Profiles in European Denial
An impartial observer of the Meseberg Summit between Angela Merkel and Emmanuel Macron would conclude that the eurozone remains as macroeconomically unsustainable as it was five years ago. And yet Europe’s establishment, oblivious to the Nationalist International preparing to devour the EU, is serving it appetizers.
ATHENS – Europe’s establishment is luxuriating in two recent announcements that would have been momentous even if they were only partly accurate: The end of Greece’s debt crisis, and a Franco-German accord to redesign the eurozone. Unfortunately, both reports offer fresh proof of the European Union establishment’s remarkable talent for never missing an opportunity to miss an opportunity.
The two announcements did not come in the same week by accident. The Greek debt implosion, back in 2010, was the ugly symptom of the eurozone’s design flaws, which is why it triggered a domino effect across the continent. Greece’s continuing insolvency reflects the deep disagreements within the Franco-German axis concerning eurozone redesign. While three French presidents and the same German chancellor were failing to agree on the institutional changes that would render the eurozone sustainable, Greece was asked to bleed quietly.
In 2015, the Greeks staged a rebellion, which Europe’s establishment ruthlessly crushed. Neither Brexit nor the EU’s steady de-legitimation in the eyes of European voters managed to convince the establishment to change its ways. French President Emmanuel Macron’s election seemed the last hope for the new Berlin-Paris accord needed to prevent a suffocating Italy from triggering the next – this time lethal – domino effect.
Under Macron, new, hopeful ideas were proposed: a common budget for the eurozone; a new safe debt instrument and quasi-federal tax-raising capacities; a common unemployment insurance fund; common bank deposit insurance and a common pot from which to recapitalize failing banks (thus providing the missing foundation of a real banking union). Moreover, a new investment fund would mobilize idle savings across Europe, without adding to the fiscal stress of member-states. And Macron’s government also seemed to adopt a proposal I made in 2015, when I was Greece’s finance minister, for restructuring public debt via GDP-indexing. That way, the size of Greece’s total public debt (and the speed of its repayment) would be linked to the size and growth rate of Greece’s nominal income.
A year later, with Italy on a collision course with the EU, the Meseberg Summit between German Chancellor Angela Merkel and Macron delivered an agreement on eurozone reform. A few days later, the Eurogroup of eurozone finance ministers delivered its own “solution” to the Greek debt crisis.
In a decent universe, these two announcements would herald the end of a lost decade for Europe and the beginning of an era of rebuilding so that Europeans may face, together, the challenges posed by US President Donald Trump and the next economic downturn. Alas, that is not the universe we inhabit.
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Even before the Meseberg Summit, Macron had diluted his proposals to the point of surrender. The common bank deposit insurance scheme and the recapitalization fund were pushed into an implausible future in which the eurozone periphery’s banks have to shed their bad loans before a proper banking union is forged. The common unemployment insurance scheme was not even discussed. Last but not least, a common debt instrument to underpin a eurozone budget amounting to 2-3% of eurozone aggregate income – the main prerequisite for a macroeconomically significant fiscal union – was unceremoniously consigned to the dustbin.
Naturally, Merkel offered just enough to allow Macron to disguise his humiliation as a personal triumph. In front of an ecstatic press corps, they hailed the decision to create a eurozone budget in name, when in reality it is nothing more than a credit line from the European Stability Mechanism (ESM, the bailout fund that gave Greece its loans in 2015). They also agreed to an insubstantial “rainy day” fund, to be financed by member states and a fictional financial transactions and digital economy tax – a “compromise” that costs Merkel nothing, given that countries like the Netherlands and Ireland are likely to torpedo it.
As for bank recapitalization, Macron and Merkel touted an ESM-funded scheme. But with all ESM decisions subject to German parliamentary approval, the German Bundestag would have veto power over the recapitalization of, say, an Italian bank. Italy’s new government is unlikely to buy into this.
When bankers try to cover up bad loans on their books, they extend new loans to enable their insolvent borrowers to pretend to be servicing the original loan. When the new loan is exhausted, the client is allowed to suspend repayment for a few years, with interest accumulating. This keeps the net present value of their asset (the loan) constant while postponing the day of reckoning (when they have to confess to their regulator that the loan is unrecoverable).
Since 2010, Greece’s creditors have been practicing this extend-and-pretend strategy as though they were training for an Olympic event. Instead of a courageous and therapeutic haircut, or the moderate GDP-indexing solution, the Eurogroup’s recent decision, proclaimed as the “end of the Greek debt crisis” boiled down to the apotheosis of this cynical practice.
Technically speaking, the central pillar of the new debt agreement is a decade-long postponement of payments totaling €96.6 billion ($112.5 billion) that were due to begin in 2023. The Greek state has thus been offered easy repayments until 2033 in exchange for continuing harsh austerity ad infinitum (a primary budget surplus target of 3.5% of national income until 2022, and 2.2% during 2023-2060); impossible annual debt repayments from 2033 to 2060 (around 60% of the state’s tax revenues); and a debt-to-national income ratio above 230% by 2060 if the next global recession puts the plan’s over-ambitious growth targets out of reach, as it surely will.
Any objective assessment of the Eurogroup’s recent deal on Greek public debt would conclude that it condemns Greece to permanent debt bondage. And an impartial observer of the Merkel-Macron Meseberg Summit would conclude that the eurozone remains as macroeconomically unsustainable as it was five years ago. And yet Europe’s establishment, oblivious to the Nationalist International preparing to devour the EU, is serving it appetizers.