Euro crisis: “The worst, I fear, still lies ahead.”

In a recent column in the FT, Wolfgang Münchau asked an interesting question [free reg req]

The markets have concluded that the eurozone crisis has ended. Several politicians said that they, too, believed that the worst was over. Complacency is back. I recall similar utterances in the past. Whenever there is some technical progress – an umbrella, a liquidity injection, a successful debt swap – optimism returns.

If you think the European Central Bank’s policies have “bought time”, you should ask yourself: time for what? Greece’s debt situation is as unsustainable as ever; so is Portugal’s; so is the European banking sector’s and so is Spain’s. Even if the ECB were to provide unlimited cheap finance for the rest of the decade, it would not be enough. [added emphasis]

In today’s Irish Times a report by Derek Scally in Berlin might suggest an answer

[German] Foreign minister Guido Westerwelle has invited eight EU foreign ministers to the Villa Borsig, north of Berlin, as part of his new “Future Group”. But his officials are already on the defensive, explaining what the meeting is not. It is not about establishing an EU policy avant garde, an official said yesterday, nor was it a likely to produce formal proposals. So what is it? For Mr Westerwelle, it is about moving the European debate, shifting the gaze beyond the day-to-day euro zone crisis.

“This kind of debate is hanging in the air. There’s an expectation that Germany takes on an important role in this debate,” said a foreign ministry official. “This isn’t about a German prescription for Europe being imposed on anyone.” Despite this, and the fact that there is no formal agenda, a Berlin foreign ministry paper proposes discussing integration of EU justice and trade affairs, as well as economic and finance policy.

Debate is likely too on achieving “more democracy” in Europe by strengthening the European Parliament and organising more efficiently other EU institutions.

Of the eight invitees, “foreign ministers from the EU’s five other founding members – France, Italy and the three Benelux states – as well as Denmark, Poland, Portugal, Austria and Spain”, Denmark and France will not attend.

And as Derek Scally goes on to note

The Lisbon Treaty moved European policy largely into the hands of EU heads of state and government at the expense of the bloc’s foreign ministers. Thus there is confusion about how Mr Westerwelle’s initiative sits alongside Chancellor Angela Merkel’s own series of informal dinners.

But at least someone is having that conversation, even if it is only in a secluded villa north of Berlin, because by the fifth instalment…  And, as I may have mentioned, “the political trilemma” remains unresolved [and under-discussed? – Ed].

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  • Neville Bagnall

    He may be right. Either way, it’s quite clear that the crisis is not over.

    The question is – to use a medical analogy – have we moved from an acute crisis to a chronic crisis?

    As in the medical field, a chronic condition can still be fatal, but it does suggest some level of proactive rather than reactive treatment. But as he points out, when the crisis pressure disappears, things can drift off course. Time will tell.

    Sooner or later, as in Greece and as is currently (we are told) partly happening for Ireland, the debt burden (public and private) will have to be addressed. Restructuring rather than default will be the preferred route it appears, although, if enough of it is owed to sovereigns or the ECB other options may still become inevitable and politically preferable.

    I have been saying from very early on that, partly by design, partly though the lack of other options or effective leadership, delay has been a big part of how Europe is dealing with this crisis.

    The alternatives have seemed too risky and the hope has been that this would give the member states the time to get their budgets in order. That remains the hope, but… “events, dear boy, events”.

    Why do the member state budgets matter so much, to the exclusion of other considerations? Well, apart from the “German” arguments, we will not be masters of our own fate, independent of the markets, until we are living within our means. That is the clincher for me. We can go to the markets without fear only when we no longer need them.

    My feeling is that we shot our Keynesian bolt stopping a global depression (or tragically in the case of Ireland, saving the banks) and we don’t get to do it again until budgets have stabilised.

    Does it have to be so nationally painful getting there? I don’t know. There are too many variables, national, european and global and I’m only an outside observer. But as much as it pisses me off, I can believe that it might have to be. However, while austerity has had some impact, I’m at least economically comfortable, so that’s easy for me to say. I’m far less convinced that it has to be so individually painful in some cases.

    Nevertheless, I’m far more pissed off about the lack of progress on real reform and what (from the outside) looks like a glaring lack of thought in policy implementation. If a thing has to be done, at least do it well. Give us some hope that lessons have been learned and that an improved civic life in this country (and across Europe for that matter) will be the return for our costly investment.

