The Next Financial Order
Europe on the Verge of a Political Breakdown
Barry Eichengreen
|
|
|
|
BERKELEY – Europe is again on the precipice. The most recent Greek rescue, put in place barely six weeks ago, is on the brink of collapse. The crisis of confidence has infected the eurozone’s big countries. The euro’s survival and, indeed, that of the European Union hang in the balance.
European leaders have responded with a cacophony of proposals for restoring confidence. Jean-Claude Trichet, the president of the European Central Bank, has called for stricter budgetary rules. Mario Draghi, head of the Bank of Italy and Trichet’s anointed successor at the ECB, has called for binding limits not on just budgets but also on a host of other national economic policies. Guy Verhofstadt, leader of the Alliance of Liberals and Democrats for Europe in the European Parliament, is only one in a growing chorus of voices calling for the creation of Eurobonds. Germany’s finance minister, Wolfgang Schäuble, has suggested that Europe needs to move to full fiscal union.
If these proposals have one thing in common, it is that they all fail to address the eurozone’s immediate problems. Some, like stronger fiscal rules and closer surveillance of policies affecting competitiveness, might help to head off some future crisis, but they will do nothing to resolve this one.
Other ideas, like moving to fiscal union, would require a fundamental revision of the EU’s founding treaties. And issuing Eurobonds would require a degree of political consensus that will take months, if not years, to construct.
But Europe doesn’t have months, much less years, to resolve its crisis. At this point, it has only days to avert the worst. It is critical that leaders distinguish what must be done now from what can be left for later.
The first urgent task is for Europe to bulletproof its banks. Doubts about their stability are at the center of the storm. It is no coincidence that bank stocks were hit hardest in the recent financial crash.
There are several ways to recapitalize Europe’s weak banks. The French and German governments, which have budgetary room for maneuver, can do so on their own. In the case of countries with poor fiscal positions, Europe’s rescue fund, the European Financial Stability Facility, can lend for this purpose. If still more money is required, the International Monetary Fund can create a special facility, using its own resources and matching funds put up by Asian governments and sovereign wealth funds.
The second urgent task is to create breathing space for Greece. The Greek people are making an almost superhuman effort to stabilize their finances and restructure their economy. But the government continues to miss its fiscal targets, more because of the global slowdown than through any fault of its own.
This raises the danger that the EU and IMF will feel compelled to withdraw their support, leading to a disorderly debt default – and the social, political, and economic chaos that this scenario portends. In Greece itself, political and social stability are already tenuous. One poorly aimed rubber bullet might be all that is needed to turn the next street protest into an outright civil war.
Again, help can come in any number of ways. Creditors can agree to relax Greece’s fiscal targets. The limp debt exchange agreed to in July can be thrown out and replaced by one that grants the country meaningful debt relief. Other EU countries, led by France and Germany, can provide foreign aid. Those who have spoken of a Marshall Plan for Greece can put their money where their mouths are.
The third urgent task is to restart economic growth. Financial stability, throughout Europe, depends on it. Without growth, tax revenues will remain stagnant, and the capacity to service debts will continue to erode. Social stability, similarly, depends on it. Without growth, austerity will become intolerable.
Here, too, the problem has several solutions. Germany can cut taxes. Better still would be coordinated fiscal stimulus across northern Europe.
But the fact of the matter is that northern European governments, constrained by domestic public opinion, remain unwilling to act. Under these circumstances, the only practical source of stimulus is the ECB. Interest rates will have to be slashed, and the ECB will have to follow up with large-scale asset purchases like those recently announced by the Swiss National Bank.
If these three urgent tasks are completed, there will be plenty of time – and much time will be needed – to contemplate radical changes like new budgetary rules, harmonization of other national policies, and a move to full fiscal union. But, as John Maynard Keynes famously quipped, “In the long run, we are all dead.” European leaders’ continued focus on the long run at the expense of short-term imperatives may indeed be the death knell for their single currency.
Barry Eichengreen is Professor of Economics and Political Science at the University of California, Berkeley.
Copyright: Project Syndicate, 2011.
www.project-syndicate.org
You might also like to read more from Barry Eichengreen or return to our home page.
|
|
DebbieSmith 12:31 10 Sep 11
Here is an article showing how central banks and foreign governments around the world no longer trust banks with their own deposits, preferring the allusion of safety by depositing funds with the Federal Reserve:
http://viableopposition.blogspot.com/2011/09/federal-reserve-reverse-repurchase.html
The last time deposits with the Fed grew this rapidly was in November 2008 and we all know how that particular movie ended.
