1. 1 Living in a Globalised World Lecture 5 George Irvin & Pam Shaw www.george.irvin.com/sussex

2. 2 ‘Eurozone Governance’ n Three Eurozone scenarios n World Economy scenarios n Soft landing v Hard landing n Does it matter for UK? Structure:

3. 3 n Eurozone ‘core countries’: recession & unemployment n ‘stagnation expectations’  high personal savings n Ultra-conservative ECB and SGP restriction on govt expenditure n Low growth  could undermine Euro in longer term Growth Matters

4. 4 n SGP extended Maastricht rules to EMU--- quite inappropriately! n Flaws of SGP (1997): u budgetary balance over the cycle ultimately means zero public debt u 3% limit arbitrary; need rules to govern ‘stock’ not ‘flow’ u Inconsistent: with other two ‘savings balances’ n A macro-economy cannot be run like a corner shop ! Stability & Growth Pact (1997)

5. 5 n Muddle through: ‘slightly softer’ SGP remains in place while ECB considers tightening monetary policy n Mild Reform: replace SGP by ‘Sustainability Council’ but leave ‘architecture’ and ECB brief unchanged; concentrate entirely on Lisbon goals & scrapping CAP n Radical Reform: change architecture: u ECB like Fed u Larger ‘federal’ Brussels budget used counter- cyclically; allow overseas borrowing u Major ‘investment package’ similar to 1993 Delors White Paper Three EU scenarios

6. 6  Crucial to ‘locate’ EU macro-debate in world econ context  US ‘twin deficits’ unsustainable (CA 6.5% and growing)  US relies on RoW savings, particularly China and EU  Soft landing & Hard landing  Soft landing means gradual US adjustment without financial or trade contraction; ie, continued world growth  Hard landing: might be very hard; world recession World Scenarios

7. 7  EU ‘savings surplus’ helps US to grow, but helps explain low EU growth  Rising Euro has not been good for growth, and further rise would constrain further (manufacturing) growth  Only China and EU are strong enough to act as ‘alternative engine’ of world growth if US economy stagnates/contracts  But only concerted EU growth push will bring desired result International Context

8. 8  UK economy highly integrated with EU  UK economy would suffer greatly from world recession; therefore in UK interest to argue for Eurozone growth strategy  Such a strategy cannot be based on ‘supply side’ reform alone  Current cross-party ‘eurosceptic’ consensus (that Eurozone best ignored) is dangerous nonsense! Britain?

9. 9 Irvin, G (2006) ‘Regaining Europe’ London: IG Tauris Advertising Break