A couple of days ago, Die Zeit kindly invited me to write an article expounding the virtues of the Modest Proposal for Overcoming the Euro Crisis in view of the Der Spiegel article that raised the alarm regarding Greece’scurrent predicament. In effect, Die Zeit gave me a forum from which to argue that this is a eurozone-wide crisis demanding a eurozone-wide remedy. Since the german original is not accessible to all, here is an English version of that article:
Last Friday, Der Spiegel published a story that “Athens is considering withdrawing from the euro zone” and, moreover, that a meeting was being held in Luxemburg on that afternoon to discuss the matter. After fast and furious denials, red-faced officials soon confessed that a high level meeting was indeed taking place in Luxemburg, albeit with an agenda that did not contain an impending Greek exit from the eurozone. As for the Greek government itself, it did what it does reliably in the face of an inconvenient story: it blamed it on speculators and their journalist friends.
Der Spiegel is, of course, no instrument of speculators and it is rather disingenuous of the Greek government to imply otherwise. Having said that, it is also untrue that the Greek government considered withdrawing from the euro, despite the country’s massive problems. So, the pressing question is: Why did Der Spiegel choose to suggest that a euro exit by Greece was on Mr Papandreou’s (the Greek PM’s) cards, even though its journalists knew full well that it was most definitely not?
The only answer that is consistent with Der Spiegel‘s calibre, political connections and intelligence is that the good magazine, in consultation with certain circles within the German government (in particular the Finance Ministry), was trying to send a message primarily to the German Chancellor but also to the Greek Prime Minister. What message? That it is time to begin the debate which Europe has been avoiding for more than a year. A debate about the need to stop living in the collective illusion that the eurozone’s present course is sustainable.
If this were, indeed, Der Spiegel‘s intention, it succeeded, at least in part. For a couple of hours on Friday afternoon, the mini-panic the Spiegel article spread throughout Europe concentrated everyone’s minds on the terrible prospect of a euro break-up and its hideous consequences for all. Of course old habits die hard. After the Friday Luxemburg meeting, finance ministers came out making, yet again, noises about new loans for Greece, with or without ‘collateral’, of debt rescheduling etc. Put simply, the same old ‘remedies’, that have proven worse than the disease, keep returning. However, and this is my hope, last Friday’s mini-panic may well prove the harbinger of a new path for Europe.
Which new path? First, Europe needs to grasp the simple truth that the triple crisis it faces (a debt crisis, a banking sector crisis and a crisis of under-investment) cannot be solved by forcing German taxpayers to guarantee relatively high interest loans that are to be given to insolvent member-states. These loans are simply wasted economic energy. To get these loans Greece et al are forced to introduce savage austerity measures that fuel domestic recession, the result being lower national income, lower aggregate taxes and, inevitably, a higher debt-to-GDP ratio. And what do the recipient governments do with these loans? They use them to repay past debts to (mostly) European banks which, immediately, hoard most of that money (instead of lending it to business) as a result of their own catastrophic financial health (courtesy of the junk derivatives and bonds on their books). In short, the German taxpayers’ money and guarantees end up in a black hole, fuelling recession in the periphery and discontent in Germany.
Is there an alternative? Absolutely! Consider the following three-step policy that attacks all manifestations of the crisis head on:
1. Use the funds raised by the European Financial Stability Mechanism (EFSF) to recapitalise the eurozone’s (almost insolvent) banks in exchange for shares in these banks. Once the banks are cleansed, they will no longer need to rely on massive liquidity injections from the ECB (and can even be asked to take a selective haircut on bonds from the periphery). The EFSF then sells the shares and recoups its funds, thus costing the German taxpayer nothing (much like the TARP scheme in the USA).
2. A conversion loan is organised by the ECB for the part of the debts of member-states which does not exceed the EU’s Maastricht limits (60% of GDP). In brief, the ECB takes on its books forthwith a tranche of the sovereign debt (of all member states that request it) equal in face value up to (the Maastricht-compliant) 60% of GDP and finances this by issuing eurobonds that are its own liability. Naturally, the member-states continue to service their debts (to the ECB now) but at the lower rates (and with the longer maturity) secured by the eurobond issue.
3. Empower the European Investment Bank (EIB) to fund a large scale investment program by which permanently to counter the forces of recession in peripheries that keep dragging the rest of the currency union (including parts of German society) toward stagnation. How can this happen? By allowing for the 50% of project funding (which now the bankrupt member-states must raise!) to come from the ECB’s net eurobond issues.
Note the great benefits of such a policy mix:
- German taxpayers do not guarantee/provide any loans to Greece, Ireland etc.
- The aggregate mountain of EU debt and banking losses shrinks (a development that will calm the markets)
- No across-the-board haircut on existing debt is involved (thus averting a crisis of confidence and losses in pension funds etc.)
- The banking sector is revitalised
- The EU’s two great institutions (the ECB and the EIB) combine forces to bypass ineffective states (like the Greek one) in spearheading Pan-European investment
- No new institutions (and, therefore, no major Treaty changes) are necessary
- With the debt-banking crisis over, and investment projects run at the EU level, it will be much easier to introduce balanced budget rules for member-states, in accordance to Germany’s wishes.
Naturally, to get our leaders to agree on such a radical policy mix requires a radical Gestalt Shift throughout our continent. It is our duty to effect it. The Spiegel-induced mini-panic of last Friday might prove a mini-godsend if it helps steer us in that direction.
