In the previous post (permalink: http://europeancommongoodsblog.org/2011/09/02/euro-crisis-and-common-sense-1-what-does-this-crisis-mean/) we arrived at the conclusion that this crisis takes place in an oligopolistic pseudo-market where nine financial majors, colluding with the rating agencies, have decided to short the Euro for the prevalent advantage of US interests, while China takes an opportunistic position. These actors are banks and financial brokerage firms who are everything but patriotic, French and German banks included.
Today we will look at the proposed remedies, trying to comment them in their political essence and main effects.
1. Cuts and austerity
2. Budget balance in the constitution
5. Collateral guarantee
6. Selling gold reserves
7. European Treasury
8. Leave the Eurozone
9. Smaller Eurozone
10. Disband the Eurozone
11. Not paying the debt
12. Odious debt
1-4 Cuts, blood and tears
The first four measures revolve all around the basic concept that the countries that are heavily indebted have eventually to pay with the money of their citizens the sums they owe to the markets.
The crudest form is to start repaying without borrowing other money, EFSF/EFSM (European Financial Stability Facility/ Mechanism) and Eurobonds are softer variants: you get money to repay part of the debt and interests, so that your national payments and cuts can be relatively more gradual.
EFSF/EFSM are limited liability and solidarity mechanisms where the money lent through the bonds sold by these bodies is backed by the European Central Bank and the European Commission, also using the EU budget as a collateral guarantee. It means that the nine financial major actors we mentioned previously (banks and brokerage houses) and that are the exclusive movers of the CDS, CDO, ERS markets know that eventually the money they want back is secured by the whole EU but up to a certain amount and indirectly by the 17 Eurozone governments.
Eurobonds instead imply an unlimited support and liability by all the partners of the Euro, especially Germany, the strongest country within this zone and also within the smaller group that enjoys a AAA debt rating (just five countries: Austria, Finland, France, Netherlands). In any case we are moving in a purely financial dimension, where real people, societies, politics and cultures are at a discount. Is this a serious perspective?
Political bottom line: the EU is trebly split by the fault lines of Euro ins and outs; countries under debt pressure (PIIGS); triple AAA countries and the others. Enlarging the area of the Euro is out of question for the next five years at the very best and keeping the area together is problematic. This group of measures, as they are presently carried out, will have two possible outcomes.
The first is that five Euro countries will be bled white, ceasing to be relevant markets for Austro-German exports and depressing the EU growth rates. Five other countries (or four if France will be downgraded) will keep their AAA and grow economically, while the remaining seven countries will orbit more heavily around this nucleus. To put it bluntly: the EU will stay together like Bosnia-Herzegovina today.
The second outcome is that the Eurozone wil split and political Europe with it. There will be an Asterix-like Siegfried village, an enclave in a partitioned Europe, the BRIC being among the more credible candidates in taking slices. It will not be the Berlin Wall, everything will be done softly, but countries will lose sovereignty even if retaining their political systems under a Hong Kong rule.
5-7 Guarantees and Eurotreasury
Since one of the real causes of the crisis has also been the lack of budget, fiscal and economic convergence among the partner of the Euro, this group of measures tries to get out of the purely financial dimension.
The first two (collaterals and selling gold reserves) are stopgaps. In the first instance it means that the trust in debtor countries is so low that European loans are equivalent to a pawnshop. Practical for the creditor and disastrous for global confidence. The second case is a desperate measure: Qadhafi is trying to sell Libyan gold reserves still in his possession, but Portugal or Greece are not in these dire straits. Moreover massive sales of gold are likely to depress the price of this metal.
Setting up a body, pro tempore called European Treasury, to co-ordinate fiscal and budget policies is a sensible move and an inevitable one if one wants to act on some root causes of the crisis. It is not impossible that, under duress, European governments might agree on this measure, but past experience is generally very disappointing regarding the effective power these bodies have.
8-10 Playing with the Eurozone
Leaving, downsizing or disbanding the Eurozone seem all sensible propositions in view of the crisis that Europe is undergoing.
If five members are sea-sick and useless, why not throwing them over board? If the mast risks to crack, why not cutting the sails? If the ship has a huge leak, why not sinking it altogether? The three answers that mirror the respective proposals point all in the same direction and to the same logic: short-sightedness and lack in planning for the future.
Where will be growth and for whom will it be if the Eurozone loses one third of its partners? What will be the strategic impact of a smaller Eurozone? And what our individual and collective destiny if the Euro founders? If people are unable to provide convincing answers to these simple questions it means that these proposals are less good than they appear.
Who will really profit from all this? Not the Europeans, nor the governments, but speculators and foreigners, who do not give a fig for our interests yes, they will indeed.
11-12 This debt stinks
The last two ideas have in common the idea that the way the debt has been created and the methods used to pay back are deeply unjust and that the situation needs drastic measures. The most seductive is to follow the example of Argentina.
In the late ’Nineties Argentina was submerged by debts and, after having tried the usual disastrous IMF austerity measures, the country decided to default at the beginning of 2002, that is not to pay $93 billion. In the end 76% of the old bonds were re-negotiated into new ones for a nominal value that was 25-35% of the original one and with longer repayment terms, but until Buenos Aires did not start repaying these bonds in 2006, the country was shut out of international financial markets. Many bond holders (possessing 25% of the debt) did not accept these terms, but they were not considered relevant.
Is it a practical proposition for the group of countries actually under pressure? No. because they would damage also their strongest Euro partners, further eroding an already shaky European solidarity, and they could not in the end devalue their own currency. It would be a waste of time, money and effort.
The idea of classifying these debts as odious debt is more complex, because odious debts are those contracted against the interest of the country and its citizens, without their consent and without full knowledge by the debtors. In practice who lends money to a country without transparency and strengthening its debt bond is a loan shark and should be treated as such.
If the concept is applied indiscriminately or arbitrarily it will dent the reputation of countries and the confidence of the loaners, which is self defeating and less useful than directly nationalizing the holdings of these banks and brokers.
But a serious debt auditing in order to enforce political and financial transparency is useful for the indebted countries and for the best practices of lenders, in order to clean the market from unscrupulous operations, although it cannot be a stand alone measure. In the next post we shall see how to combine different approaches for a solution benefiting the European general interest.