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Wednesday, February 10, 2010

Eurozone vanity

Latest word is that the eurozone group is holding an emergency video conference this afternoon to discuss Greece's economic situation and possible ways to go ahead with a much anticipated (read: much feared) bailout of the country. This morning's press reports noted that eurozone countries had decided "in principle" to provide financial assistance to Athens, with German Finance Minister Wolfgang Schäuble telling officials in Berlin that there “was no alternative” to a rescue plan.

Ahead of tomorrow's summit of EU leaders, we have published a new briefing looking at 10 different ways in which Greece can be bailed out. At the moment, some sort of eurozone credit facility or an IMF-style 'euro fund' seem to be the frontrunners. However, it's unclear whether these two options are actually legal under the EU Treaties 'no bailout' and 'no credit facility' clauses. (in fact, of the 10 possible bailout scenarios we looked at, only one - early payments of structural funds - is unambiguously legal under the EU treaties).

Obviously lots of issues are on the table at the moment, but at least three consequences of a bailout are worth hammering home.

First, as has been widely documented and argued, watering down the EU's 'no bailout' clause and the 'no credit facility' clause creates moral hazard of unprecedented proportions, and has previously been fiercely resisted by a whole range of EU politicans and central bankers - particularly in Germany. Former Chief Economist at the ECB, Otmar Issing, has said that this would spell an end to "the political stability of the monetary union". He said that, in order for financial discipline to prevail, every member state must be responsible for its own debt and deficits: "without this there would be no end", he said.

Secondly, short term measures will not address the structural lack of competitiveness that affects not only Greece, but also countries such as Spain and Portugal. In order for the differences in competiveness within the eurozone to be addressed, a one-off bailout would need to be followed by continuous financial transfers from the poorer bloc to the richer bloc within the eurozone. Indeed, there would be no end.

Thirdly, there's no public mandate or support for establishing a formal system of fiscal transfers - polling by Open Europe shows that 70% of Germans are against using taxpayers to bail out another member state. This means that eurozone countries are stuck in a very tricky dilemma: either accept continual strains on the eurozone, stemming from the weakness of Greece and others, or pursue a policy of closer economic integration, for which there's no public support.

Some key people in Brussels now seem to be set on the latter alternative. Commission President Jose Manuel Barroso has already said he plans to interfere more in national economic policies, stating that “economic policy isn’t a national, but a European matter. No modern economy is an island. When a member state doesn’t make reforms, others suffer because of that.”

Likewise, EU President Herman Van Rompuy has said, “Whether it is called coordination of policies or economic government” only the European nations working together are “capable of delivering and sustaining a common European strategy for more growth and more jobs…Recent developments in the euro area highlight the urgent need to strengthen our economic governance”.

Former European Commission President Romano Prodi once said that a future crisis could be exploited to radically speed up the pace of economic union: "The euro will oblige us to introduce a new set of economic policy instruments. It is politically impossible now. But some day there will be a crisis and new instruments will be created."

It seems Barroso and Van Rompuy are intent on proving him right.
For the immediate short term purpose of helping out Greece, as we argue in our briefing, the simplest and most sensible option would be to go to the IMF. The Swedes and the UK reportedly both want it but it seems as though the eurozone standard-bearer, Germany, is too proud to contemplate this route.

So integrationist politicians now see in the financial crisis and the introduction of the Lisbon Treaty a chance to take a quantum leap towards a common economic government in the EU and it seems that even Germany - that so far has opposed any movement towards EU fiscal federalism - may be willing to move out of the way.


Anonymous said...

Never a crisis wasted, eh? The prospect of economic integration is frightening -- once they hold our economy, we might as well kiss our sovereignty goodbye. It will be expatriation for me if they manage to set up a federal economic structure.

Anonymous said...

At last the cracks in the eu and the euro are showing.

I find it interesting that the people the money actually belongs to ie: the tax payers in all the member countries are never consulted as to how it's used, the politicians just sit there writing checks as if it's their own personal ATM so why would Britain, who's been pretty well sucked dry by the eu, (and still no one can tell me what it is we gain from membership when we did very little trading with Europe before this big con came into being) why would we want the euro, of course I’m sure that our traitorous government can be bought for the usual pocket of gold.

walengscon said...

The signing of the Lisbon treaty, and further intergration, was a fraud on the electorate and a mis use of the Royal Perogative, as no promised referendum was held. It brought into constitutional conflict democracy and executive or tyranical government and the Lisbon treaty ought to be declared illegal by the supreme court in consequence.
The Euro one size fit all is not going to work even if taxation is harmonized. The opposite will be the case as governments with horrendous deficited will have the chance of balancing their economies removed from their control, and will merely sponge of others more thrifty. Only a mad mad would invest in a black hole.


M. Cawdery said...

When I read Marta Andreasen's book, I rapidly came to conclusion that due to EU financial corruptness and the image it created would result in the financial collapse in the vassal states - particularly those in the euro zone. It is all coming to pass but the Eurocrats do not seem able to admit their mistakes!

Anonymous said...

Surely one of the conditions of an IMF bailout would be for the miscreant country (i.e. Greece)to leave the Monetary Union. Otherwise, what is to stop THEM (i.e. the Americans & other non-euro-maniacal countries), being called on again & again to keep bailing the P.I.G.S. out? [Just as the Germans etc. will be called on for repeated transfers if it is kept within the EU]. . . if the troublemaker doesn't have to restore its own interest & exchange rates to take the punishment the NEXT time that they do exactly the same thing!

My economics textbook 20 years ago made it clear that: "There IS NO answer to the 'free rider' problem" for a single currency between different states. A free rider is a state which binges on borrowing & spending, whilst effectively having someone else's currency, interest & exchange rates. The choice (after a decade or two of postponing it) is to either have many states with many currencies, or one currency AND one state.

Delors etc. knew all this - and that a crisis like this was the catalyst needed to push for the single (economic) state model - which is the specific thing which Maggie said "no, no, no" to.