by Wolfgang Münchau
.
.
The European rescue package has changed the odds about the future of the eurozone in two ways. It has reduced the probability of a collapse within the next three years – and increased the odds within the next 10 years.
The eurozone came extremely close to a breakdown 10 days ago. The Spanish newspaper El Pais reported a claim by José Luis Zapatero, the Spanish prime minister, that Nicolas Sarkozy “beat his fist on the table and threatened to withdraw from the euro” unless Berlin accepted a deal. Whether this story is true or not, the deal is unquestionably the result of a successful French ambush.
The more important issue, however, is whether the eurozone has become more sustainable as a result. The answer to that question depends on your diagnosis of the problem. If you believe, as the French do, that financial speculators are to blame, then the new €440bn special purpose vehicle might just do the trick. If you believe, as the Germans do, that the deep-rooted problem was fiscal profligacy, a stricter stability and growth pact would be the logical answer.
While the French and Germans profoundly disagree with each other, they are both wrong. The eurozone was never under speculative attack at any time. What happened was that investors, European pension funds among them, lost confidence in the system. And while fiscal profligacy was the root cause of the problems in Greece, it is not the root cause of the problems in Portugal and Spain. That would be a combination of a defunct labour market and massive indebtedness of the private sector.
But instead of solving those structural problems, the two countries last week responded with a fiscal tightening. What makes the economic problem in the Iberian peninsula so difficult is the simultaneous need to reduce debt and improve competitiveness. A reader wrote from Madrid last week that, in his estimation, the price level in his city was about 30 to 40 per cent higher than in Germany – as a result of which he orders all his durable goods from abroad. It is not surprising therefore that we are starting to see core price deflation as Spain cannot maintain a large price differential with Germany forever. If you add fiscal retrenchment into this toxic debt-deflation mix, the result is bound to be a self-sustaining depression, especially in the absence of structural reforms.
So when the European Union’s programme of credit guarantees ends in three years, the same combination of factors that led to the most recent crisis will still be present. The economic situation in Spain and Portugal will have deteriorated. And even if the Greek austerity programme works like clockwork, the country will still probably have to restructure its debt eventually.
What is completely missing in Brussels – and even more so in Berlin – is an understanding of the urgency of the situation. None of the governance reform proposals that are currently discussed even attempt to answer the questions of how Spain is going to get out of this hole, and how the competitiveness gap between the north and the south of the eurozone is going to be closed.
That also goes for last week’s governance reform proposal by the European Commission. It contained some good ideas. To my taste, it placed too much emphasis on fiscal policy and not enough on growth. The Commission’s latest growth initiative, the Agenda 2020, is certainly not going to solve any of the short-term problems. What the eurozone needs is an increase in domestic consumption in the north, particularly in Germany, and labour and product market reforms in the south, most importantly in Spain. All of this needs to be done right now, so that it can be implemented and already be having an effect when the EU’s support programme ends in 2013. At present there is no recognition, let alone a consensus, that any of this is necessary. On the contrary, Germany continues to block any initiatives to suppress its massive current account surplus, and Mr Zapatero has chosen the austerity programme, so that he can avoid the electorally more risky labour market reforms.
While the Commission’s proposal avoids the question of short-to-medium-term economic adjustment, it has some sensible things to say about effective governance in a monetary union. It recognises that you have to go beyond fiscal co-ordination and incorporate structural policies as well. It will be interesting to see how much of that part will survive the EU’s legislative mill. I would expect that Angela Merkel, the German chancellor, will push through the bulk of her agenda. The most likely outcome will be a much tougher stability pact.
By the way, the German media reported last week that Ms Merkel had also secured sufficient support for Axel Weber to succeed Jean-Claude Trichet, in October 2011, as president of the European Central Bank.
When I read the details of the rescue package, I thought it was ironic that a special purpose vehicle had been chosen to save the eurozone, given our most recent experience with those toxic structures. Come to think of it, perhaps not. They are the perfect instruments if a lack of clarity and transparency is the ultimate purpose. As the fog lifts we will notice that, despite the shiny new umbrella, not much will have changed.
No comments:
Post a Comment