The eurozone is in grave danger, and something must be done, fast. This is the message I get from various corners of the EU commentariat. Economists are particularly pessimistic. But the immediacy of the crisis is something relative – I’ve heard many macabre predictions many times during the last two years.
So I am more interested in the possible impact of the crisis on the future of the European Union. This may sound like an “unknown unknown”, but to my opinion trying to solve the eurozone crisis without taking into account the impact on the EU institutions and the integration project is useless. So let’s see what the options are.
1. Monetization of debt
The excessive debt of peripheral eurozone countries can simply be monetized by the ECB by using the proverbial printing press. The downsides are clear: the threat of moral hazard and inflation. Moral hazard means that once the ECB starts to monetize debts, every eurozone Member State can point to this precedent and demand equal treatment (i.e. more printing of euros to cover unsustainable debt). This leads to the second danger – elevated inflation, although some claim that this is not very likely due to the recession. If monetization happens, it will obviously be accompanied with a form of fiscal union, because there will have to be very strong guarantees against fiscal profligacy. In the short to medium term this approach can save the eurozone, and the European project as a whole. The problems with this approach are twofold: first, it may lead to unsustainable EU fiscal institutions if Germany and other northern Member States push too hard in their desire to guarantee fiscal discipline; second, in the long term this may also mean that peripheral Member States will become even more uncompetitive if again Germany and other northern Member States fail to reform their economies and stimulate internal demand.
In conclusion this approach may lead to long-term mutations that may transform the European Union into an undemocratic and unjust sovereign. On the good side, it saves us from immediate harm.
2. Credit crunch and disintegration of the eurozone
If the ECB does not monetize peripheral eurozone debt, then we may expect consecutive bank runs, asset sell-offs and overall economic misery in the eurozone periphery. This misery will probably be contagious, spilling over to the eurozone core, the US, Japan, China, and all over the world. Sooner, rather than later, the eurozone periphery will reintroduce capital controls and will effectively pull out of the eurozone. The economic and social consequences cannot be reliably foreseen, but will be very damaging to the global economy. Politically, the EU may disappear.
3. The way forward
It is quite obvious that the eurozone core must be convinced to monetize peripheral debt. This solution will be very difficult to achieve, but it serves all interests. However, it must be done carefully in order to protect the European project from excessive German influence that may in the long term transform the EU into some ugly mutant. The peer pressure of G20, and the US in particular, will be instrumental in achieving this difficult victory over petty short-term interests.
Posted in Budget and Finance, EU Reform, Institutional Affairs
Tagged core, credit crunch, debt, Euro, eurozone, Financial Crisis, G20, Germany, inflation, institutions, monetization, moral hazard, periphery
This week was tumultuous for the eurozone, in a string of equally tumultuous weeks that preceded it. The Greek Prime Minister proposed a referendum for the new bailout package for Greece, was promptly scolded by his fellow eurozone leaders at the G20 summit, and had to arrange his exodus from the scene. Meanwhile Italy panicked and started redesigning its own austerity programme.
What all this reveals is a new incursion into political entrepreneurship, mainly by the leaders of France and Germany, to somehow solve this crisis. This is also a sign of failure of the European governance mechanism that simply does not withstand the political pressure.
The leaders of the main EU institutions play only supporting roles in this spectacle. The governments of the Member States, aided by the IMF, are once again trying to pull themselves by their own hair.
The crisis of European political leadership notwithstanding, we are experiencing the incapability of the institutional mechanism of the European Union to deliver in this difficult moment. Important decisions are taken outside the multilateral decision-making track. This brings more instability to the system and delegitimizes the decision taken. One of the reasons is the blatant disregard for European Union law.
During the dinner in Cannes Mrs. Merkel and Mr. Sarkozy reportedly asked Mr. Papandreou whether Greece wants to stay in the eurozone or not. The problem of this question is that it has not been discussed with all 26 Member states other than Greece, and to my knowledge it would take all these 26 Member states AND Greece in order to decide on its exit from the eurozone. In other words the political entrepreneurship has neglected the very structure and substance of EU law, hiding behind the veil of urgency. Urgently taken decisions often are bad decisions, though. The European Union is much more than its currency and no economic crisis of any proportion should be used as a tool to destroy what has already been built.
While we, Europeans, remain surprisingly short-sighted, our American allies have already noticed and evaluated the huge importance of our weakness. Perhaps it is time to start thinking strategically and stop shooting in the dark.
Posted in Budget and Finance, EU Reform, Institutional Affairs
Tagged Bailout, debt, eurozone, Financial Crisis, France, Germany, Greece, IMF, Italy, referendum
The last two decades were very good for you. You were able to unify your divided territory and your people. You had your fair deal of growth and expansion of trade. You began to “normalize”, as experts say.
Today you have to solve a great problem. It is up to you to decide whether the eurozone project lives or dies. I will not go into the details of the problem and the possible solutions. In any case you know very well what is at stake and what the options really are.
