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When I heard Christine Lagarde complain about the lack of “adults in the room” on Thursday night, I knew that things were getting out of hand. Whatever the purpose of the remark by the managing director of the International Monetary Fund, it was not helpful to dish out personal insults. It makes the search for a compromise even harder.
If the leaders fail on Monday, we are looking at a sequence of events that may include default, capital controls, the introduction of a parallel currency and possibly a Greek exit from the eurozone. What then?
The impact of Grexit would probably not be a sudden financial crunch. The more insidious danger is a slow realisation by investors, and more importantly by citizens, that the eurozone ceases to be a genuine union if it forces out a member state. The pretence of irreversibility is what distinguishes a monetary union from a fixed exchange rate system with a shared currency. Grexit would mark the moment when the EU moves from integration, via stagnation, to disintegration. The economic and geopolitical impact would be colossal. Not all of that would be visible immediately to everybody, which may be why so many EU leaders appear so fearless.
The counter-argument is that Grexit would forge a much closer union among the remaining members. This rather optimistic hypothesis will be tested at this week’s second EU summit. By Friday, we will have a clearer picture because this is when the leaders will discuss the future of the eurozone. I fear that they will fail abysmally.
There are several competing reports on the eurozone’s future on the table — from member states and the so-called four presidents’ report, written by the heads of four EU institutions. All have in common that they are monumentally lacking in ambition. Various drafts have circulated, but it is clear that not a single country or institution will stand up on Thursday and speak truth to power: “The eurozone, as it stands today, is not sustainable. We face the choice to learn from our mistakes and to change the European treaties to make it sustainable. And if that is not possible for political reasons, we should perhaps follow Greece into monetary independence.”
None of the drafts I have seen comes even close. A change in the treaties is needed to do anything meaningful. Without treaty change, it is impossible to create a road map to a fiscal union. Nor is it possible to create a genuine banking union with a joint deposit guarantee fund, and a banking resolution mechanism. The eurozone has pretty much exhausted the scope of what it can do inside the existing treaties.
If the eurozone goes down the of path of no ambition, it will find it progressively harder to handle future crises. Apart from the consequences of a Grexit, the other big foreseeable problem is the macroeconomic imbalances. The current account surpluses of Germany and the Netherlands are heading towards 10 per cent of gross domestic product per annum — a position that is neither sustainable, nor self-correcting: a bad combination.
The summits confront the eurozone’s dual demons — a mismanaged crisis and the lack of a small fiscal union that can act as an economic and financial stabiliser. Without tackling them, we will still be talking about the eurozone crisis in 2030, if it lasts that long.
The EU’s leaders will be called upon to fix Greece on Monday, the rest on Thursday and Friday — or at least start a process that gets them towards economic integration. There is more than a chance that they could fail in at least one of those respects, if not in both.
Full article on Financial Times (subscription required)