The least one can say is that the EU Ministers meeting in Brussels yesterday (21 July 11) at last took decisions to avert immediate crisis as the Vox EU letter from 13 economists asked.[1] Although it is early days yet, the package seems to have been accepted by the markets. The aim of the exercise was only in part to bail out Greece—chiefly it was meant to halt an attack on Italy and Spain. And it appears to have worked since yields on 10-year bonds in both countries have fallen and the euro has strengthened against the dollar. [2]
As for the decisions, let’s look at them in turn. The most striking, of course, was the approval of the €109bn Greek bailout subject to the condition that the private banks ‘share the pain’. The Germans have insisted—having brushed aside the objections of the ECB and a variety of (mainly French) counter-proposals—that private banks are to be offered a ‘voluntary’ choice of bond exchanges, buybacks and rollovers. Without going into precise details, because banks don’t generally value their bond assets by ‘marking to market’, this means taking a haircut of 10-15%. The catch is that Greek banks hold the bulk of the bonds—far more than France and Germany combined—so their banks will suffer most. [3]
The gamble is that even if the credit rating agencies mark down Greek bonds to selective default grade, either the ECB will ‘make an exception’ and continue accepting these bonds as collateral, or else the agencies will immediately rescind their markdown as soon as Greek debt in re-profiled. The meeting did add that there would be no haircuts on any non-Greek bond. Mrs Merkel and her team wanted a warning shot fired across the private banks’ bows about ‘moral hazard’, but the conditions are such that Greece’s selective default seems unlikely to provoke another Lehman moment. [4]
Will Greece now prosper? Cutting the interest rate on the EU/IMF package to 3.5% and extending the loan, as well as many of the short-maturing term bonds, to 15 years certainly makes the debt more manageable, as does the promise of more structural funds from the budget and the EIB to help kick-start growth. But claiming that this constitutes a ‘Marshall Plan’ is decidedly over-the-top, especially since the country is currently plunged into economic contraction worse than it experienced after the 2008 shock. In the absence of nominal exchange rate adjustment, Greece must continue to apply the wage-cutting ‘internal devaluation’ medicine, a cure which could still kill the patient. Moreover, if the country’s debt-to-GDP ratio is to fall in future, it must grow fast enough to generate a primary budget surplus.
Turning to the wider picture, while the strengthening of the European Financial Stability Facility (EFSF) is to be welcomed—its size will be doubled to €800bn, it will be able to lend pre-emptively anywhere in the Euro Area (EA) and some have even suggested that it will be a European mini-IMF—questions still remain. The most obvious question concerns size. The ESFS needs far more capital to be truly credible, a total of €1.5-2.0tn.[5] It will not get all this from the member-states, implying that sooner or later it will have to borrow on international markets; ie, it will need to issue some form of European euro-bond.
But the most worrying feature of the package is its conditionality. The centre-right German, Dutch and other governments are revising the zombified Stability and Growth Pact (SGP) by passing legislation forcing all other EA countries to return to a 3% general budget ceiling by 2013. As Paul Krugman promptly tweeted—comparing the EU to the US in 1937—budgetary austerity is the last thing Europe needs at the moment. [6] To add to the pain, the ECB has raised its key interest rate again. Business confidence in the EA has ebbed, with the eurozone PMI falling to its lowest level since 2009. Like Britain, the EA needs reflation, growth and jobs—not prolonged fiscal austerity.
In sum, there is a short term gain—assuming the ‘haircut’ strategy works, a major euro crisis has been averted and a strengthened EFSF (to be made permanent and rechristened the European Stability Mechanism after 2013) is emerging, an embryonic institution strengthening EA economic governance. But if it is to withstand bad weather in countries such as Spain and Italy, it will need far more capital. Europe is still without a central bank that can trade genuinely European bonds and engage in Open Market Operations; it is without a Treasury or a long-term macro vision of how to overcome its trade imbalances.[7] In the medium-to-long term, bigger decisions need to be made to avoid even more serious pain.
