German Chancellor Angela Merkel met with the English Prime Minister David Cameron to discuss the Eurozone crisis. Both leaders support a two-speed approach to the future of Europe.

Several leaders outside of the Eurozone, such as U.S. President Barack Obama, have urged Germany and the other participating nations to take immediate action on the crisis. Cameron stated, “I’m very clear that urgent action is needed to deal with the market uncertainty… [it] is about building firewalls and recapitalizing the banks.” Although Cameron has urged the Eurozone to solve this crisis, he has made it quite clear that he expects them to solve their own problems.

The United Kingdom and Denmark, although members of the European Union, negotiated agreements in 1992 to be excluded from the euro. Both countries wanted to maintain their own currency, which now appears to have been the best course of action.

Merkel has already admitted that the Eurozone crisis has been building over the last ten years and will not be solved in a day. Merkel stated, “now it will also take a few years to get things right again.”

Many economic experts have claimed that the Eurozone structure is faulty because seventeen nations are connected through a currency but are not coordinated with their budget plans. This lack of budget coordination is not a problem until a crisis such as the 2008 recession arises; now the weaker economies are dragging down the whole system. Merkel agrees that something must be done to integrate these nations better. “We need more Europe, we need not only a monetary union, but we also need a so-called fiscal union, in other words more joint budget policy,” she said.

European Union officials in Brussels want Germany, the strongest economy in the Union, to accept jointly guaranteed European debt and allow the European Central Bank to issue eurobonds. These eurobonds would help to regain some of the debt for the other countries as well as Germany, but Merkel worries that issuing these eurobonds would harm the German people and the German economy more. Before any kind of fiscal union is created in Europe, Merkel is insistent that there needs to be more stability from other European Union countries. Some experts claim that the integration cannot wait.

Another suggestion from the European Commission and European Central Bank is the creation of a central banking authority that would help alleviate concerns of excessive debt. Currently, Spain’s finance minister has claimed that credit markets are “effectively shut” to Spain at this time, making it impossible for them to get the billions in euros to rescue their banks. As of 6 June 2012, the European Commission has announced a plan for a “bank union” in Europe that would make it easier for countries like Spain to get credit.

Although many worry that Spain will need a bailout, Spain insists that they will not. Merkel has stated that Germany will not pressure Spain to take a bailout although the funds will be there if they are necessary.

The European Central Bank cannot provide bailouts due to the ‘no bailout’ clause of the Maastricht Treaty of 1992. However, starting in July there will be a 500 billion euro rescue fund known as the European Stability Mechanism.

Merkel has insisted on austerity measures in bailout countries such as Greece, but these measures have been met with great opposition. Many claim that what governments should be focusing on is growth. Merkel claims, “budget consolidation [aka austerity measures] and growth are two sides of one and the same coin.”

Currently a budget-discipline agreement is being discussed across Europe and has already been ratified in some countries. The Irish referendum vote in the previous week affirmed the agreement. Merkel’s coalition government in the German Parliament is working to get the two-thirds majority necessary to approve the agreement. However, the opposition party – which believes the debt crisis can only be solved by spending for growth – has also requested a financial transaction tax be added to the agreement or at least followed by Germany.

The United Kingdom, with London being the biggest financial center in Europe, is opposed to a Europe-wide financial transaction tax. Cameron stated that the tax would “simply [draw] those transactions offshore and to other places.”

On 7 June 2012 Merkel stated, “we need a political union first and foremost… step by step we must from now on give up more competences to Europe, and allow Europe more powers of control.” Although Cameron agrees that the Eurozone must become more integrated financially, his country is not a member of the Eurozone and would not have to deal with the consequences.

After meeting with Cameron, Merkel announced that she is tolerant of a ‘two-speed’ Europe, meaning that while the current Eurozone countries become more integrated fiscally and politically, other countries such as Denmark and the United Kingdom that use their own currency would still be a part of the Union but relegated to the edges. Merkel claims, “we have to be open. We always have to make it possible for everyone [to join]… but we must not stop because one or the other don’t want to come along just yet.”

Merkel says that one of the greatest aids for the European Union countries is to become more competitive. She claims that the economies will improve when they begin producing more on the global market.

An EU summit is planned for later in June and the leaders will discuss plans for a political union. However, according to Merkel, the decision and the arrangements will not be completed in one summit and more meetings will have to be planned.

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Paul Krugman, one of the most famous economists in the world, recently claimed in an interview with the BBC that Greece’s best option is to leave the Euro. Krugman stated, “Greece was seriously, seriously irresponsible even during the good years.” He compared Greece’s spending to those of the US and other European nations and claimed that the irresponsible spending was “not to the same extent.”

Krugman explained that the problem for Greece is that it cannot print its own money which gives it an “enormous vulnerability.” Therefore Greece has two options: accept the demands that Germany is imposing on them in regards to lending or to leave the Euro. Krugman declared, “Greece must and will leave the Euro.”

However, Krugman also points out that it is difficult for any Greek politician to say that Greece should leave. In fact, Krugman believes “whoever says, ‘that’s it’ will have ended his career.” According to Krugman, Greece leaving the Euro could happen in a couple of weeks depending on the outcome of the Greek elections. The other option is that the European banks will eventually refuse to lend to Greece which will force it to create its own currency again.

Ultimately Krugman claims that this is the most desirable thing for the Greeks and for everyone else in the Eurozone. He believes that the main ramification will be the fact that the Euro membership is reversible. The greatest worry is that there will be a run on the Spanish and Italian banks. However, as long as the European Central Bank is willing to supply the Euros for this run there should not be a major problem.

In another interview with the Independent, Krugman also went more in depth as to who should be blamed for the Eurozone crisis. Krugman believes that the Maastricht Treaty of 1992 is what originally caused this crisis because it led the way for the use of a single currency in Europe.

Michalis Sarris, chairman of the Cyprus Popular Bank also commented on the possibility of Greece leaving the Euro on 17 May 2012. Sarris claimed that Greece leaving the Euro was not “inevitable” but was a “clear possibility.”

 Ultimately Cyprus hopes that Greece will recover without leaving the Euro because many of its finances are tied up in Greek investments. Sarris reported that the Cyprus Popular Bank suffered a loss of about 2 billion Euro do to the financial crisis in Greece. Sarris is hopeful and remains positive that Greece will be able to find a way out of this crisis without having to leave the Euro.

Paul Krugman is winner of the Sveriges Riksbank Prize in Economic Sciences (informally the Nobel Prize in Economics), Princeton professor, and a columnist/blogger for the New York Times. His books include End This Depression Now! and The Return of Depression Economics and the Crisis of 2008.

Image Courtesy of  Portokalis / Shutterstock.com

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