If central banks around the world don't trust their domestic banking industry, we should be very, very concerned about our own fiscal security.
davidodonnell 01:59 10 Sep 11
American Pragmatism & European Social Democracy have a lot in common. This is a very sane Pragmatic Analysis .... Greece needs a 50% haircut WITHIN the EZ; without the SOLIDARITY_BOND Europe will regress ...
RangerHondo 02:43 10 Sep 11
Nothing short of biting the bullet will help. You can dump tax payer money on the banks until the State is at risk of collapse along with revolution but it won't help until banks and governments quit lying and produce a fully transparent balance sheet. Asking investors to please trust us when bank managment and governments have done nothing but lie is a fools errand. Open the balance sheets to full transparency, adopt regulations such as Glass/Stegal separating risk taking (in order that investors aren't investing in the next high risk debacle) and stop the insane acceleration of debt both financial and governmental. Then and only then will investors even begin to sit at the table and discuss investing in banks.
Andrewp111 05:29 10 Sep 11
Greece needs to default and get it over with. They need to just repudiate their debt and start over. Whether they stay in the Euro or not after that is almost irrelevant.
chrisdornan 03:25 10 Sep 11
This article is so clear. I remain amazed at the boundless capacity of those responsible for Eurozone to remain behind the curve.
utilitus 01:52 11 Sep 11
So far, it seems as if bin Laden was qualitatively far more successful in doing what he set out to do than all the economic and political thinkers who cooked up the Euro. Of course, the later project was run as a faith-based initiative light on 'transperancy', while the former literally involved symbolic dreams.
Alphaboy 03:59 11 Sep 11
Eichengreen writes: "This raises the danger that the EU and IMF will feel compelled to withdraw their support, leading to a disorderly debt default – and the social, political, and economic chaos that this scenario portends."
This is hyperbole, of course--there is no reason, following Argentina's very enlightening example, that social or economic chaos will ensue in the event of a default; in fact, we might expect just the opposite. There may indeed be a political price to pay on the international stage--Greece risks becoming a pariah state in the eyes of the IMF and the ECB, and Greek politicians are naturally inclined to curry favour with these institutions. But as Greece is already in turmoil as a result of austerity, there is very little risk of further damage to the social fabric. Austerity has been tried, and it has proven a heartbreaking failure. it's time to try something else.
And I would amend Eichengreen's "first urgent task": problem banks should be allowed to fail. It is absurd in the extreme that austerity is being imposed in Greece and Ireland in order to receive bailout money from Germany, via the ECB--only to have that money return to Germany to rescue German banks. It's time to end the ridiculous placating of the bondholders and actually save an economy or two.
joebhed 04:09 11 Sep 11
If I read it correctly,it says that only an immediate three-part strategy will work. Part 3 of 3 is to restore economic growth, and parts 1 and 2 will not work without 3.
Given the penchant among European leaders for austerity these days, and given the American political stalemate over deficits and debt, there can hardly be a less-likely environment for economic growth.
So,if we really have only weeks, not months, I'd get the cream of the EMU crop working on the exit strategy they all said they would never need.
An exit strategy from the EMU.
Dragzon 11:52 11 Sep 11
Main root of all the problems to EU and USA are new competing economies coming on the horizon.
And the only way out of this mess for EU and USA is to finally accept their places that really belongs to them in this world, and to start behaving according that. New world is emerging, new world leaders, new competitors to EU and USA. Competitors with huge natural resources and energy ( Russia, Brazil ), population ( Chine, India ) and their hungry consumer demands. There is nothing that can be done against that on the side of EU and USA.
EU and USA’s people simple have to understand that from now on, they will have to trim their standard of living, work more for less, drive older cars, go less on holidays, and etc. They will have to accept the fact that Russians, Chinese, Indians and other Asian people will slowly but steadily become richer then them.
The hardship of EU and USA’s people will stop when the salary in Chine, Russia, India surpasses theirs salaries. When products produced in those countries become more expensive then theirs. That process will take at least 40 to 50 years, but it will inevitable take place.
EU and USA can jump up and down as much as they want, but they can not really change much. Especially when one takes into consideration small and decreasing EU population, and total lack of natural resources and energy compared to their competitors. I do not see light in the tunnel for EU and USA in the foreseeable future. ( I am sorry for that ).
Zsolt 10:11 14 Sep 11
The problem is very simple.
