Eppur si muove (?)


Galileo’s defiant exclamation should be transposed to the European Union. After steadfastly preaching “stability”, i.e. budget consolidation and debt reduction as the primary direction of EU economic policy, tomorrow’s “crisis summit” might (and should!) result in some moves. It is the realization that the bitter medicine for Greece is no longer acceptable to large parts of its population, plus the new impetus Francois Hollande provides, all backed by the serious background grumbling of the respected Mario Monti that EU leaders show some signs of pragmatism. Maybe it was also the strong effort which Barack Obama exerted at the most recent G-8 summit in Maryland, or even the less-than-welcome calls from the sideline from David Cameron (who admonishes his Eurozone partners, but vows to maintain his austerity stance in England) that seem to lead to some softening of politically and socially untenable, and economically perverse stances by EU leaders.

There is increasing talks of “Grexit” (what a horrible word) from outside the Eurozone. There are pointers that Argentina’s default and abandoning its dollar peg in 2001 might be a model for Greece. However, Mario Blejer, former governor of Argentina’s Central Bank, warns against that, citing the large social disruptions in Argentina and also the dissimilarities between these 2 countries – to the disadvantage of Greece. Unless, as Blejer says, the Eurozone comes to understand that this inappropriate economic, but politically highly positive integration project needs a transfer union, meaning that Greece needs more help from it co-Eurozone members, including a temporary moratorium on debt repayments, help with the banking sector and with growth projects, plus wage subsidies, in order to increase competitiveness.

Most observers inside the Eurozone know and say that a Greek exit might lead to massive contagion to other countries, a collapse of the weakly capitalized European banking system and a deep depression. Some populist outsiders (especially, but not only in the UK) discount these risks.

The European landscape has changed dramatically during the past few weeks. The merry-go-round initiated by the European Central Bank, dispensing 1 trillion € in liquidity may have prevented even worse; but neither did this help to capitalize the banks nor did most of it end up in the real economy. Much of it is parked overnight in the ECB, for fear that lending it might result in non-repayment. The financial markets are jittery, many funds bet on a Greece exit and thus reinforce the dramatic situation. Austerity has led to massive reductions in GDP (in the Greek has of around 20%) without “solving” the debt problem: on the contrary, debt shares are going up all over the peripheral states. Thus again my demands:

a)      Remove sovereign financing from private markets and turn it over to the ECB or EFSF/ESM.

b)      Create a real fiscal union with EIB, Structural Fund and other transfers from surplus to deficit countries

c)       Formation of a banking union where cross-border banks are regulated and crisis measures devised on a joint level, in order to prevent “beggar-thy-neighbor” crisis solutions

d)      Raise new European taxes by means of a wide-ranging financial transactions tax and use its (more than 50 billion €) annual revenues to help finance countries in distress.

The crisis summit will discuss some of these ideas, being proposed by F. Hollande. Some of the more far-reaching ones will be left un-discussed. Hopefully not until it is too late. The writing on the wall is there. Let us hope that the EU moves – and quickly and in the right direction.

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