Macroeconomics & the euro

The eurozone crisis is changing the way the EU works. It is reinforcing a number of trends that had already been visible over the last decade or so: a shift towards a Union in which governments are in the driving seat, large countries matter more than small ones, and more decisions are taken by subsets of member-states.

The German economy has been growing exceptionally strongly of late. In the second quarter of 2010, it expanded faster than any other economy in the G7 and faster than at any time since the country’s reunification in 1990.

Almost every member of the eurozone is rushing to slash public spending. While there is no doubting the scale of the fiscal challenge, the eurozone economy is not strong enough to cope with the contractionary effects of a generalised budgetary tightening.

Europe faces a critical choice between greater integration or disintegration. The gap between the rhetoric of a united Europe and the reality of national interests and politics has always dogged the EU.

Despite their battered reputation, markets remain the best way of generating economic growth. But the market economy faces a crisis of legitimacy brought about by rising inequality and a breakdown of the relationship between risk and reward.

Germany has finally agreed to help bail out Greece. The negotiations were acrimonious and took months. Angela Merkel’s hesitation and prevarication have increased the cost of the bail-out and unsettled financial markets.

George W Bush convened the first G20 summit in Washington in November 2008, at the height of the global financial and economic crisis. At two further summits in 2009, G20 leaders pledged to co-ordinate their economic stimulus packages (as well as exit strategies), avoid protectionism, address global imbalances, triple the resources of the IMF, and work out stricter rules for banks, hedge funds and other financial players.