The Euro: Symptom of a deep political crisis!


No one can doubt the seriousness of the economic and financial crisis about which the experts concur that it is still far from over.


The forceful measures taken by the Central Banks as of the summer 2007 followed by Governments in the fall of 2008 contributed significantly to avoiding the implosion of the global financial market. Stimulus programs combined with the unlimited provision of liquidity and low interest rates provided authorities with a short breathing space that they were expected to use in order to correct the weaknesses of the financial system.


The focal point of the reforms aimed at addressing the global character of financial markets and their high degree of interconnectivity which made useless any attempt to manage a crisis purely at national level. This realisation led to the mobilisation of the G20 in the fall of 2008 at the instigation of France and was evidenced by a clear declaration of intent mapping the main objectives: in addition to a unanimous appeal to shun any protectionist measures (a lesson learned from the 1930’s experience), the main themes that were to be the subject of further harmonisation and cooperation covered the regulation and supervision of financial markets, the abolition of tax havens and measures to improve risk control and the factors that contributed to their exacerbation (inter alia excessive compensation practices).


This unusual show of unanimity, born of the necessity to tackle a crisis of historic proportions, began – unfortunately – to unravel fairly quickly. At EU level this trend was evidenced by the deliberate initial choice to implement an “intergovernmental” approach to the management of the crisis by inviting each government to develop its own “stimulus package”. Such a choice was clearly in contradiction with the existence of the “Single Market” and of the “European Monetary Union” as well as with the discipline of the “Stability and Growth Pact” and the “Convergence Programs”. It was also the negation of the rhetorical appeals for coordinated economic governance at Eurozone level, whose necessity was widely recognised. Further collateral damage was inflicted by marginalising the action of the Commission whose role was relegated to that of a “Secretariat” overseeing the implementation of the European Council decisions.


This unfortunate trend found further confirmation in the de Larosière Report presented end February 2009 to the European authorities covering the regulatory/supervisory architecture of the Community financial sector. With the perhaps commendable aim of achieving a consensus, its recommendations were largely based on a concept of “cooperation” (indeed strengthened in relation to the existing Lamfalussy process) between the regulators and supervisors of the 27 Member States, despite the fact that its shortcomings had been convincingly demonstrated by the incapacity to prevent the crisis. The legislative proposals presented by the Commission are currently subject of intense debate opposing the European Council, who has adopted an even more restrictive stance concerning the delegation of powers, to the European Parliament whose four “Rapporteurs” have unanimously recommended the introduction of “supranational” enforceable mechanisms. Furthermore, one should note that the current proposals to not oblige Member States to adopt compatible regulatory/supervisory structures which will considerably weaken the efficiency of the proposed “cooperation”.


In parallel, points of discord are surfacing in the transatlantic dialogue despite the fact that the globalisation of financial markets makes imperative to agree on a structure that will foster compatible regulation and supervision. Indeed, the proposed structures and powers of the new entities charged with “systemic risk” evaluation are considerably different on either side of the ocean. It is also the case with regard to the competencies of the various Agencies charged with regulating and supervising various segments of the financial markets. The very productive dialogue that had been instituted between the Commission and the American Regulators risks to be thwarted once the three new European Market Authorities assume their responsibilities.


Other disagreements concern the regulation of hedge funds and, more fundamentally, the advisability of reinstating a separation between commercial and investment banking (Volker Rule). Resolving this matter is, however, a precondition to any global agreement on prudential standards framing banking activities (Basel II – Competition, etc.). It is also the case for coming to a consensus on crisis resolution, the financing of depositor guarantee schemes or the taxation of financial institutions.


Summing up the situation, as the Managing Director of the IMF has rightly pointed out, with the passage of time, the political will to promote global answers to the problems created by the crisis seems to be waning rapidly, both at global and EU level. It is urgent to wake up to the challenge if one wishes to avoid a new crisis.


Nowhere has this situation been more in evidence than in the Greek case. The distressing spectacle of indecision offered by European and Eurozone politicians has been the main factor in the – perfectly superfluous – questioning of the Euro’s solidity. This imbroglio, which has been gleefully exploited by euro sceptics and broadly reported by the media, has considerably increased uncertainty and undermined confidence that are supposed to be the key underpinnings of any currency. The announcement, following the recent European Summit that a “compromise” had been reached with regard to the respective roles of the EU and the IMF in assisting Greece – appropriately criticised by President Trichet – leads only to reinforcing the perception of a structural weakness of EMU.