We all live in an illusion. Imagine a swimming pool, and there some people who think they are standing on the side of the pool, putting their fingers or toes into the water feeling if it is cold or warm, they do not dare to get closer not to fall in it. There are people who are already in the pool, moreover some of them look like drowning, and everybody is shouting from the sides telling those in the pool what to do how to save themselves, but they do not lend a hand least they also fall in. But in truth all of us are already in the pool, and we are all drowning, but we do not want to accept it yet, as our noses are still above the water. And this is a tricky pool, only if we work all together can we climb out.
We all need to wake up before it is too late to understand what truly a global world means. Our previous individual calculations, always trying to get out as much as possible for ourselves in any situation, do not work anymore. We simply evolved into an integral system, where we are all interconnected and interdependent. This is our life now, there is nothing we can do against it, there is plenty of impeccable research showing it. And we can also see it from the global crisis, we need to admit that our previous methods, tricks have exhausted themselves.
We need to start a new calculation, on mutial responsibility, taking the whole into consideration ahead of individual benefits. It is against our inherent nature, and suggesting such things today is a poltical nightmare. But we have no choice, we are facing natural laws here, the laws if a global integral network we are all part of.
PaulWilson 05:55 14 Sep 11
So Greece might be on the brink of "civil war". On what does Mr Eichengreen base this statement? Is there an organized and armed popular movement prepared to mobilize if sufficiently provoked? Or is this statement based on some belief that civil wars are a spontaneous result of certain forms of injustice or inequality? I suspect the latter.
Mr. Eichengreen would immediately dismiss any such an unsubstantiated remark made about an economic condition, particularly if made by a non-economist. But he, and most economists, feel free to make such remarks about political conditions.
Nichol 12:07 20 Sep 11
It is a common mistake to think that what is good for the long term is also good for the short term .. it is called sticking to principles, but it is a mistake.
However: it may be that some agreement on long-term goals may make it easier to allow some short-term flexibility, which is now urgently needed to fix the crisis at hand.
cigdemerbek 07:04 20 Sep 11
i really don't see how you can consider "restarting growth" as an urgent task that can be achieved in months. if that one were that easy, the world economy would not be in its actual condition. if you can suggest a golden path leading to instant growth, all the governments of the world would be delighted to be advised on that.
rebentisch 12:32 01 Oct 11
"The crisis of confidence has infected the eurozone’s big countries." No, it hasn't. The term "crisis of confidence" is misleading here.
montecristo 09:53 02 Oct 11
Some interesting point raised here. Given that time is of the essence here, and arresting the freefall a logical step before undertaking laborious structural change, has anyone here taken the time to read Yanis Varoufakis' and Stuart Holland's 'Modest Proposal'?
By no means a long term fix by their own admission but the ideas put forward by these chaps would arrest the current crisis and give everyone in Europe the breathing space needed to work out a new blueprint which ought to be nothing less than a redesign of the Eurozone's architecture if it is to be sustainable. Also it would go a long way towards lifting the ridiculous weight that the crisis has placed on the minds of influential players at a time when we have bigger fish to fry, namely climate change!!
raphael 05:50 03 Oct 11
Rather than think in terms of solutions which will not work, let us consider what might resolve the Greek crisis and allow Europe the breathing space necessary to avoid a global financial collapse while it reconsiders the terms of it‘s monetary union.
Allow that the debt of Greece is approximately 350 billion euros. Consider also that Germany, France, Japan and the US themselves can float 30 year bonds for below 3%. Is it inconceivable that these countries' treasuries could not absorb the entire Greek debt at 87.5 billion euros each financed by their own bonds to prevent a world wide financial collapse? The cost over three decades would be insignificant compared to the risk of default. France and Germany alone could do this tomorrow and their economies would be immediately stronger for it.
Greece may be making a sideshow political effort to pass legislation meeting the terms of the troika, but the Greek people are saying very loudly that they will never pay their government's debts. The collapse of the troika negotiations is imminent and inevitable.
An international buyout of the Greek debt would remove Greece from the bond markets and revert it to the drachma, allowing the depreciation necessary to reconstitute it's economy. The Euro-zone would get the necessary breathing room to restructure their weak economies without the imminent collapse of the currency Europe would get the year or two necessary to reform its monetary union and the world would be spared an unnecessary collapse unprecedented in history.
Economists create theories but politicians make law. Both need to step up to fact that this world is headed for chaos. With a cancer one removes it to preserve the body. It is time for the world’s leaders to excise the Greek cancer.
