Tuesday 11 December 2018

Europe has much to do 10 years on

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Editorial

Editorial

The 10th anniversary of the onset of the economic crisis has given rise to much retrospective analysis as to what went wrong, but a more pertinent question is whether the real lessons of that calamitous event have been learned to ensure a similar event will not reoccur in the future. It would be convenient to say that such lessons have been learned, and for many, at a personal level, the scars have been recent and so deep as to make it unlikely that a repeat of the conspicuous mistakes of the past will reoccur in their lifetimes. Indeed, on a broader domestic level, there are also signs that prudent management of the economy has become more the norm than the exception, although the necessity of politics may ultimately bedevil such good intentions. Were that to happen, it would be unforgivable.

However, it is at a broader level again that causes for concern most exist. It is worth recalling that as we mark the 10th anniversary of the economic crisis, we are also fast approaching the 20th anniversary of the launch of the Euro. It is sometimes forgotten that when the economic crisis hit, officials in Europe wrongly assumed that the event was purely a US banking crisis and that Europe would scarcely be affected. Within a few months, however, Europe's banks were exposed, too. Such a false assumption at the highest levels in Europe was the first of many wrong or late decisions taken to contend with the consequences of the economic crisis.

When the crisis hit the US, the Federal Reserve moved quickly to lower interest rates and to inject liquidity. In all, the US introduced three massive rounds of quantitative easing, or new money into the money supply. At the same time interest rates in the Eurozone were as high as 2.5pc, and took five months to be reduced to 1pc, only to be increased again at the first opportunity in 2011, after which the second wave of recession hit. Furthermore, no attempt was made to introduce quantitative easing in Europe at this time. At the same time European fiscal policy saw the imposition of severe austerity measures, with Ireland particularly affected. Most experts now agree that these policies, the longer they continued, were damaging and self-defeating and to a large extent have come to be seen as representative of poor judgment on the part of policy makers at the time. Undoubtedly, political decisions taken domestically in the Celtic Tiger years leading up to the crash significantly contributed to the problems faced by Ireland, a heavy dependence on the construction sector and a narrowing of the tax base being just two of those decisions.

However, the question still remains, 10 years on, as to whether enough has been learned at European level in relation to monetary and fiscal policy to better manage the next crisis. The answer would have to be in the negative. It should also be noted that the European Central Bank President, Mario Draghi, who when appointed did 'whatever it takes' to save the Euro, will step down in October next year. His replacement will be important. Fiscal policy in Europe, meanwhile, is in not much better shape and governments continue to struggle with high debt levels, leaving little room for a stimulus if a recession were to happen again, as inevitably it will. So as the perhaps more significant 20th anniversary of the Euro approaches now is a good time for governments to ensure better co-ordination of budget and monetary policy next time around for the betterment of all of its citizens.

Sunday Independent

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