Events & News


Sovereign Debt Crises and the Future of the Eurozone

Prof. Kurt Hübner, Jean Monnet Chair for European Integration and Global Political Economy and the Chair for German and European Studies at the Institute for European Studies, the University of British Columbia

19 Apr 2011

Level 13, ESSEC Amphitheatre, 100 Victoria Street, National Library Building, Singapore 188064

4 .00pm to 5.30 pm


Having joined the eurozone, Greece, Portugal and Ireland had yielded their sovereign control over monetary policy and exchange rate policy to the European Central Bank. This means that they were not able to use these tools to devalue their currency and by this means alone aim to ramp up their exports, as a means of reining in their debt and deficit levels. The alternative option of letting these economies ‘fail’ was not palatable, as that would lead to repercussions for the eurozone as a whole. For Prof. Huebner, there was an additional impetus for the German political elite (though not so for the German public) to see through a bailout for Greece, due to the sizeable holding of Greek assets by itsLandesbanken (banks resident in the individual German states or Länder).

There were problems inherent in the construction of the euro, some of which provided fuel for the debt crises. To begin with, the Maastricht criteria for membership of the eurozone (namely, that a eurozone member’s annual budget deficit shall not be higher than 3% of GDP and the member state should not hold a national debt higher than 60% of GDP) were arbitrary stipulations and ‘not the result of sound economics’, as Prof. Huebner pronounced them. The Growth and Stability Pact, which enshrines these criteria, proved to be politically hard to enforce even against its main proponents, France and Germany. But crucially, it was the shift from the high-inflation drachma to the low-inflation euro created the perverse incentive in Greece to go into debt as debt is cheap in such a scenario. In addition, the unreliability of economic statistics in Greece compounded efforts by EU authorities to monitor its finances. This was most notably exposed when the size of Greek budget deficit had to be revised upwards – not once but twice – in the course of the tumultuous year of 2010.

However, Huebner was unequivocal that the euro is here to stay, as the political costs for its abolition are too high. The question, rather, would concern the future characteristics of the euro and the eurozone. Would eurozone membership become scaled-down, with possibly the exit of Greece and Ireland? Would the euro regain its reputation that it enjoyed before the crisis, when it was touted as a possible alternative to the US dollar as the international reserve currency? All this remains to be seen.

Economic theories typically posit only a few ways to deal with debt crises, and unfortunately these options are not the most workable for Greece. One could cut public expenditure (very difficult politically, as can be gleaned from the violent street demonstrations in Athens), increase tax receipts (also difficult in Greece where tax accounting is weak), or become more competitive economically, so that GDP growth is greater than the debt’s interest. The latter is also challenging, due to Greece’s ‘innovation gap’.

In any case, Huebner was of the view that the EU’s responses to the debt crises have so far been too reactive and not entirely coherent. Much has been due to the unrelenting pressure from the markets, though the difficulties the EU has been facing could be boiled down to a fundamental structural problem – that inter-governmentalism reigns when crises hit. It is also as, Prof. Huebner believes, not just a cosmetic issue of whether the President of the European Council and the High Representative for foreign affairs are appearing often enough in the media. Rather it is an issue of the lack of clear political leadership of the EU as a body when in crisis-management mode. At the moment, it would appear that the fate of the EU rests in the hands of Germany, the ‘paymaster’ of the EU and its strongest economy at present.

The question for EU member states is not whether to make budgetary cuts, but rather how much is needed, and when they should be made. There is, hence, a pressing need for a new ‘socio-economic contract’ for the EU, between its leaders at all levels and its citizenry to tackle the crisis.

Questions fielded by the audience were concerned with the politics within individual member states in relation to the eurozone crisis, and included whether sharp cuts and austerity drives as pursued by the UK actually worked, and the ‘forgotten’ financial crisis of Latvia. The question time was engaging and was continued during the following reception. The EU Centre found a congenial host in ESSEC and hopes to collaborate more in the future.