by Luis de Sousa
Fri Mar 26th, 2010 at 08:59:56 AM EST
AP Photo/Bernd Kammerer
Yesterday, as the first agreement between Germany and the remainder of Eurozone on helping Greece became known, and as the Socialists announced a proposal for a financial mechanism to deal with such cases, the rating agency Fitch downgraded Portugal's sovereign debt. A coincidence, certainly.
Today the local media is waking us with claims that Germany is acting concertedly to depress the uro, fostering exports and local investor confidence. After all, when the trouble was with private banks there was no hesitation in putting on the table several times over the handful of thousand million euros Greece needs to refinance its budget.
Today it also emerged an article published by the Neuropeans magazine that puts it all into context with an interesting allegory: Let's transform the Greek tragedy into the first Eurozone epic!
frontpaged - Nomad
Here's the intro to the article:
Eurozone needs a Economic Governance: Let's transform the Greek tragedy into the first Eurozone epic.
A tragedy requires the heroes to be aware that the gods are playing with their destinies but without being able to prevent disasters of unraveling. An epic requires wars and fights, adversaries, if not dark enemies, to be violently defeated. What looks like a tragedy from a Greek point of view is more and more resembling more and more an epic seen from a Eurozone perspective because it represents one of the beginning of a global war of currencies, involving the Dollar, the Yuan, the Yen, ... and of course the Euro, the new comer in the game, and the most promising one which became in 10 years almost 35% of the world's reserve currencies. On the other hand, you find the Dollar fighting in a tragic attempt to preserve its dominant status and the British Pound holding its last fight for survival. In the middle, you have the Yuan, wondering how and when to establish its newly global status. All around you find scores of international medias serving mostly their Dollars-Pounds masters, hedge-funds and speculators of all sorts trying to make short term profits from every bit of chaos. Last but not least, at the very core of the epic, you have billions of small heroes, the citizens from Europe, America, China, ... trying to find out what will happen with their wealth, their economic sovereignty, their future.
If all that does not set the picture for an epic, then our era has lost the sense of grand historical upheavals.
Two things are certain though before getting into the details of the story :
. any epic needs heroes but very often they shape themselves to that status along the way when at first they look like anything but 'to be heroes', full of doubts and uncertainties ... no question that Eurozone leadership has lots of candidates of that kind;
. the very country whose epics have been the core exportation product for centuries is Iceland! That is undoubtedly a good sign from the Gods!
And some highlights of the main text:
First, these questions are typically the kind of issues which should be discussed within a Eurozone Economic Governance body, as proposed five years ago by Newropeans*, not when a crisis erupts, but rather on a regular basis; not in a non-Eurozone newspaper, but rather within specific Eurozone institutions.
it is absolutely ridiculous to imagine an exclusion of the Eurozone beyond pure psychological pressure's aims. A country faced with such a situation will see its currency and financial situation fall into pieces while it will generate a major political mess throughout the EU.
Meanwhile the global crisis is putting an end to what used to be the 'norm', such as Germany using its Eurozone partners as mere exports markets; or Eurozone leaders pretending that they still can act as if the Euro did not exist.
in the coming years the Eurozone needs to create a kind of 'Rapid Financial Deployment Force', such as a European Monetary Fund, dedicated to the sole Eurozone interests. One reason being that the Eurozone can no longer trust the IMF (in Washington's hands) to respect its own interests rather than those of the Dollar.
there is no doubt that the Greek case will be solved. Fifty billion Euros is little money compared to what the European banks have received last year.
PIIGS (five different ones) is an acronym that refers to the Atlantic (Portugal and Ireland) and Mediterranean (Italy, Greece and Spain) Eurozone states. These are states that didn't fare very well in the aftermath of the II World War, by not benefiting from the Marshall plan, by not sorting their internal political framework timely or both. These states pretty much missed the growth, development and social reform that took place in Europe during the 1950s and 1960s, up to the 1968 convulsion and the Nixon Shock. The symbolism of this acronym, reminiscent of Orwell's allegory "Animal Farm", is very ironic, in various ways.
PIIGS adopted an economic modus operandi based on lax budgetary execution, that was later corrected with currency depreciation. This avoided tax increases, kept money circulating and preserved employment (I remember 2 digit price inflation and salary increases still in the 1990s). It also avoided the sort of social cohesion central European states built up during that time.
Then one day they all joined a monetary union. The next day borders where opened to the same products the PIIGS where manufacturing. The day after that there was an Oil Shock. I like Orwell's allegory, but the one about the cicada and the ant perhaps applies better.
Finally PIIGS are coming to grips with the simple fact that the old ways do not apply any more. Now they do not export cheap goods and can't depreciate the currency at their own will, and it hurts. Let's face it, 2 digit budget deficits are no longer viable, discipline is in order. Obviously, discipline would be much easier with unemployment at 5%, instead of the present 10% and tightening now the budget too fast might be a treacherous path.
But the problem the Council is facing these days is another: how to repell the speculators that have been feeding on the PIIGS. In timely fashion, the anglo-american financial giants have been degrading debt ratings and using the press, pushing up the interest on sovereign bonds and notes every time one of the PIIGS needs to refinance itself or roll-over debt. The fact that any single state of the Eurozone is facing a better budgetary setting than either the UK or the US seems to be irrelevant for the time being.
From my perspective, at the root of this problem is a deficient European Construction, so far leaded by men and women that have shied away from the inevitable federative structure that is the only framework on with such a wide union can operate. Whereas the ECB was set mainly as a centralized structure, with a sort of federative consultative body (the state central banks and the Eurogroup), the Treasury remained a loose and undefined con-federative institution. Clearly, an European Treasury is amiss.
Certainly the question could be posed on the need of such a Treasury, given the minuscule dimension of the European budget. But the Treasury can work as a reference in times of crisis like these. When haunted by foreign hawks, like Portugal and Greece today, member states could recur to the European Treasury to emit debt on their behalf. This would have two immediate effects: first it would provide instant liquidity to the recurrent state and second it would scare the hawks away by showing the Eurozone's cohesion. Such an intervention would have, above all, a psychological effect. In the present day, an European Treasury wouldn't perhaps need to emit more than a thousand million euros on behalf of Greece to calm the speculation over this state's debt, opening the way for the 9 thousand million euros or so Greece has to emit itself.
There's obviously the danger of abuse of the European Treasury, with member states preferably recurring to this institution when issuing new debt. This Treasury should remain as a last resort intervenor, at least as long as the European budget remains this small. To ensure that, two basic rules can be proposed:
- All debt emitted by the European Treasury can only be bought and claimed by European citizens (or European institutions acting on their behalf);
- When receiving funds issued by the European Treasury, member states shall incur in a fixed interest premium (say 1%) over the marketed interest. This extra interest could either revert to bond holders, the European budget or both
The first rule aims at preventing the European Treasury from increasing sovereign foreign debt. The second rule tries to present a penalty to those recurring to the European Treasury, thus assuring that it would the exception rather than the rule.
An European Treasury could be run by a Treasury Commissioner, appointed together with the remainder of the Commission. And it should be respondent to state Treasuries, especially when acting beyond pre-established limits. In the future this could evolve to a better defined federative structure, if the powers of Commission evolve that way too.
There can be issues with the implementation of such institution, and there may be more clairvoyant ideas about its possible workings or even alternative institutions. But what it is certain is that, as they exist today, monetary institutions in the EU are not up to the job. May the Council be up to it.