for the European Union institutions and UK government in responding to these issues.
The European Commission's response
The roundtable began with the European Commission’s Christian Krappitz providing an overview of the key strands of the Commission’s response to the crisis. He emphasised that the Commission’s approach in managing the sovereign debt crisis was not limited simply to measures aimed at fiscal consolidation but combined the objectives of achieving a sustainable financial stability and long-term economic growth and jobs. Mr Krappitz briefly outlined the Commission’s response to a range of issues, including the specific challenges related to Greece, the provision of ‘backstop’ or ‘firewall’ measures and the strengthening of governance arrangements around economic and monetary union – highlighted by the recent Treaty on Stability, Coordination and Governance in the Economic and Monetary Union. However, he stressed that the Commission’s approach was based on the understanding that managing this process was ‘a marathon and not a sprint’ and that although the Commission could ‘kick start’ these developments, it required national and regional governments to implement these measures.
View from the Financial Markets
Graham Bishop, a leading analyst of European financial affairs and Special Advisor to the House of Commons Treasury Select Committee and to the House of Lords European Committee, considered the sovereign debt crisis within context of the financial markets. He argued that for most European States the ‘crisis of confidence’ was not impossible to rectify but would require strong leadership. Mr Bishop noted that although the Commission was right to talk about the need for growth to go hand in hand with austerity, it was important that the austerity element was not forgotten. Indeed he stated that without action on public debt, it was unlikely that financial markets would begin to trust governments again and once again invest in government bonds. He offered two initial areas which could begin to restore market confidence, firstly utilising unspent structural funds to respond to the debt crisis and secondly to promote competitiveness across the EU, for example, by opening up the ‘closed professions’ in many Southern European States. Restoring market confidence would deliver both a reduction in long term interest rates and an increase in lending by banks – stimulating investment and growth. However, he warned that failing to take adequate action could undermine the Single Market and lead to the ‘balkanisation of the banking system’ within the EU.
Professor Martin Bull
The Southern European perspective
The final presentation by Professor Martin Bull (University of Salford) considered the sovereign debt crisis from the perspective of Southern European States and its impact on their relations with the Eurozone and the EU. Professor Bull noted that in addition to the wider European sovereign debt crisis, the Southern European States – Portugal, Spain, Greece and Italy – have experienced major domestic political crisis in recent years. He argued that to understand the impact of the crisis on the Southern European States’ relationship with the EU it was useful to consider the historical trade-off between solidarity and discipline. The former provided Southern European States with a range of benefits including support for their fragile democracies, funding via structural funds and imposing fiscal and economic discipline where national political elites had previously failed. These benefits of solidarity were perceived as outweighing the costs of discipline introduced via the Maastricht Treaty and moves to the Single Currency. Professor Bull argued that the single currency had undermined the system by leading to a decline in competitiveness and driving down real interest rates making debt-based investment within these States less costly. This had enabled States to effectively ‘free-ride’ on the back of the Single Currency and combined with the liberalisation of the banking sector and relaxing of fiscal rules within the Eurozone, provided the context for the accumulation of sovereign debt. However, attempts to introduce austerity measures had led to the growth of anti-EU feelings within Southern European States and therefore the economic crisis may have sparked a potentially more far-reaching political crisis.
The roundtable presentations were followed by a lively debate stimulated by questions from a highly-informed audience focused on a wide range of issues including competing interpretations of the diagnosis and remedies for the sovereign debt crisis, the influence of perceptions on markets, variation across the Southern European States and the social and political impact of the austerity measures on the EU. In closing the roundtable the Chair, Professor Kenneth Dyson (Cardiff University), noted that the questions raised by the presentations and the discussion engaged with a set of issues which went beyond European States and encompassed the wider global economic crisis and the debt crisis driven by the private sector, particularly in the US. Furthermore these issues tied into the themes of the next roundtable in the programme - Banking Crisis in Europe: Systemic Risk and Financial Stability – scheduled for 22nd February 2012.
Further information on the ‘Reforming European Economic Governance: Implications for the United Kingdom and Wales’ programme of events is available.