MUNICH – The euro crisis has passed through six phases so far. It is worth recalling them, because they show how policymakers stumbled along, trying to put out fires without keeping an eye on where their chosen path was leading them. Currently, markets remain calm, but this is only the beginning of a seventh phase of the crisis, during which Europe will become mired in debt. The sequence so far has been as follows:
- The collapse in 2007 of the inflationary credit bubble caused by the euro’s introduction.
- The southern eurozone countries’ reliance on the printing press to replace private international financing, an option enabled by a dramatic lowering of collateral standards for the refinancing credit provided to banks by the eurozone’s national central banks.
- The European Central Bank’s purchases of public debt through its Securities Markets Program, aimed at maintaining the value of precisely this collateral.
- Fiscal rescue mechanisms to bail out the stricken countries and the ECB.
- The ECB’s promise to buy unlimited amounts of public debt within the framework of the outright monetary transactions (OMT) program, which was intended to encourage further private capital flows to southern Europe, given that the fiscal rescue measures were considered insufficient and politically too restrictive.
- The limiting of creditors’ and investors’ liability to a mere 8% of the balance-sheet total of banks in the context of Europe’s new banking union – a measure aimed at ensuring more private international lending to stricken banks.
The seventh phase of the crisis is one of enhanced moral hazard, stemming from a run-up in debt. With investment risks largely collectivized by the bailout measures instituted by the ECB and the eurozone’s member governments, investors are once again accepting low yields, and borrowers are seizing the new opportunities.