In the next couple of weeks, the leaders of the eurozone must agree with the representatives of the peoples of Europe the exact terms of the economic governance deal that should ensure that no eurozone members will fall into disarray in the future in the way that Greece has. Agreement on robust measures of collective eurozone oversight of the totality of economic policies for euro members is now essential. These very same leaders have repeated regularly since the debt crisis broke in May 2010 that they would “do whatever it takes” to ensure the stability of the euro.
They signed up to the principles of the current plans many months ago. It is now extraordinary that any of the States are hesitating to agree the detailed policies proposed by the European Commission, enhanced in some parts by the European Parliament and which is strongly supported by the European Central Bank. Remarkably, it is
Most media commentators have completely overlooked the significance of the “six pack”. Instead they write that the eurozone is simple throwing good money after bad in supporting
The eurozone’s leaders learnt the lesson in May 2010 that all States had to maintain or - in some cases – restore competitiveness. Rigorous mutual policing of this process is the reason for the six-pack of legislation so it represents the long-term, permanent component of the resolution of the current crisis. Without it, markets will soon realise that there is not a long-term solution being put in place. Both they and taxpayers in the lending countries will soon ask why money is being wasted now when the whole problem could recur in a few years time.
Indeed, the deepening crisis already shows that markets doubt the commitment of the political leaders to deliver on their promises to “do whatever it takes”. Sensible long-term investors – for example pension funds investing to be certain of giving their pensioners an income in 30 years time – will attach little weight to promises from a group of finance ministers who may already be gone when the issue arises of “haircuts” for bondholders after 2013. So it is natural that bondholders will already be pricing in the risk of a haircut in 18 months time. The certainty of paying pensioners their coupon in 30 years time is a tough test.
The new pricing has already launched a slow, but certain, fiscal strangulation of say
Some commentators argue that
The success of the single market has created a Europe-wide financial market so doubtful public debts are distributed throughout the European Union. The bank “stress tests” will be published shortly and should reveal the precise distribution of these debts. Bank depositors will then be able to make up their own mind on which banks they regard as sound – and move their deposits as necessary and prudent.
Finance ministers have repeatedly promised to have back-stop arrangements in place for those banks revealed to be “vulnerable”. But they have carefully obscured whether they mean vulnerable on the basis of the official “stresses” or the foreseeable judgement of the markets. For those Systemically Important Financial Institutions (SIFIs) that are “too big to fail”, the markets will look to their host state as guarantor. If the guarantor is seen as dubious, then the situation becomes ever more grave – an exceptionally nasty, vicious circle.
But the eurozone as a whole is in reasonable shape – the primary deficit (i.e. excluding interest payments ) of the group is forecast by the European Commission to be under 1 per cent of GDP even in 2012 – and far below the 6 - 7 per cent of GDP of the US and Japan! Growth cannot be expected to be substantial when the population is barely growing and confidence – of consumers, business and investors alike – is battered every day. But the current account remains in small surplus – versus the continuing 4 per cent of GDP deficit of the
However, if the Greek debt portfolio were rolled over at current market interest rates, then debt interest would explode to more than 25 per cent of GDP - taking up half of all government expenditure. Manifestly, that would be completely unsustainable and the dominoes would start falling with a vengeance: first the Greek banks; then perhaps some other European banks (to be observed after the stress tests are released; then State X that is the guarantor of such banks (and especially if State X itself is already giving cause for concern; then another round of banks that hold excessive quantities of the debt of State X; etc. The decline in the share price of some banks and the rise in yields of their associated guarantor suggest that such a vicious downward spiral may already be starting.
So the political leaders of the eurozone must now cease to look at their own opinion poll ratings and fulfil their commitment to “do whatever it takes”. They must fulfil the role of statesmen and stateswomen regardless of any personal short-term cost. After all, they expect their armed forces to be willing to make the “ultimate sacrifice” on behalf of their country and a political career seems a rather more modest sacrifice. So they must focus now on the long-run benefits to the peoples of
"Whatever it takes” surely includes the following:
1) Agree immediately to the final element of Parliament’s proposal on the six-pack – enabling a courageous European Commission to propose prompt corrective measures to any State that is losing competitiveness due to unsound overall economic policies. The Member States could then only override such proposals by Qualified Majority Vote (QMV) – a tough requirement that would probably only be met in the event of manifest error by the Commission. These policies would underpin a strong probability of good economic behaviour into the foreseeable future;
2) Change the EFSF’s terms of reference to enable borrowing on demand by any State whose economic policies have been approved by the Eurogroup during the “European Semester”. However, that right to borrow would be subject to intrusive and regular checks to confirm that the State is maintaining its performance. If it is not, then any
3) Expand the size of the EFSF to at least €1 trillion immediately – with a commitment to expand it as required by borrowers. The EFSF is a mechanism that exists today; can be used immediately; is not a fiscal/transfer union and does not need tortuous Treaty change;
4) With such facilities in place, it would be difficult to argue that existing bonds could be in default – because they would be repaid on time;
5) The future borrowing costs of
6) With these guarantees in place, the ECB should have no qualms in continuing to accept Greek etc. government bonds as “good” collateral. Indeed, an expanded and aggressive programme of bond purchases might capture some useful profits for the European public purse; and
7) Confidence could revive rapidly as the daily media drumbeat of imminent disaster would vanish. Banks would not need to absorb investment capital against systemic risks that no longer exist and could boost lending to the economy instead. Declining long- term interest rates in many states would be a policy easing in itself.
What is required now is for the leaders of the eurozone to have the courage and vision to turn their words into action: finally “do whatever it takes” - and do it very soon. If they cannot find the courage, then their names will certainly be engraved in the history books.
Graham Bishop’s recent book: "The EU Fiscal Crisis: Forcing Eurozone Political Union in 2011?" expands on the analysis above. Click here for details and to purchase the book.
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22 June 2011
21 June 2011