But why should you choose to save the euro? Well, two reasons spring to mind. First, a breakup of the eurozone will be very messy and will likely hurt your banks, pension funds and ultimately – your own citizens. The breakup will negate some of the important benefits of the internal European market and will cause widespread economic troubles around the whole world.
Second, killing the euro will go against your own obligations. When you founded the eurozone you also agreed that any amendment of the rules of the EMU will go through an amendment of the Treaties. That means that countries such as France and Belgium must explicitly agree to the eurozone breakup, and I sincerely doubt that they would. So in case you want to print Deutsche Marks again, you will have to infringe the Treaties in a very blatant way.
If the internal political pressure is really high you might probably risk and do it. But going against the founding principles of the European Union will have a very high price for you. One of the reasons for the unification back in 1990 was that you were securely integrated in the European Community. Yes, you are very different now and yes, you are rightly demanding a stronger voice in the world affairs. But still – there are ambiguous feelings in Europe about a strong and expansionistic German economy, especially if combined with a rapprochement with Russia. You need to think carefully about those considerations.
Whatever you decide to do, I would strongly advise talking sincerely with your own people. Cheap propaganda about the lazy Greeks may sell the newspapers, but we’re not talking about entertainment here. Your choices will define the future of all European citizens, and that means Germans as well. The European Union will never be the same after the breakup of the eurozone, and you will not enjoy the position that you have now.
Please think carefully before making your decision. The world will not end with the euro, but it will be an uglier place.
Posted in Budget and Finance, EU Reform, Institutional Affairs
Tagged bonds, break-up, debt, Euro, European Union, eurozone, Financial Crisis, Financial Markets, Germany
The Greek financial crisis now threatens the whole eurozone. It appears that without substantial debt restructuring Greece is likely to default, and would have to leave the eurozone. This could lead, however, to substantial collateral damage and unintended effects for the whole European banking and financial system. The other option is a very large fiscal transfer from the eurozone core. This second option will lead donor Member States to demand substantial political guarantees for fiscal discipline in Greece and other possible recipients (i.e. Ireland and Portugal).
It looks like the crisis has brought back the idea for a true European political union on the table. The president of the ECB, Jean-Claude Trichet, himself has called for the establishment of a European financial minister.
Now, the idea is not really new. Back in the 1950s there was such a project, called the European Political Community (EPC) that aimed to politically unite the Member States in the European Economic Community (read more about it in the excellent paper by Berthold Rittberger). The main institutional innovation in the EPC was the central role of the bicameral parliamentary body in adopting the budget and the legislation. The EPC project failed, but some of its ideas were later implemented by including the European Parliament in the legislative and budgetary procedures.
Going back to Mr. Trichet’s ideas, we see something completely different. In his framework, the Council would act on the basis of a proposal by the Commission, in liaison with the ECB, to take some measures directly affecting the economy of the Member State that has not implemented its fiscal stability program. There is no role for the European Parliament whatsoever. Apparently Mr. Trichet believes that the very agreement on a stability program is substantial legitimation for a direct involvement in the economic and fiscal policies of a Member State by the Council.
This is quite doubtful. It’s very difficult to imagine how the same people that violently oppose to austerity measures taken by their democratically elected governments will somehow accept direct interference by an institution of the European Union. It’s equally difficult to imagine that the European Parliament will approve such an institutional framework. I can certainly understand the reasonable motives for proposing such a second stage of austerity enforcement, but I’m afraid that such a procedure will decisively worsen the democratic deficit of the European Union.
If and when the governments of the Member States decide that a more profound Treaty revision is needed for establishing tighter fiscal coordination, they will have to consult their national parliaments and the European Parliament. Such consultations are in fact inevitable, since TEU requires the summoning of a Convention to adopt the draft text of the revision (art. 48, para. 2-5 TEU).
Posted in Budget and Finance, EU Reform, Institutional Affairs
Tagged debt, European Central Bank, European Parliament, European Political Community, European Union, eurozone, fiscal policy coordination, Greece, Jean-Claude Trichet, political union, proposal
The German government is on the forefront of an attempt to restrict the volatility of the euro exchange rate. First, the German financial regulator BaFin placed a unilateral ban on naked short-selling of eurozone sovereign debt instruments, with little effect. Second, Angela Merkel proposed a comprehensive reform of the stability and growth pact, with tougher rules of the game aiming to achieve one thing in particular: that member states bear the responsibility for a solid budget management. Third, Germany is hosting an international conference on financial market regulation in Berlin.
So far, so good. The markets, however, are not impressed. In fact, some analysts say that the euro may fall below parity with the dollar in the first quarter of 2011. The problem is that the decline in the euro may hurt demand for the region’s sovereign bonds in the year when new debt will be soaring.
The President of the eurogroup, Jean-Claude Juncker, says that foreign-exchange intervention isn’t an urgent issue.
