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
Euractiv reports that representatives of Europe’s major banks and financial industry players have issued a joint appeal, calling for progress on supporting transnational financial groups in the event of crisis.
This call is quite well scheduled, since at least one source is saying that the banking crisis in Europe will be much worse than in the United States.
Justin Vaïsse from the Brookings Institution analyses in a new article the implications of the economic crisis for the European Union. He consecutively renounces ideas about the surge of nationalism and populism, the death of the internal market, the disintegration of the eurozone, a new iron curtain between the West and East in the EU.
Vaïsse thinks that the main threat is a “soft partition” of the EU. This threat may be realized if the Stability and growth pact is trumped, and if EU leadership remains weak and fragmented.
The author sees much more opportunities for the EU stemming out of the crisis. He thinks there is strong motivation for EU candidate countries to join the Union, and for member states to join the eurozone. According to him EU has serious advantages in specific areas, such as climate change mitigation and adaptation.
He acclaims the ECB record on the crisis, and is very critical of the leadership of Commission’s president Barroso and the Czech EU presidency.
His main argument is that the EU is “too interdependent to fail” due to the crisis.
Posted in Budget and Finance, Environment, EU Reform, Institutional Affairs, Internal Market
Tagged analysis, disintegration, European Central Bank, European Commission, European Union, eurozone, Financial Crisis, measures
I am not an economist, but this is too important: Mary Stokes from the RGE Monitor says that a Latvian crisis would shake confidence in Bulgaria’s currency board.
The background: Latvia is currently in a deep financial crisis, and Mrs. Stokes says a devaluation of the lat is imminent. This may add pressure on the Bulgarian currency board, because Bulgaria shares a similar boom-bust trajectory to that being played out in the Baltics.
An important aspect of the problems with Latvia is the timing for entry in the ERM II mechanism.
The Financial Times has published findings in a previously confidential report by the International Monetary Fund claiming that:
“Without euroisation, addressing the foreign debt currency overhang would require massive domestic retrenchment in some countries, against growing political resistance.”
The IMF goes further to suggest the introduction of Euro in Eastern Europe states even without formally joining the eurozone, as well as a relaxation of entry rules for the eurozone.
Such proposals are objected in principle by the European Central Bank, Member States in the eurozone, and even some governments in Eastern Europe. The IMF is well aware of that fact, so it should have really serious motives for disclosing its report.
Rather surprisingly, the G 20 Summit in London has succeeded in delivering palpable results.
• an additional $1.1 trillion programme of support to restore credit, growth and jobs in the world economy;
• a call for strengthened financial regulation and supervision;
• establishment of a new Financial Stability Board (FSB) with a strengthened mandate, as a successor to the Financial Stability Forum (FSF), including all G20 countries, FSF members, Spain, and the European Commission;
• taking action against non-cooperative jurisdictions, including tax havens;
• extending regulatory oversight and registration to all systemically important financial institutions, instruments and markets, as well as systemically important hedge funds, and Credit Rating Agencies.
This is an impressive list. It remains to be seen what will be accomplished.
The forthcoming G20 meeting is expected to outline a new policy division between the US and EU on fiscal stimulus to counter the financial and economic crisis.
Mr. Jean-Claude Juncker, president of the eurogroup, said “The 16 euro area ministers agreed that recent American appeals insisting that the Europeans make an additional budgetary effort to combat the effects of the crisis was not to our liking (…)Europe and the eurogroup have done what they needed to do.”
This contradicts to appeals by Barack Obama’s top economic adviser, Lawrence Summers, who said that the urgent need for a short-term increase in spending by governments temporarily overrides the longer-term goal of tackling the global imbalances.
The G20 meeting will be the arena of an indeed important debate, since some of the leading economists that predicted this economic crisis (the Nobel laureate Paul Krugman and Nouriel Roubini) say that we need a lot of fiscal stimulus, among other things.
Advising on policy measures from a scientific standpoint is easy; implementing policy measures being an elected politician is quite different. However, it may be useful to at least discuss different views, rather than not.