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[1] See http://www.voxeu.org/index.php?q=node/6778
[2] See http://online.wsj.com/article/BT-CO-20110713-705779.html
[3] See http://www.cnbc.com/id/43850798
[4] See http://bit.ly/ntPCyX
[5] The Dutch Central Bank says at least €1.5tn will be needed; see In Traynor, The Guardian 22 Jul 2011; http://bit.ly/qbfvrT
[6] See http://krugman.blogs.nytimes.com/2011/07/21/1937-1937-1937/
[7] See Irvin and Izurieta, ‘Fundamental flaws in the European project’ Economic and Political Weekly, http://epw.in/uploads/articles/16386.pdf
#1 by Lawrence on July 22, 2011 - 6:22 pm
Guess this says it all.
http://euobserver.com/9/32653
Greece to face ‘restricted default’ as bailout details emerge
http://euobserver.com/9/32651
European Central Bank chief does not exclude Greek default
http://uk.news.yahoo.com/ireland-flags-extension-bailout-beyond-2013-123957945.html
Ireland flags extension of bailout beyond 2013
#2 by Joe on July 22, 2011 - 9:41 pm
While the uncertainty comes to an end-point for Greece, there are still barriers in the way of prosperity. There is still an awful lot of debt. There is the low growth rate to deal with, and the EXTRA low growth rate that has come from strikes and other disruptions. There is a level of unemployment that doesn’t exactly do much for the inland revenue coffers, and the like.
One asset is qute plainly that as a “distressed asset,” investment will be sure to flow in. The nation’s properties and businesses which have been moved to the discount aisle now look a little less like they will explode once they’re in your hands: to which I mean the ones that there have been concidered secular such as shipping.
Hotels, resorts, and anything tourism related will be thought of as good investments, including aviation related businesses, and so forth.
Otherwise they are going to be ‘correcting’ their way to where they probably should be if they are smart: working theyr way DOWN to 100%-of-GDP-debt-level, and resembling the economy of Hungary or Romania, and rather less like Spain – in line with what they do economically, and absent the magic potion of anually sprinkling borrowed money on their economy rivalling their GDP.
http://www.google.com/publicdata/explore?ds=d5bncppjof8f9_&ctype=l&strail=false&nselm=h&met_y=ny_gdp_pcap_cd&scale_y=lin&ind_y=false&rdim=country&idim=country:GRC:ROM:HUN:ESP&tstart=-298065600000&tend=1279771200000&hl=en&dl=en&iconSize=0.5&icfg&uniSize=0.035
The terror this kind of thing causes worldwide is not quite over: the same steady stream of threats that we’ve been hearing for the past year over Greece are still to be heard from Italy, Spain, and perhaps even Belgium.
But this is what’s sick about the whole thing. The private sector is trying to accomplish something. Governments have borrowed these economies into oblivion, yet people are mad at the banks. No amount of solicce about that government borrowing creating private sector largesse is even close to proving to be a plausble salve. So all we have now is another unproductive burden, something that monetary union removed by eliminating the friction in transactions.
The worst thing now would be for large numbers of people to take up a “Sad Sack” attitude and believe that “you just can’t get a break.”
#3 by Madis on July 23, 2011 - 8:52 am
“The ESFS needs far more capital to be truly credible, a total of €1.5-2.0tn.[5] It will not get all this from the member-states, implying that sooner or later it will have to borrow on international markets; ie, it will need to issue some form of European euro-bond.”
Why do you abbreviate the financial stability fund as ESFS while EFSF is commonplace?
EFSF does not get any cash from the member states, just guarantees. It has issued a couple of bonds already, it keeps some 20% of the proceeds as cash and lends out the rest to those in need.
The fund in principle could be increased to X trillion, but already now member states guarantees amount to more than 10% of their GDP – and this adds to their debt/GDP ratio, by Eurostat’s methdology. Better hope that GIP countries will behave well and service those EFSF loans.
#4 by Betterworld on July 25, 2011 - 1:16 pm
Wonderful analysis George, thanks you.
I think the Euroland game plan is to try to spin things out until 2013 when real financial measures can be taken under the new mechanism promised, but this is a long shot. Political checks and balances have yet to be agreed and these are not easy, given the systemic contamination of a mindless neoliberal ideology in Germany, France, Netherlands and some others. The vision is missing. And the capacity for vision destroyed by an anti-vision ideology. I almost found my self repeating Fujimori’s “end of history” quote. I hope I am as wrong as he was.
