Cause and Effect in European Politics and Law

The Crisis Is Only Visibly Fading, the Underlying Problems Remain

Adelina Marini, March 2, 2013

The eurozone crisis seems a bit distant from Sofia, the capital of the considered poorest EU member state Bulgaria. Distant because people here say they have lived in a constant crisis ever since the beginning of democracy in 1989. And may be this is the reason why one of the very few Bulgarian economic analysts who follow the developments in the EU and globally believes that the acceleration of the eurozone integration will lead to even further distancing of what Dimitar Ashikov calls "the eastern periphery" - countries like Bulgaria, Romania and Hungary, which are outside the euro area. According to him, to a large extent the problems in the zone of the single currency are under control thanks to the ECB policy last year.

Now no one speaks of a break-up, of a Greek exit and this is why more attention should be paid on the next stage - what is going on with the others. And what is going on, separately from the pessimistic economic data - declining demand in Romania and Bulgaria, but also in Hungary - is underestimated. The wave of protests in Bulgaria specifically, as well as the constitutional problem in Hungary is not assessed in depth.  In Brussels, these problems are viewed as temporary crises, temporary deviations and instability, the analyst says. And unless more attention is paid, the risk these counties to begin distancing notably from the rest of the EU is very big.

And although he says the situation in the eurozone is under control now, Dimitar Ashikov warns that this is only the visible part. The main underlying issues that have led to the crisis, are still unresolved. What has been done so far is to achieve a good balance of public finances. The deficits are under control, the debts are beginning to decline, but the reasons why the balance was broken in the first place, that made austerity policy necessary, remain. These reasons are connected to investment, to outsourcing outside the EU of businesses, to employment policies. There is no common industrial policy. The banking system is disintegrated and continues to be regulated on a national level.

Moreover, the problems are getting ever more complicated which leads to wrong assessment of national specifics and therefore makes the finding of the right solutions for every member state separately very difficult. The analyst points out that there is a crisis of competence in every decision to explain to every country and its establishment what stands behind. This is one of the reasons for the resumption of the dispute between the proponents of austerity measures and those who promote injecting of money into the economy to boost economic growth and reduce unemployment.

Dimitar Ashikov explains, however, that the latest studies show that 1% cuts of budgetary spending leads to over 1% decline of gross domestic product, while increasing tax burden results in around half a percentage or even one third of a percentage decline of the GDP. In other words, increasing tax burden has a more positive effect on economic growth than belt tightening, but it is difficult to sell to voters, the economist says. If the price for servicing the public debt is low, then there is no problem with its size. The question is, however, what measures to apply.

This is an issue which not only analysts deliberate on but decision makers too. In response to the "admission" of IMF's chief economist Oliver Blanchard in January that the mistakes in economic forecasts had led to unexpectedly bigger decline of gross domestic product, the European Commission published a document of its own in March. In it, two economists from GD Economic and Monetary Affairs of the Commission explain that, in fact, austerity measures should not be in conflict with measures that increase the revenues in the treasury. Structural reforms are needed in the pension systems, of the labour market and education which could have real contribution to economic growth.

Some countries do rather well with reforms and are already exiting the crisis. An excellent example, quoted more and more often in the EU, is Ireland which is also the rotating president of the Council of the EU. Dimitar Ashikov, however, is cautious and says that although it is very nice quoting someone as a role model, the genesis of the crisis remains different in the different countries. On the one hand, it can be said that Ireland is a success story, but this is hard to believe by others who have other problems that cannot be solved with methods that fit the Irish better. The fact that they all paid a high price does not mean that they have paid for one and the same thing, the economist believes.

The path the EU is walking onto to build a banking union is the right one. And now it is essential what political decisions will be taken, especially in the area of economy and finances, the Bulgarian analyst concludes. The entire interview with Dimitar Ashikov you can watch in the video file.