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  Can EU Heads of State Stabilize Euro Crisis?  

Will a Franco-German Consensus be imposed on EU member countries

WHO:   American University experts from the School of International Service available to discuss the euro- zone financial crisis and heads of state summit in Brussels.

WHAT:
  Available to analyze and comment on efforts to stabilize euro-zone economies

WHEN:  December 8-ongoing

WHERE:
American University, in-studio, or via telephone

WASHINGTON, D.C. (December 8, 2011) – European heads of state are meeting for an EU summit aimed at trying to stem the deepening euro-area financial and sovereign debt crisis.  Germany and France will lead efforts to achieve a fiscal union of sorts that relies heavily on a disciplined package of fiscal austerity measures which carry their own set of economic, financial and social risks for the EU while at the same time convincing EU members to cede more of their fiscal sovereignty to the Commission in Brussels via a new treaty.  At the very least the stage is being set for a clash between EU member countries and those countries which comprise the 17 member common currency euro-zone.

American University’s School of International Service EU faculty experts Matthias Matthijs and Stephen Silvia are available to discuss the current state of the euro-zone economy, risks associated with plans being discussed to prop up the EU economy, and the implications the euro crisis has on the U.S. economic recovery.

Matthias Matthijs, assistant professor in the School of International Service, is currently focusing his research on the European sovereign debt crisis, politics of economic crises, regional integration, and the role of economic ideas in economic policy making.  His most recent article, Why Only Germany can Fix the Euro in Foreign Affairs stresses Germany’s role in solving the crisis and its missteps.

Matthijs observes, “A grand bargain between the EU heads of state is simple: Governments need to commit to creating something resembling a “fiscal union” so the European Central Bank can calm the markets by buying the European periphery’s bonds in the secondary markets.”
•    Euro-zone members have so far been unwilling to cede sovereignty over fiscal affairs to the Commission.
•    Germany does not really want a true fiscal union – which would mean a ‘transfer’ union – but rather a disciplined, austerity union. The German austerity measures are not sustainable over a decade and could potentially lead to a deflationary spiral.
•    The U.S. Fed’s leading efforts to coordinate central bank actions and provide liquidity worldwide is all it can do to ease the crisis for now.

Stephen Silvia, associate professor in the School of International Service, specializes in German politics and political parties, and the European Union. Silvia is a current board member of the American Council on EU Studies, European Center of Excellence.  

Silvia observes, “Angela Merkel's drive to remake the euro area in the image of Germany is doomed to fail.  Germany has succeeded economically through a combination of domestic austerity and running trade surpluses with the rest of Europe.  There is no equivalent set of economies beyond the euro area able and willing to absorb exports from the euro area.  As a result, internal austerity will only result in a downward spiral for the euro area economy.”

“The austerity entailed in reforms proposed by France and Germany are likely to produce a lost decade of growth for Europe, which will be a drag on the U.S. economy as well.”

•    The EU will not break up for two reasons: 1) The treaty creating the EU does not contain a provision for renouncement or expulsion; and 2) the costs of break up would have severe financial consequences for those members in financial turmoil (Greece, Italy, Portugal, Spain) due to capital flight and those which are economically sound (Germany, Netherlands, Finland) which would face an exchange rate spike which would render export industries to their neighbors uncompetitive thereby undermining their own economic stability.
•    Euro-area countries seem to take two steps forward and one step back in their approach to the crisis.  In an effort to avoid credit default swaps in October, creditors “voluntarily” wrote off 50 percent of what Greece owed them.  Bondholders leery of Italian, Portuguese, and Spanish debt are exiting faster and deepening the crisis as a result.  Additionally, forcing European banks to increase capital reserve ratios by mid 2012 has begun to force banks to reduce lending which makes the economic downturn worse.

American University is a leader in global education, enrolling a diverse student body from throughout the United States and nearly 140 countries. Located in Washington, D.C., the university provides opportunities for academic excellence, public service, and internships in the nation’s capital and around the world.

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