Chronicle of a predictable crisis.


Recent market events, and in particular those surrounding the Greek crisis, should alert Authorities to the urgency of making courageous decisions if a fallback into the financial crisis is to be avoided. Indeed, its likelihood is increasing: in the event, it will not be the repetition of the initial scenario, resulting from the bursting of the “subprime” bubble, but rather the consequence of a partial transfer of the excessive private and banking indebtedness to the public sector.


Relatively little progress has been made towards re-establishing an appropriate sustainable equilibrium between asset values and indebtedness supporting them or public expenditure and tax revenues. It is therefore perfectly clear that these efforts and the accompanying sacrifices they imply lie ahead rather than behind us.


Following the effective measures implemented by the Authorities to avoid the implosion of the financial system in the autumn of 2008, attention has been mainly focussed on avoiding a “repetition” of the errors that led to the crisis, by the designing of an in depth reform of the world financial architecture. I have recently detailed the derailing of these efforts (The Euro: Symptom of a deep political crisis 4/04/2010) insisting on a wakeup call, that recent market action more than justifies.


Without slowing down the efforts already undertaken, the immediate priority should however be directed at preventing a collapse of investor confidence in the capacity of governments to manage public finances. The situation that is unfolding appears far more serious than two years ago because, to counter the first phase of the financial crisis, the authorities did not hesitate to mobilise all the resources at their disposal: unlimited provision of liquidity to the banking system and greater refinancing flexibility by Central Banks as well as direct support to individual institutions (equity injections, guarantees etc.) and implementation of “stimulus programs” financed through public indebtedness. Having burnt – quite appropriately – these boats, severely limiting their capacity to intervene, authorities find themselves facing a very precarious situation in which any sign of indecision or disagreement is immediately translated into speculative market movements.


I have, for now nearly a year, drawn the attention on the inadequacy of the proposals currently under consideration aimed at identifying and managing “systemic risks” because they fail to take into account the precisely systemic aspect of public finances and therefore of the risk that the States themselves represent for the financial system. As is demonstrated by the Greek case, the increased premium paid by the Government to finance itself aggravates the deficit even further: a snowball effect could rapidly surface where a higher risk premium is considered as a signal putting the solvency of the borrower into question as well as – indirectly – the solidity of the Euro. Despite the unequivocal statements of ECB President Trichet reaffirming his absolute confidence in the efficacy of the measures laboriously negotiated by the 27 EU Member States, he finds himself somewhat isolated, failing to receive the unflinching political support without which markets will continue to test repeatedly the political will of Governments.


This is all the more regrettable that the option of a default by Greece should be excluded for basic common sense reasons: indeed, the prime victims would be all EMU Member States leading rapidly to a situation that would escape the control of authorities. On the one hand a default would put into jeopardy the fragile consolidation of European banking balance sheets which carry over €200 billion Greek paper and whose refinancing by the ECB would have become impossible; on the other hand, the demonstration that a default by an EMU Member was a possibility would encourage speculation to turn towards other targets whose state of public finances is quasi as preoccupying and whose European banking exposure totals a multiple of that concerning Greece.


In his recent fascinating book “A la recherche du temps vécu”, Marc Eyskens qualifies the financial crisis as “embryo of a new international community” (page 310 ad following). He recalls that it is not appropriate “to give the word crisis an excessively catastrophic connotation, its Greek (sic!) origin describing more accurately a moment of reflection, of inflexion, a reversal, a change of course for better or for worse.” This description is particularly fitting for the current situation in which he underlines the “gaping asymmetry that has appeared between the “globalisation” of the world economy and the “localisation” of the policies pursued by Nation States.”


It is high time to fully assume and master the management of the crisis rather than to endure and react to it. This involves reassessing the mandate of the ECB, because, benefitting from a still largely intact prestige, it is only right to endow it with the necessary tools to oversee efficiently the crisis “exit strategy”. It is incumbent on all actors to avoid that institutional rigidities lead to a damageable head to head confrontation between the ECB, restricted to fulfilling its “price stability” mandate, and EMU Governments who, in order to promote economic recovery, avoid taking necessary budgetary measures that could compromise it.


A new financial crisis would have economic and social consequences of at least similar – if not greater – importance than the severe depression of the 1930’s. This option being therefore discarded, one must seriously address remedying the structural imbalances that pervade the globalised world: this implies tolerating a “controlled measure of inflation” so as to reduce significantly over time the burden of accumulated indebtedness. Furthermore, it is imperative to extend EMU to all Member States and implement a mandatory concerted economic framework. Under such conditions, the “exchange rate” could become once again a useful tool to mitigate the effects of inflation, keeping in mind the necessity of moderation in its use to avoid initiating a worldwide destructive protectionist climate.


These urgent decisions should be accompanied by the immediate adaptation and reactivation of the old “balance of payments facility” for the benefit of EMU Members. Hence, the EU, now endowed with legal personality, could act as intermediary to raise funds in the market. To avoid any discussion on the vexed question of “subsidising” unworthy borrowers, they could be requested to pay into the Community budget a premium over the actual borrowing cost equal to the average spread paid by EMU Members over the Bund, weighted according to their respective EU budgetary contributions. Reactivating rapidly this mechanism would contribute significantly to the elimination of uncertainties concerning the joint and several commitments of Member States to support troubled EU participants.


Taking advantage of its credibility, the Governing Council of the ECB should, instead of restricting itself deliberately to the strict implementation of its existing mandate, take the initiative to make proposals to the European Council, amending its mandate so as to manage effectively, in partnership with EU Governments, the necessary crisis

exit strategies.


Showing leadership in implementing the fundamental reforms of the EU that the situation requires should also greatly facilitate the acceptance by individual citizens of the necessary sacrifices that each country will demand by a combination of higher and fairer taxes, lower social entitlements as well as such changes in lifestyle that the preservation of the environment and the ageing population will require.


The EU must now show unfailing political will because, once the “infernal machine”

gets underway, it will be nigh impossible to stop it. Such a scenario would most

likely lead to the unravelling of EMU, if not of the EU itself, the social and economic

cost of which is far too high to be contemplated. At such a time, political appointees

will be called to account to explain to their electors their incapacity to have

anticipated a crisis, the premises of which have been, this time around, largely visible

and identifiable.

14:35 Écrit par Paul N. Goldschmidt 13 Ave. Victoria 1000 Bruxelles dans Général | Lien permanent | Commentaires (0) |  Facebook |

Les commentaires sont fermés.