I see major advances being made in the post neo-liberal wasteland that once was Latin America. Perhaps all the latter day EU colonies (lovingly referred to as PIIGS) should cut to the chase: leave the EU and join ALBA!
ALBA has the benefits of being respectful of national sovereignty and is a resource rich community of nations in an era of looming peak resource events. The transatlantic relationship could then be a source of nurture, not disease.
We are hitched to a sinking anchor with a rope made of neoliberal ideology. If we don’t cut the rope we’ll run out of air.
#5 by energy consulting on July 26, 2011 - 4:17 pm
Although I’m pleased to hear that small steps are being taken it does seem that the whole of Europe is refusing to learn from it’s mistakes. It seems like there is a financial crisis at least every few decades. When are the powers that be going to make significant changes and start looking at the way capitalism works and how economies can be adjusted to avoid the same thing occurring in another decade?
#6 by Lawrence on July 27, 2011 - 10:37 pm
There were also Spanish immigrants who moved throughout South America as there were Portuguese that did the same.
As for the euro have a look at today’s headlines on the international media.
Greece has received another downgrading.
Cyprus and Italy have joined the list.
Scheubel said Greece bailout was a one-off, so no more saving the euro bankrupt countries and the euro itself.
If you want I can put the links here to make it easier for you.
As I always say, the eu has been cursed for depriving the people of the member countries of their Independence and Freedom and for inundating them with immigrants from other continents especially illegal immigrants and it will be consigned to the dustbin of history to where it rightly belongs with its euro.
#7 by Susanna on July 28, 2011 - 7:19 pm
Thank you prof. Irving for the brilliant analisys!
It seems to me more and more clear that the lack of EU economic governance (or Euro Area governance) in political terms cannot last for long. It was still clear in 1999 when the Euro was launched and even in 1989 when the rules about it were written. All the scholars agreed then that there wasn’t any remedy for possible asymmetrical shocks occurring. It was -I suppose- the idea of the “fathers” of the Euro that the picture would have been completed when needed. I.e. NOW.
Being a lawyer I am absolutely persuaded that the stability pact was written just to prevent and not to sanction, a little trick.
Who would ask to a State in serious crisis to pay a penalty? who would ask to that government to face the consequences of such a fine in front of its public opinion? And the consequences for the EU as a whole? where are the impartial judges to decide to apply it or not? That’s why it has been reformed so many times, each time that it was expected to apply and it didn’t. The idea is to persuade ourselves that there is something to be ameliorated and that next time……
That’s why I don’t believe anymore to such revisions.
The EMS is an interesting step forward, but there are others clearly needed: a bold reform of the budget to increase it and a proper Treasury. Of course, much has to be discussed about how to do it, but if not now, when???
#8 by George Irvin on July 30, 2011 - 1:02 pm
I’ve been asked to make it clear that the ‘comments’ section is not to be used for personal messages to other people, nor for people advertising their products etc.
#9 by Pedro on July 30, 2011 - 5:39 pm
Country of deadbeats…..
http://www.telegraph.co.uk/finance/economics/8590527/UK-deficit-hits-record-despite-1.1bn-axe-on-borrowing.html
#10 by Wim Roffel on August 1, 2011 - 12:44 pm
Susanna, have you either studied the economic differences between Northern and Southern Italy or between Northern and Southern Yugoslavia? Being in one economic area is not a solution for all problems and often has exactly the opposite effect: perpetuating differences.
I am an opponent of more “Euro area governance” as I believe that it will be tightrope that will strangle the European economies yet more.
#11 by Susanna on August 3, 2011 - 9:48 am
I know Wim, my country -Italy -is not a good example. But I still think that being part of the euro area have saved us in many ways in the last ten years, so… now… I thnk the euro area itself should be saved. I don’t believe to the markets which self regulate themselves (and I think nobody should, after what happened with the global financial crisis), so the only solution is governing them… and to find the better governance formula is the challenge.
#12 by Joe on August 5, 2011 - 2:47 pm
I think all of this is eclipsed by the simple fact that we’re looking at a bank solvency crisis, not a bank liquidity crisis. Banks aren’t sufficiently capitalized, and that’s going to add to the scale of the soverign debt load. Some part of the losses that may take place in the banks will have to be socialized.
