After suffering the worst economic crisis it has known in 8 decades, Europe has now taken action to reform and improve public finances, and to establish new institutions which can prevent and manage such crises better. These long lasting structural changes are designed to make Europe stronger and more competitive in today’s ambitious financial world.
The Global Crisis in Europe
There have been two global crises which have hit Europe, the first being in 2008 when European banks suffered from the fallout of the US banking system’s bailout. The second crisis hit just two years later when debt burdens and deficits which had built up over time bloated housing prices and wages. As the situation gradually became worse, the decision was made to push through reforms to improve competitiveness and public finances, and to strengthen the economic governance of the EU. The ESM (European Stability Mechanism) was created which accelerated growth and raised the essential funds required in capital markets. The weakened Euro increased exports and new institutions were created under the Banking Union to monitor and supervise insurance companies, securities markets and banks.
And the Results?
As a result of these reforms the countries hit by these financial crises are now at the head of many international rankings and are now in the top 5 OECD members. This has been done by reducing deficits, improving public finances, and cutting the costs of labour to become more competitive. In fiscal terms, the Euro area outperformed the UK, US and Japan with a budget deficit that was much smaller than its peers, and some of the crisis hit countries are even becoming growth leaders.
Three Big Initiatives to Shape Europe’s Economic Future
During the time of crisis, Europe increased its pace of policy integration and reform with 3 incentives that require closer attention and which will set the financial and economic agenda for the next 5 to ten years.
Completion of the Banking Union
The Single Resolution Mechanism put in place by Europe’s Banking Union aims to resolve bad banks at the lowest possible cost for taxpayers. The private sector will participate in this and banks covered by the SRM will probably be required to provide 55 billion Euros of funding over the next 8 years to create the SRF (Single Resolution Fund). Although the banks will face higher costs, taxpayers will have less need to cover the failures of their banks. The EDIS (European Deposit Insurance Scheme) will also soon be introduced to guarantee deposits of up to 100,000 Euros within the Euro area.
A Deeper Capital Markets Union
The Capital Markets Union has been created with the goal of creating more integrated and deeper capital markets, reducing the dependency on banks and increasing funding flow to IPOs, equity and debt capital market financing and Private Equity from Venture Capital.
Strengthen Economic and Monetary Union (EMU)
New initiatives will be introduced within the Euro area which will be combined to allow for increased risk reduction and more risk sharing, reducing the need to use taxpayers’ money to absorb financial shocks. If these initiatives can be successfully implemented in the next ten years, Europe’s long term economic future will be defined.
Can Europe Afford to Deviate From its Path?
Immigration may stimulate growth and this will have a short but positive impact on the GDP of the EU, compensating for long term weak demographics. If Europe effectively protects its outer borders and brings in the right skill sets, providing effective social integration programmes while managing the fear of immigration, it is sure to reap rewards. The best path forward for Europe is to remain strongly integrated and interconnected deeply as a continent. Over the last 7 decades, Europe has been stable, peaceful and dedicated to the creation of wealth as the largest single market in the world. It is certainly in the continent’s best interest to remain a leader in global finance and economics.
A Bright Future
During the last economic crisis, Europe managed to capitalise upon it, meaning that the continent actually emerged stronger than ever. By deepening the CMU, completing the Banking Union and strengthening the EMU, Europe’s economy can only become more robust, diverse and competitive. The foundations have been laid for a bright future for Europe and by realising this agenda, Europe will become more influential, stronger and more able to retain its position as one of the world’s economic powerhouses.