If “speculation” has exploited this situation, it is the politicians and their reckless declarations, often aimed at their home public opinions, which are to be held mainly responsible. Instead of blasting operators who have used the “available” instruments such as CDS, Greek bonds etc. to implement their strategies, politicians should have focussed on informing citizens of the major role that the single currency played in mitigating the negative effects of the crisis. They should also have insisted on the very limited importance of the parity between the Euro and other currencies, in particular the USD, since some 90% of all intra-Eurozone transactions do not involve foreign exchange exposure and that inflation remains, at present, well under control.


Within the context of the Greek crisis, it is, of course, appropriate to condemn the unorthodox practices and the unacceptable dissimulations that occurred and to impose drastic measures to redress the situation. The sacrifices imposed on the Greek population will be painful and the EU should, by mobilising the resources of the Cohesion Funds, endeavour to alleviate the most severe consequences affecting the more vulnerable social classes.


That being said, it is also true that it is the other Members of EMU who have the greatest stake in assisting Greece because, sharing the same currency, they have much more to loose from an implosion of the Euro. The latter would be unavoidable if Greece were forced out of EMU as, quite naturally, speculation would focus on another candidate (Portugal, Ireland Spain?) and any attempt to regulate it would prove both impossible and counterproductive. The failure of a country subsequent to its exclusion from EMU would foster a new crisis because of the huge volume of government securities held by European banks. Unable to refinance themselves, Governments would be unable to save once again the financial sector provoking the dreaded world crisis.


There is, however, no good reason to spread the rumour of a vacillating Euro. Its current level is still 10% above the original exchange of € 1= USD 1.17 and, within a low inflation environment, a further weakening to a level of between USD 1 and 1.20 can only be favourable to an economic upturn be supporting both exports and employment. That is one of the advantages of the floating exchange rate mechanism, of which EMU will only be able to take full advantage by achieving further economic integration, the sine qua non precondition to create a level playing field with the other economic powerhouses.


Let us imagine - purely theoretically - that instead of excluding Greece, and in order to avoid initiating a domino effect, it is Germany that decides to leave EMU. Speculation would undoubtedly be attracted to the “new Mark” whose value would appreciate. As a result German exports would come under severe pressure so that, in order to protect its heavily export dependent economy, the new “Bundesbank” would be forced to accumulate Euros (just as China is forced to buy dollars). In doing so, it would be financing the “laxist” policies of its European partners! Germany would be all the more vulnerable that, contrary to China, its domestic economy is small when compared to the rest of the world so that its internal consumption could not be stimulated sufficiently to compensate for the fall in exports.


One can draw the conclusion from this purely hypothetical exercise that such a scenario would undoubtedly lead to the implosion of the EU itself and the loss of all the progress accomplished over the last 60 years including understanding and peace between European nations.


To conclude, it behoves the political class as a whole to assume its responsibilities and explain clearly the true dimensions of the challenges facing European citizens. The latter are perfectly capable to understand that there is no credible alternative to further European integration. Over time this means extending EMU to all Member States, further integration of economic, foreign and defence policies, as well as truly “federal” regulations and legislation in areas of common interest. This should not contradict the principle of “subsidiarity” and the management of regional and local interests in close proximity to the citizen.


To pretend that it is possible to eliminate globalisation - or that a compromise can be found that preserves the current status of “national sovereignties”- is a dangerous phantasm and totally unrealistic. It will also lead quickly to social unrest if a determined effort is not undertaken to reduce the inequalities between an ever smaller number of rich and growing masses of poor.


Europe, through its unparalleled level of culture and wealth, has the necessary resources to meet the challenges ahead even if the exit from the crisis will demand further sacrifices. It is incumbent on all politicians to promote the Euro as the very symbol of the Union’s success rather than to depict it as the tool of its disintegration.


18:06 Écrit par Paul N. Goldschmidt 13 Ave. Victoria 1000 Bruxelles dans Général | Lien permanent | Commentaires (0) |  Facebook |

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