Does the EU deserve a Nobel Peace Prize?
The European Union (EU) has been recently awarded the Nobel Peace Prize for the year 2012 recently 'for bringing peace to a continent that tore itself apart in two world wars'. There is no doubt that a supra-national political framework such as EU has done a lot of good work in the past, but choosing the EU for a Nobel Peace Prize has been more of a motivational gesture.
The Eurozone's economic troubles have escalated to a point that an economic breakup of the organisation is being discussed by experts and diplomats. In these hard times, awarding this prize is only a conciliatory measure and one with an uncertain result.
Recently, German Chancellor Angela Merkel flew all the way to Greece to assure the people that Germany, along with other countries, will support them and values their suffering as they bear the bitter medicine of austerity; that Germany would like to see Greece remain in the Eurozone. While such a move by Ms Merkel clearly reflects sincere concerns regarding a unified Europe in the face of economic setbacks, pouring out words of encouragement while putting pressures on the government to introduce greater austerity is not going to extend relief to the people who are getting evermore doubtful of the perks of staying in the Eurozone; massive protests in the crisis hit countries are a testimony to the unpopularity of reforms being implemented.
To complicate the matters, it is not just Greece that is doing badly, Spain too has seen its sovereign debt rating crumble to just above junk status; this is a way for rating agencies to say that Spanish government bonds are a risky investment. As a result, the interest rates on bonds will rise and it will be more difficult for a defiant Spain (still not applying for bailout) to raise capital and service its debt. Since foreign investors will be wary to throw in money, the government will have to slash social services in order to raise revenues for debt payment. This directly translates into lesser jobs, lower government spending, decreased social benefits and a risk of economic contraction.
Nevertheless, this month started with encouraging news for crisis hit Eurozone as the European Stability Mechanism (ESM) was finally set up. Roughly speaking, the ESM will be able to borrow money from financial markets by selling its own bonds and lending the money to the crisis hit countries. The countries backing the pledge are primarily Germany, France and Italy. While the markets have seen a temporary surge in the wake of this news, confusion still exists on how exactly the Eurozone banks are going to receive capital injections through the ESM. The trouble is, ESM - coupled with Draghi's idea of OMT (Outright Monetary Transaction- ECB's ability to buy unlimited short term bonds) - are only going to give temporary relief to financial markets as they cannot easily address the fiscal losses of governments, neither are they aiming at progressive structural changes in the economies.
The crisis hit countries are already seeing the economic and political fallout of austerity measures: The Greek economy is shrinking fast; Catalonian Spaniards are protesting for freedom since they pay a fifth of government revenues and are significantly hurt because of increased austerity; the Red Cross has for the first time initiated a food distribution program in southern Italy in order to help families who cannot even buy regular monthly groceries. Clearly, the crisis had flooded out of the financial institutions and into the production and consumption environment long ago and this calls for a careful treatment of economy. Extending monetary benefits to financial institutions while putting in contractionary measures on the economy is quite contradictory to the objective of increased economic growth and lower fiscal debts.
While the Nobel committee deemed EU to be fit for the Peace Prize, recognising its fighting spirit for what is humane and what is right, the Eurozone financiers and diplomats still need to earn this title by balancing off the tighter spending with checking economic contraction. In order for that to happen, tougher decisions need to be made not just by the political parties of the crisis hit economies but also by those who are part of the Eurozone and are seen as the engines of growth. It is time for the Eurozone to ease up on austerity and let the economy grow towards a structural change because slashing up the bank debts while middle classes are wipes out is not going to produce an economic growth that could favour income equality in the region. There appear to be only two options for the Eurozone out of this crisis, a complete break up or greater economic integration and both options are set out in front of the financial and political leadership of the Eurozone; let’s hope for the sake of the world that they choose it right.
Read more by Rehan here or follow him on Twitter @rehan3416
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