One leg of the problem according to Proffessor Michel Aglietta, is that we have a solvency problem with Greece, not a liquidity problem. He says that the austerity program for Greece is a ticking bomb that could cost dearly to the whole European Union. He advocates for immediate restructuring of the Greek debt. He also says that the eurozone will not survive without a system for budgetary transfers among eurozone members. according to him the private sector is not capable to compensate for the draconian austerity measures in Portugal, Spain, Ireland and Italy.
Jan Kregel and Rob Parenteau outline the key aspects of the eurozone predicament using the financial balance approach developed by Wynne Godley. They say that the current attempt at “budgetary discipline” in peripheral eurozone members will lead to fiscal retrenchment, private income deflation, and rising private debt distress. They warn that IMF conditionality is bound to set off the twin contagion vectors of falling trade surpluses and rising bank loan losses in the core nations.
I am not an economist. But these warnings against the current EU approach towards the eurozone crisis come from too many places (for alternative ideas see Peter Bofinger and Stefan Ried, Avinash Persaud, and Paul De Grauwe). This issue is way too serious to be decided upon in a hurry.
Posted in Budget and Finance, EU Reform, Institutional Affairs, Internal Market
Tagged Angela Merkel, budgetary discipline, debt, Euro, eurozone, existential crisis, financial retrenchment, Greece, Ireland, Italy, Portugal, private sector, Spain, Stability and Growth Pact
The European Union has asked Greece to produce detailed plans for its budget deficit reduction targets for the period 2010-2012. This should be done this week, in order for the European Commission and the ECB to provide an assessment to eurozone Member States, which must approve unilaterally the release of credit funds for Greece.
8.5 billion of Greek debt payments come due on 19 May. Now the question is whether the Greek government can produce a plan that is acceptable for the German Bundestag on time. Greek financial minister George Papaconstantinou has hinted on the opportunity of bridge loans if the procedure for release of financing is too slow. But many analysts think that debt restructuring (a polite form of bankruptcy) may be necessary.
Meanwhile the prominent American economist and Harvard Professor Kenneth Rogoff says that at least one more country in the eurozone will need help from the IMF over the next two to three years. Other problematic cases include Ireland, Spain and Portugal. Mr. Rogoff said that:
“A lot of countries have to consolidate their budgets and some may have to turn to the IMF for someone to blame”.
Wolfgang Münchau says that this is going to be “the most important week” in the 11-year history of Europe’s monetary union.
Posted in Budget and Finance, Institutional Affairs, Internal Market, Taxes and Duties
Tagged bankruptcy, debt, ECB, European Commission, eurozone, Greece, IMF, restructuring
We know that some measures will be taken to support Greece. The decision was taken during a meeting of the eurogroup on Monday. Officially we don’t know what the measures will be. Unofficially we know that most likely they will come in the form of coordinated bilateral loans. The final decision will probably be taken by the European Council.
The question now is – is this really enough?
The idea for a European Monetary Fund (EMF), put forward by Daniel Gros and Thomas Mayer, is gaining new ground. FT reports that the German finance minister Wolfgang Schäuble has revealed the first details of a plan for establishing the EMF.
Mr. Schäuble said that the EMF would be an institution for the internal equilibrium of the eurozone that would have at its disposal both the experience of the IMF, and comparable intervention mechanisms. The idea is also to include tough penalties for eurozone members that fail to curb deficit spending or run up excessive government debt.
Greek Deputy Prime Minister Theodoros Pangalos has criticised Germany’s attitude towards the ongoing Greek debt crisis, adding that Athens had never received adequate war reparations. The German foreign ministry said that a discussion about the past is not helpful at all to solve today’s problems.
Mr. Pangalos also said that the EU suffers from lack of leadership. He added to that Italy was being more inaccurate with its financial statistics.
At the same time Greece demands a debt default guarantee to calm down markets.
I am in disarray. How is Greece expecting to get support and sympathy from its peers when using such language??? The markets will not be calmed by Mr. Pangalos’ statement; that is clear. I wonder whether Kostas Simitis knew better.
The pressure is mounting on the European Union to do something about Greece’s debt and fiscal deficit problems. The word “bail-out” is heard more and more often.
Meanwhile the Greek public sector workers have gone on strike in the first major test of the government’s commitment to push through austerity plans.
But who can really “save” Greece? There are some options – a common EU approach, a unilateral bail-out by Germany, or an IMF-led bail-out. All approaches have their benefits and shortcomings.
However, I am much more interested in the conceptual debate – why did the crisis happen in the first place, and what can be done to prevent such future crises.
One of the reasons for the crisis is the poor quality of the Greek financial statistics. There is some evidence that Goldman Sachs has helped the Greek government hide (???) in 2002 an additional 1 billion US dollars in debt. I find this scandalous and unacceptable, and a proper investigation should be carried out.
But Paul Krugman goes further and says that the only way forward is fiscal and labor market integration. I agree. From a conceptual and systemic viewpoint the current arrangement of the eurozone is quite vulnerable. I also tend to know that such integration seems unthinkable in many European capitals today. Maybe the Greek experience (and the Spanish, and the Portuguese, and perhaps more) will teach us to be practical.