Well, it was 4 a.m. when Eurozone leaders finally emerged from 10 hours of hard-fought discussions. On the surface, they delivered what they had promised during the past few days. A “voluntary” reduction by 50% of Greek nominal debt (such that by 2020 the country will achieve a debt/GDP relation of 120% (!!!); a bank recapitalization scheme of more than 100 bill €; a potential increase in EFSF’s “firepower” from 440 mill € to around 1 trillion €, by offering bond-buyers insurance and/or establish special purpose vehicles that could be co-fed by outside financiers (IMF, statefunds); and “10 points” on strengthening Eurozone economic coordination. The latter make the observer cringe with their self-absorbed bureaucratic attempts to divide labor between the Council President, the new Eurozone Council President (for the time being both functions administered by Van Rompoy), the Eurogroup President (Juncker), the Commission President (Barroso) – veddy efficient! The only manifest novelty is the installation of a permanent Head of the Euro Working Group, the secretariat which is supposed to help coordination of policies of the Eurogroup. The wish towards “more Europe” is there, its implementation insufficient.
All this is an emergency firewall against further contagion from the Greece crisis, within the existing system. As chancellor Merkel rightly said: this is no seachange! It managed to please the financial markets (at least on the day one after) – but is that what is really needed? All that was decided is only defensive, so banks can go about their business-as-usual as before. The grand objective, to change the system around, was neither attempted, nor achieved. It is a necessary, but insufficient step forward – if its objective was to placate the financial markets. It is not a solution to the manifest Eurozone crisis.
What should have happened, in order to prevent another crisis hitting us again?
- The existing imbalances, both within the Eurozone and between the large countries need to be tackled: it is incompatible with sustained global growth if some countries run large deficits (and resort to massive debt buildup) and other large surpluses. Thus exchange rate, growth-balancing measures must be taken, both by deficit and surplus countries alike.
Institutionally this would require a global economic governance institution, something along the lines of the 2009 G-20 Meeting in the UK, whose dynamic and impetus unfortunately has run out and made these meetings another talkshop.
- From the substance, the major point must be to take away the responsible task of government financing from the anxious and volatile financial markets. One way towards that would be to forbid secondary trading in government bonds (in the manner of the German “Schatzbriefe”), another one to turn government financing over to the European Central Bank which would hold the bonds in its portfolio until maturity (with exceptions). It is remarkable that the ECB is not named once in the Euro Summit results document – as if it did not have a role to play. Both the Fed and the Bank of England (and ECB for a while with about 170 bn €) have been heavily involved in buying government bonds to calm the markets. I would go much further and “forget about the markets” by relieving them of their financing function for governments, and relegate them to the private sector, but also there regulate them tightly.
Another would be to introduce Eurobonds, guaranteed by all 17 Euro countries; potentially only up to 60% of each country’s national debt, in order to prevent “irresponsible behaviour” (“moral hazard” in finance speak). In this way, each country would still have an incentive to reduce its debt burden.
- It was important, if very late, thus expensive, to grant Greece a rescheduling of its staggering debt, because as many of us have said for a long time, its debt burden was impossible to be borne by that country. Even now, it will still be left with a staggering burden, which will expose its social and political stability and coherence to an extremely severe stress test. Greece will need to invest part of the debt payments saved into a “Greek Future” program which will broaden its economic base and make it in the long run competitive with other Eurozone countries. Cutting salaries and social benefits alone might help, but will not be anywhere enough – and will throw the country into a long-term depression, with its effects of social unrest, out-migration of the best educated. The compromised Greek politicians will have to prepare their populations in any case for a long-lasting reduction in wellbeing, but need to show positive prospects at the end of a long tunnel.
- Apart from the “voluntary” debt reduction for Greece (still many details must be worked out with bond-holding banks and insurance companies), the existing EFSF “firepower” of 1 billion € looks high, but will not be sufficient, if the present contagion-containing effects are not enough. Therefore, unlimited liquidity supply by the ECB should have been arranged. Only ECB is able to provide that as a precautionary protector and “lender of last resort” – without burdening Eurozone taxpayers even further. It is a near-catastrophe that “stability-minded” Germany has prevented that. This might still involve an extremely high price to be paid.
