Vince Cable, the liberal-democrat government secretary likened the present British situation to the economic equivalent of war. He could have applied this image – with even more justification – to the situation in the Eurozone and the EU. There is a “war” going on, but politicians are negating it, as the disappointing recent summit in Wroclav (Poland) shows once again. There ministers finalized the “sixpack”, the automated stability pact and monitoring of national economic policies – no more.
I agree with the British “Economist”, that it is highest time for politicians to act appropriately and speak clearly, if they want to avoid the Eurozone and the EU breaking apart under the onslaught of the financial markets. This would cause massive damage to the welfare of their own citizens and the world economy. While I agree with the four areas of necessary action which the Economist lists, I disagree on how to solve them.
1. There needs to be a clear decision which Eurozone countries are insolvent and which are only illiquid. The former (Greece) need to have their debts reduced and restructured urgently, the latter need to be backed with firm and full guarantees.
2. European banks need to be re-capitalized; the necessary stress tests determining their needs this time need to include losses from sovereign defaults.
3. European economic policy must finally give up their fetishization of budget consolidation and find a way towards a joint economic and growth policy.
4. The “architecture” of the Eurozone must be re-configured in a way to prevent other crises following the present one.
It is absolutely urgent and necessary for politics to address these areas adequately and appropriately. A recent estimate by Swiss UBS Bank puts the first-year losses of the Eurozone breaking up for peripheral countries at a staggering 40-50% of GDP, for the core countries at 20-25%. Thus my characterization of this situation as a “war”.
Let us go through the 4 Economist points individually:
For a long time most assessments (even those of the EU) have judged Greece to be insolvent, unable to repay its debts. This was true even when growth forecasts were far above the -5% estimates for this year and further recession in 2012. Proclamations by EU functionaries and ministers that the EU would not let Greece default were mainly made to assure jittery financial markets whose judgements are deemed the ultimate wisdom. The results of this strategy which also included massive financial aid to Greece are devastating. Thus, a restructuring of Greek debt is absolutely necessary. To delay it further increases both contagion risk and costs. Of course, such restructuring will cost Greek, German and French banks dearly and might endanger the viability of one or the other bank. But these costs are still far below one of unorderly default. And even if some banks fail, this will have to be borne as part of the necessary deleveraging of the whole European financial sector and its re-orientation towards financing the real economy.
Non-default countries must be supplied with hard and fast ECB guarantees. This might even convince financial markets, if such a division between insolvent and illiquid countries is made. Even if such guarantees might have to be called, in the present situation this would not cause any risks of inflation. Central banks have shown during the past weeks and months that they are the only institutions to act together, decisively and quickly. Their record needs to be prolonged.
Since the inception of the common currency, and before that in the EU, the Eurozone’s macroeconomic management has been reduced to single-minded concerns with budget consolidation. Even today, when the original stimulus packages have run their course and another recession is threatening, this consolidation fetish is pursued. EU countries compete about which country will reach the 3% Maastricht target earliest – a self-defeating absurdity. Even the “neo-liberal” IMF is now asking countries to delay their consolidation in favour of stimulating growth. We all know that consolidation will be necessary, in order to bring the high indebtedness back into manageable proportions. EU debt ratios have increased by 10 percentage points as a result of the stimulus and bank saving efforts and have reached unsustainable levels. But this medium-term task cannot go at the expense of short term growth-enhancing measures which will bring our economies back to their potential growth path. Growth will not come only along the Economist-proposed “structural change” supply-oriented measures (desirable as some of them might be), but it also needs demand-enhancing measures, such that consumers and producers can buy the goods and services produced.
It is true that in addition to the Stability and Growth Pact, the EU issues economic policy guidelines, purportedly as a growth strategy – but these again consist nearly exclusively of supply-oriented recommendations and aim to achieve “competitiveness” via cost reductions and wage restraint. Again, this is inadequate and ignores the necessary rejuvenation of industries, the widening of economies’ supply base, the importance of social security (pension, health, unemployment insurance and poverty alleviation) for the productivity and well-being of society and for social cohesion. The example of Greece shows very well that cost reductions alone are not able to assure competitiveness when the economic base of the country is too narrow.
The politically most difficult issue is the re-engineering of the Eurozone architecture. Even ardent Europhobes nowadays agree (maybe not without glee) that we need “more Europe” if we want to maintain the viability of the common currency and its vast benefits. For a long time those of us who already at the inception of the Eurozone had called for wider economic cooperation that just budget deficit and debt ratio targets were ignored and sidelined. Today, this is common knowledge, but ignored by policy makers because of their experience with the last treaty changes. EU, and especially Eurozone countries today are so closely interlinked (also as a result of the common currency) that national idiosyncracies in the realm of tax policy, infrastructures, industrial policies, growth measures, social and financial policies have severe limits and strong spillovers into other countries, thus require coordinated approaches. This means two things: many policy issues need to be coordinated better and earlier, and, more importantly, the substance of European economic policymaking must leave its singularly market-oriented consolidation mentality and be put on a much wider socio-economic, welfare-enhancing base. As a first and important step, sovereign finance must be taken away from the ups and downs of financial market jitters; the financial sector must be shrunk, financial market supervision more strongly Europeanised; a joint growth policy must be developed and tax policy harmonized in order to end the ruinous tax competition with the aim to attract investments away from other (EU) countries; an effective elimination of tax havens must be started.
All this, and more, requires changes in the EU treaty, which at present need to be ratified by national parliaments or referenda. Either politicians must start immediately to conduct rational dialogues with their populations on the concomitant costs and benefits of such changes, or – even furthergoing – other ways to assure legitimacy and popular support must be developed.
It is high time for politicians to go beyond the mantra of the EU as a “peace project”. While the ending of conflict in Europe still is arguably the most important achievement of the project EU, the present generation which has grown up in peace is no longer inspired by it. We need to focus on the “Project Wellbeing Europe” (working title), to inspire those who are out of work, who do not have enough money to lead a “good life” (Keynes), who struggle in multiple jobs, whose living standards have been eroded by decades of supply-oriented economic policies. We need to impress on EU citizens, that most of them live in a welfare state system which most of the world’s populations are envious about (albeit not all governments), where material and immaterial standards of living are excellent, but endangered. In order to maintain and even expand these standards, especially for those parts of the population not enjoying it, we need this new “Project Wellbeing Europe”. Ageing populations, ecological disasters and global competition require joint action, thus “more Europe”. It is this vision which politics must make their populations embrace.
It will be a difficult task. Today, most of what politicians say, is devoid of substance and designed to make the politicians look good. To generate optimism seems the major motivation. Citizens however, experiencing the difficulties of everyday life, have learned not to trust these “feel-good” speeches any longer and as a result discount nearly everything politicians say.
Vince Cable’s “blood and tears” speech at the liberal party convention 2011 was variously commented with disbelief: where is the positive message? But Cable is right. These times require politicians who bluntly speak the truth, tell it how it is. Populations understand this and will be willing to sacrifice, if they see a light at the end of the tunnel, if they see fairness and that everybody needs to chip in.
It is close to High Noon. To stick to business-as-usual, to shy away from deep-going solutions which go to the roots of existing problems because of fears of right-wing nationalist populists, means to endanger our and the next generation’s wellbeing. While long and deep economic depression is less gruesome than outright military war, its human and social costs are nearly as staggering.