Franz 10:04 04 Oct 11
I would have structured this article differently. The conclusion is to be found in the very last sentence.
“European leaders’ continued focus on the long run at the expense of short-term imperatives may indeed be the death knell for their single currency.”
However, the scetch made of the situation, as are both enumnerations of actual “long term” and “short term” imperatives offered, do not make the reader contemplate the difference between long term and short term objectives available to European politicians.
“It is critical that leaders distinguish what must be done now from what can be left for later.”
I identify this sentence to be of real value to the discussion on the European single currency and the souvereign debt crisis. Yet the summery on what has occured, what politicians have proposed so far, and what the author thinks should be done to tame the beast. I have honestly read more interesting, more compelling and more elloquent compositions.
Perhaps it can be more usefull to eleborate on how one can actually identify short term and long term objectives. First by analysing what the longivity of the sum and its parts -i.e. the European Debt crisis in conjuction with the Europan integration project- is with respect to the present situation.
Finally, I want to break a lance for the European political leadership. In this imperfect world called the European Union and EMU, they are to find a supposedly perfect solution to tame the financial markts. I think it wisdom to try and identify the root causes of the crisis. In the end the problem is a lack of political integration and the European Democratic deficiet, and not political cronyism and financial deficiets in the European perifiry. European leaders are to device structures/institutions to excersise political leverage over debitors, and make for a good bargain to sell to both the South and the North.
Dragzon 12:18 04 Oct 11
I am really amazed at the way the Western people like to think about the root of THEIR crises. It seams to me that none of you guys writing on this blog understand, or do not want to understand, the real causes of your present hardship.
For your politicians, economics, and you yourself to make right decisions, you first have to honestly look and admit the following:
1. This financial crises is not world’s crises, but your WESTERN countries’ crises. Russia and especially Asia ( China ) will be hurt by your countries collapses, but they will survive. Right now, their economies are growing from 5 – 8% annually.
2. Your enormous economic problems are caused mainly due to your countries abnormal borrowings, in order to keep your standard of living that you, with your work input, do not deserve.
3. Your Western crises will end the day when products produced in your countries become chipper then those produced in competing economies ( Russia, China, Asia, Latin America )
4. For products to be produced chipper, your salaries will have to be lower then the salaries of workers in competing economies, Russia, Chine, Asia, … due mainly because you do not posses much of natural resources, human resources, energy, compared to abundance of that in competing economies, Russia, China, Asia…..
5. With transfer of capital from your countries to competitor’s countries, ( investors naturally invest in vibrant and not stagnating economies ) you will get behind with technology as well. Smart people, innovators, will go where they are paid the most. ( Or someone will be that stupid to tell me here, that smart young German will not accept the job in Russia or Chine, if they offer him much more money then in Germany ).
All of the above said, and many more reasons that I have not mentioned here, for example drastic decline in population of EU ( just in Germany 12 % children were less born now then just 10 years ago ) ( 30% less in Eastern Germany ), tell any reasonable human been one thing, and that is…
You Western people better prepare yourself for low living standard in the foreseeable future, and start setting your minds to understand that you are not going to be the richest people on the plant ( and in that respect the leaders) but those who are to follow the future leaders of the planet… Russian, Chines, Indians …..
Sorry for telling you the truth, it hurts sometimes, I know.
rebentisch 02:29 04 Oct 11
"European leaders’ continued focus on the long run at the expense of short-term imperatives may indeed be the death knell for their single currency."
No one would be willing to agree on a short term solution without a longterm committment of structural reforms, without a "guillotine" for those policies responsible. An appropriate stick-carrot mix is key.
cheeheongquah 06:39 05 Oct 11
Slashing interest rates in Europe too will only inflate the emerginig markets further if capital continues to flow across the globe. This will just create another bubble and financial crisis, this time in emerging markets such as China and India, without any good to growth whatsoever.
Remember the the 1930s and the 1970s fiascos came after periods of credit easing in the US and we certainly don't want another Great Depression!
Growth would not come, no matter what you do when the public are deleveraging after the asset bubble burst.
I think it's better to accept and endure the hardships in the short-run and look for long-run improvement.
Quah, Chee Heong
Alternative 08:56 09 Sep 11
Another writer who doesn't know the Greeks. Greeks don't know the word commitment. They only know the word 'promises' and never live up to their promises. Why do northern-europeans think that will change one day? Most European politicians never lived in Greece. Nor do they understand the culture.