    As for the political trilemma, it may not be resolved (as suggested, I don’t think it can be and we have to pick two) but there are clear signs that the nations of Europe are continuing down the same accommodation to it that it has adopted since the death throes of the nation-state in WW2. The gradual diminution of the nation-state in order to maintain democracy and globalisation. Personally, I think that’s the right choice.

    I expect the latest step (Fiscal Treaty) will be rebalanced by an increase in democratic accountability at the European level. A step closer to a confederation. That is the history of the democratically elected governments of Europe. They understand the importance of democratic accountability, even as they (like all governments) find it inconvenient. Arguably the Treaty in itself is a democratic improvement over the Stability and Growth Pact. We may even see real ex-ante budget accountability in the Oireachtas. Sadly, I also expect the European Council will not go as far as I would like in boosting democracy at the European level. Personal power is hard to give up and there is still no appetite for the creation of a pan-european polity, although its getting harder to resist.

  • Pete, I believe that there were more interesting parts of Wolfgang Münchau Article which you did not quote in the body of your post.

    It is generally agreed that whilst bailouts of the Irish, Greek and Portugese economies are affordable, bailouts of Spain and Italy are not. So if the Europeans want to save the Euro, they have to ensure that there is no default by either Spain or Italy. Münchau believes that the present policies of European Leaders can not deliver those objectives.

    His article contains an outline analysis of Spain’s public and private debt crisis. Münchau points out that most of the toxic Spanish debt is in the private sector. He indicates that under present policy, deleveraging in both the public and private sectors will occur at the same time. As a result, Spain’s economy will not be able to grow for a long time. Consequently, its finances will worsen to the point of bankruptcy. He concludes:

    “Spain remains stuck in a worsening debt trap, out of which default will be the only escape. If it pursued the agreed policies, it would end up where Greece, Portugal and Ireland are – under a rescue umbrella. This is the most likely scenario for Spain.
    In November, I said European leaders had only 10 days to save the euro. My diagnosis then and now is that they have flunked it……”

    It is rather difficult to disagree with that view. My biggest fear is not so much that the European Leaders are not trying to resolve the problem. It is that they have misconceived the solution to it.

  • Alias

    “It is that they have misconceived the solution to it.”

    True, but only because there isn’t any solution to debts that are a multiple of GDP beyond default or enforced penury, and they’ve ruled out the former solution in over to protect massively overleveraged French and German banks from the consequences of their reckless and excessive lending during the bogus ECB monetary-engineered ‘boom’ years.

    The way to look at debt is to see it as the amount of consumer spending in the economy that can no longer occur. Instead of earning income to buy more goods and services to keep the economy going, they must use their income and taxes to pay for spending that has already occured either by them as consumers or by financial companies as consumers of eurosystem financial products. This amount of wealth that is to be harvested from citizens and taxpayers and then exported to foreign financial companies within the EU is measured in hundreds of billions. The total external debt is measured in trillions, and that must also be exported with interest added.

    It’s just a shame that it vanished into assets that are worth a fraction of the money that was imported to pay for them. As the assets cannot be exchanged for the amount of the loan, the nation must generate the wealth by other means. It is not at all clear what the other means is, but Mr Noonan seems to think that it will come from an export bonanza and Mr Kenny seems to think it will come from China. Shame again that exports are half the level in real terms than they were before we joined the eurozone and we import 6 times the amount from China than we export to it.

    There is no example in history where such a black hole in a nation’s accounts has not led to economic penury, and there is no reason for anyone to believe that the EU’s magic pixie dust will help Ireland to escape its inevitable third world fate just because out eurogombeen political class believe it.

    At some point, the states that have seen their economies destroyed by eurozone membership (over 40% of them) will simply have to stop putting the interest of the French and German economies before their own nation interest if they want to avoid penury. But being post-sovereign and post-democratic, that might require the public to form the view that they do, after all, have the right to determine their own affairs in their own national interest.

    In the meantime, it’s not so much hoping the problem of debts will go away as hoping that the nations that have been sold into servitude will continue to be successfully led to beleive that sertitude is in their own best interest.