#13 by EUobserver Blogs Admin on August 6, 2011 - 2:10 am
We’ve deleted a few comments. Please stay on topic. And there is no point in writing the same comments over and over again. Thanks.
#14 by Marcel on August 6, 2011 - 12:44 pm
The Euro is an utter disaster for my country the Netherlands, why on earth should we contribute to help paying off debts of Spain, Italy, Greece etc… when we would be far better off with our own currency, or maybe one combined with Germany and one or two other countries who are not trying to steal our money like Greece and Italy.
#15 by Pierre O on August 8, 2011 - 12:04 pm
Over regulation is hurting everything and everyone both in the EU and the US. This lack of freedom and more centralized control is why free-market money is leaving. You cannot legislate growth. You have to get out of it’s way. Greece will never grow it’s way out until there is true free-market incentive. Let the Greek entrepreneurs do in their land what they have done all around the world! Your own blog administration demonstrates exactly the problem. You intervened to cut (regulate) discussion you did not deem appropriate. This type of elitist thinking is killing the EU zone and the US. The independents (CH) and the developing world nations (like China) are leaving us behind. Hands off Brussels and Washington!
#16 by Anonymous on August 9, 2011 - 3:57 am
@ #15
Greek entrepreneurs?! That’s an oxymoron if I’ve ever seen one
#17 by traverten eskitme on August 15, 2011 - 4:33 pm
and the developing world nations (like China) are leaving us behind. Hands off Brussels and Washington!
#18 by Jan on August 18, 2011 - 5:06 pm
George: It’s a little for comments now but I was wondering from where did you get the idea that the size of the EFSF was being doubled? As far as I know the 21 July summit left its size untouched (at €440bn), much to the disappoinment of the markets. Would be grateful for clarification. Thanks!
#19 by kabin on September 9, 2011 - 11:42 am
scillant sans cesse entre ironie et noirceur, un regard consterné, lucide et compatissant sur notre société, partagée entre jeunes gens perdus et adultes dévoyés.
#20 by su deposu on September 16, 2011 - 10:40 am
and the developing world nations (like China) are leaving us behind. Hands off Brussels and Washington!
#21 by Ofis Mobilyası on October 6, 2011 - 11:18 am
investment truly pay for the credit problem will not be a good choice, but must be
#22 by ofis koltukları on October 26, 2011 - 3:25 pm
pourraient s’accorder dans un juste accord ? Une main sans un oeil averti est souvent impuissante, mais un oeil sans une main experte l’est tout autant.
#23 by Penny oriental rugs on December 24, 2011 - 12:29 am
Someday the euro debt crisis that started in Greece and spread to engulf Europe will be over.
Politicians in the nations that use the euro will figure out the right mix of carrot and stick to get Greece, Portugal, Spain and other member states to adhere to European Monetary Union limits on debt. They’ll figure out how to balance national pride with the clear need for more-integrated fiscal systems among the members. They’ll gradually earn back the trust of financial markets, and someday we’ll all be back talking about the euro as a rival to the U.S. dollar as a global reserve currency.
#24 by sell muscle cars on January 11, 2012 - 10:15 pm
The euro fell Wednesday, a day ahead of a closely watched meeting of the European Central Bank and as comments by an official with Fitch Ratings added to worries that Europe’s debt crisis will spread.
The drop in the euro came amid other troubling signs that the region may already be in recession and that the debt crisis could deepen.
#25 by Ios On Android Phone on January 27, 2012 - 7:28 am
Please stay on topic. And there is no point in writing the same comments over and over again. Thanks.
#26 by John Jackson on February 4, 2012 - 1:38 pm
Although some of the recent news from the euro zone has suggested financial conditions may have gotten a little better, the longer-term underlying fundamentals remain bearish for the currency of the euro zone. While there is no shortage of economic and political problems in the U.S., it appears that the strains on the financial system in the euro area are much more severe by comparison.
#27 by used cars Brisbane on February 21, 2012 - 10:23 pm
It’s coming a new crysis like the big depression. This is happening because the wars. These countries (the rich ones) are spending too many on wars and these are the consecuencies.