The euro area crisis - European Union Committee Contents

The euro area crisis

CHAPTER 1: introduction

1.  The euro area crisis is a complex blend of financial, economic, political and institutional problems. Over the past year, developments in these interwoven elements have dominated the political and news agenda. Despite repeated attempts by European leaders, a solution has proved elusive. This Committee has observed these events with growing concern. In March 2011 we published a wide-ranging report on The future of economic governance in the EU. As the crisis deepened, we conducted a follow-up inquiry to examine how the crisis has evolved and how the response of European leaders has developed. This report is the result of that inquiry.

2.  In chapter 2 the report examines the development of the crisis over the past year. We then assess in chapters 3 and 4 the policy responses relating to the financial and economic aspects of the crisis; and in chapter 5 we address the institutional aspects of the crisis—concentrating on the controversial proposed treaty based on a ''fiscal compact'' for budgetary discipline. Though the focus of the report is on shorter term measures to deal with the crisis, in the final chapter we highlight the importance of economic growth.

The March 2011 report on The future of economic governance in the EU

3.  Our March 2011 report on The future of economic governance in the EU examined how the banking crisis in 2008 triggered a crisis of confidence in the financial health of Member States within the euro area. At the time the report was written, concerns over the level of Greece's public deficit and debt had widened to include other euro area countries, notably Ireland, Portugal and Spain. One of the findings of the report was that the crisis had revealed shortcomings in the original architecture of the Economic and Monetary Union (EMU). An asymmetry between a centralised monetary policy and decentralised fiscal and supply-side policies, combined with a build-up of competitiveness imbalances among Member States, had left the future stability of the euro area in doubt. These problems had been exacerbated by a failure of the markets, and Member States themselves, to comprehend the implications of the way the euro area had been constructed. Until the crisis broke, the markets treated the euro area as a single entity without appreciating, and thus acting on, the financial health of individual Member States.[1]

4.  The report considered a series of legislative proposals brought forward by the European Commission, which focused on two elements: fiscal discipline and macroeconomic stability. The Committee found that, though these proposals did not constitute "the full fiscal union in the euro area that some of our witnesses suggested was necessary, the design of these measures is a step in the right direction." However, the Committee expressed doubts whether the proposals would be implemented effectively, noting that previous attempts to enforce fiscal discipline in the euro area through the Stability and Growth Pact had proved ineffective.[2]

5.  The Committee also supported the establishment of the permanent crisis resolution mechanism, the European Stability Mechanism (ESM), to be created and funded by euro area Member States. The report concluded that "the problems in the euro area have, so far, been contained and no Member State has yet defaulted on its sovereign debt. However, the threat remains and the period until the new crisis resolution mechanism is introduced in 2013 is likely to be fraught despite reassurances from EU leaders. In particular, the willingness of taxpayers in countries subject to the most acute pressures to continue to shoulder the burden of adjustment cannot be taken for granted. If economic growth does not ease this burden they may be tempted to demand that bond-holders share the pain of adjustment, a prospect that could result in fresh financial turmoil."[3]

Background to this report

6.  The period since the report was published has showed this judgement to be prescient. Over the past year the euro area crisis has escalated at an alarming rate. Prospects in Greece continued to decline, to the point that a restructuring of its debt became inevitable. The crisis threatened not only smaller nations such as Portugal and Ireland, but also Spain and now Italy. With the fourth and third largest economies in the euro area under increasing strain, the entire euro area project was seen to be vulnerable. In November 2011 the German Chancellor Angela Merkel acknowledged that Europe is facing its biggest crisis since the Second World War.[4]

7.  The scale and speed of changes present significant challenges to anyone seeking to understand and respond effectively to the crisis. There have been major developments while we conducted our inquiry and prepared this report, including the resignation of governments in Italy and Greece and their replacement with cross-party (or no party) administrations under the leadership of non-party-political Prime Ministers, and the agreement on 9 December for a new ''fiscal compact'' treaty. Almost every day there are significant developments. While it is inevitable that events will continue significantly to alter the political and economic landscape still further, we nonetheless hope that this report, which was finalised on 7 February 2012, will prove valuable in assisting understanding of the ongoing euro area crisis.

8.  In the second half of 2011 our Sub-Committee on economic and financial affairs and international trade took evidence focusing on the agreements at the October EU summit on Greek debt writedown, bank recapitalisation, and the rescue funds; and also on other possible policy responses such as further European Central Bank (ECB) interventions, and the issuance by euro area states of mutually underwritten debt ('eurobonds'). The Sub-Committee heard evidence from Georg Boomgaarden, German Ambassador to the UK; Sharon Bowles MEP, Chair of the European Parliament Economic and Monetary Affairs (ECON) Committee; Professor Willem Buiter, Chief Economist, Citigroup; the Financial Secretary to the Treasury, Mark Hoban MP and Michael Ellam, Director-General for International and EU Groups, HM Treasury; and from Professor Iain Begg, European Institute, London School of Economics, and Special Adviser to the Committee's March report. The members of the Sub-Committee are listed in Appendix 1, together with the interests declared for this report by members of the Select Committee and the Sub-Committee.

9.  The Select Committee itself took oral evidence which focused on the institutional aspects of the crisis, from the Rt Hon David Lidington MP, Minister for Europe, in November 2011 and January 2012; from Edward Carr of The Economist and Charles Grant of the Centre for European Reform in November 2011; and from Mr Giuliano Amato, former Prime Minister of Italy, and Professor Paul Craig, Professor of Law, University of Oxford in January 2012. We are grateful to all our witnesses, including those who took the time to provide written evidence, for their assistance. Full details are given in Appendix 2. Appendix 3 includes a glossary defining the technical terms referred to in the report.

10.  We make this report to the House for debate.

1   House of Lords European Union Committee, 12th Report (2010-11), The future of economic governance in the EU (HL Paper 124-I), Summary. Back

2   The future of economic governance in the EU, Summary. Back

3   The future of economic governance in the EU, Summary. Back

4   Speech to the CDU party Conference, Leipzig, 14 November 2011.  Back

previous page contents next page

© Parliamentary copyright 2012