- The excessive debt/GDP levels of insolvent Greece, illiquid Portugal, Spain, Italy (?) and Ireland, and of all the other Eurozone countries can only be brought down to sustainable levels by 4 instruments: debt rescheduling, high inflation, higher growth and/or a very high increase in taxes and reduction in government expenditures.
The first makes only sense for insolvent countries (Greece), of the other 3 a combination is likely to happen: however, it needs to be realized that a European strategy of just cutting expenditures and increasing taxes – the objective of the reinforced Stability and Growth Pact – will cause long-lasting recession. It is absolutely necessary to promote growth (beyond the mentioned re-direction of government expenditures towards growth-enhancing measures: how shall countries faced with debt burdens which eat up a large part of expenditures find room for such measures, unless the timeline for deficit reduction is abandoned?), and – at the same time, to reduce the interest rates countries and firms pay to below the (nominal) GDP growth rates. Otherwise, as simple arithmetic shows, it is impossible to reduce the debt/GDP levels. We can observe this already now, when governments are cutting deficits, that debt/GDP levels increase further – why: because GDP stagnates/falls and interest rates are higher than GDP growth rates. Again: to reduce government bond interest rates, these need to be controlled by the ECB and not by the financial markets (see item 2 above).
- Re-capitalization of banks is important to make them more resilient to shocks. Many banks now threaten to achieve their 9% target by shrinking their balance sheets, by deleveraging, concretely by cutting their lending to enterprises. While deleveraging for the global financial sector as a whole is desirable and necessary, in order to re-structure finance once more towards serving the “real” economy and consumers and get them away from the excesses of the past 20 years, the socially desirable deleveraging must occur in investment banking, in speculation, in M&A financing, in hedge funds, etc., but not, I repeat not, in corporate and consumer lending and lending to small and medium enterprises. Governments and the EU must use their legislative and regulatory powers to re-direct banking activity and prevent another credit crunch. It is hard to understand why governments which supported banks with billions during the 2008 ff. crisis, partly by quasi and real nationalization, did so far not use their influence to counter this threat.
- Yes, the Eurozone needs “more Europe”. The present crisis has shown the inadequacy of the Euro arrangements and the need to not only vaguely “coordinate”, but unify Euro country fiscal and economic policies. It is necessary, but not enough, to take fiscal sovereignty away from Greece – this needs to be extended to all countries of the Eurozone. Not with a EC “commissioner” placed in each country, but with a fiscal and economic binding authority at the Eurozone level. The present talk about a “Eurozone finance minister” becomes immediately reduced to speculation about names. More important is a decision on which powers need to be “Europeanized” in order to guarantee Eurozone functioning. The present Stability and Growth Pact mechanism clearly is not enough, for 2 reasons: It still leaves fiscal authority with national parliaments and governments and de facto reduces the EU authority to (weak) ex-post sanctions; but more importantly, it does not permit the development of a Eurozone growth strategy and its implementation.
The summit still believes that government deficit reduction and “structural reforms” in the labor and goods markets are sufficient for growth. The recent years have shown that this view does not hold – especially not in getting out of a deep recession. Investments in infrastructure, material and immaterial, in climate change, in education, F&E and innovation, together with a solid social welfare base, are needed.
The summit achieved an overdue emergency operation to help Greece from social turmoil and even deeper depression; it might achieve to placate financial markets, at least for the time being. It increased financial buffers for banks and found small bureaucratic achievements towards “more Europe”. But it failed in its most important task: to put the Eurozone on a long-term sustainable basis by cutting the power of the financial markets and make it revert to its major role: to finance the real economy. Eurozone politicians seem content to remain in awe and fear vis-à-vis financial markets as the masters of the Universe. They have given them a signal that they might risk their money, if acting irresponsibly, but have provided them once more with even more taxpayer money to prevent banks’ collapse. The rabbit will still shiver petrified in front of the (financial) snake.