Euro

The Franco-German contribution ahead of today's Brussels meeting contains little detail

When eurozone leaders decided last year it was time for another look at overhauling their common currency, the main driver was Mario Draghi, the European Central Bank chief who has been one of the main figures behind the push to make the eurozone a more fully integrated and centralised union.

But in the months since a Draghi-backed decision for the eurozone’s four presidents – the heads of the European Commission, European Council, eurogroup and ECB – to present another blueprint on the way forward at June’s EU summit, the appetite among political leaders for a step change, always lukewarm, has cooled even more.

If documents sent around to national capitals in recent days ahead of Tuesday’s Brussels meeting of EU “sherpas” – the top EU advisers to all 28 prime ministers – are any indication, the report being pulled together may propose little more than a bit of euro housekeeping in the near term. Although more ambitious plans could be included, the leaked documents show they will be relegated to the medium and long term – a tried and true EU tradition that is normally a recipe for bureaucratic burial.

Among the documents obtained by the Brussels Blog are a three-page summary of what the new report will look like (posted here) as well as a Franco-German contribution (the French version is here) and that of the Italian government (conveniently in English, here).

Although the Italians emerge as the most ambitious reformers of the lot, the “note for discussion by sherpas” makes pretty clear that the measures being contemplated for immediate action are the leftovers from recent reform efforts – streamlining and clarifying the EU’s crisis-era budget rules, for instance, and adding a bit more financial heft to the EU’s bank bailout fund. Read more

Ahead of this week’s gathering of European finance ministers in Brussels to hash out new bail-out systems for the eurozone, two magazines have weighed in with their views of what needs to come next to rescue the single currency – and both suggest going further than ministers have been willing to thus far.

On Sunday, the New York Times Magazine published a highly readable summary of the crisis by Nobel Prize-winning economist Paul Krugman entitled “Can Europe be Saved?” in which he appears to back the idea of a Europe-wide bond.

And the new issue of the Economist advocates a different and far more pessimistic route: a restructuring of Greek debt, followed potentially by similar moves in Ireland and Portugal. Read more

The most significant EU-related development over the holidays was Estonia’s official entry into the eurozone on New Year’s Day, an event that is worth revisiting as the single currency prepares for what is likely to be another year of turmoil.

As Fredrik Erixon, director of the Brussels-based European Centre for International Political Economy, notes in a new “Obituary for the Estonian kroon”, it wasn’t too long ago that the Estonian government was being advised to drop its peg to the euro and let its currency float in order to save its economy from the ravages of the European debt crisis.

But Tallinn hung tough, and as we noted in an article last month, is now poised for gross domestic product growth that is the pride of the EU. According to forecasts by Eurostat, its 4.4 per cent 2011 real GDP growth would make it the best performer in the eurozone.

When I talked to Estonian President Toomas Hendrik Ilves last month, he recalled with hard-to-contain smugness the amount of pressure the country resisted to devalue during the early days of the euro crisis. “All three Baltic economies were in serious trouble, and all kinds of people said devalue, devalue, devalue,” he said. Read more

The euro has fallen by almost 20 per cent against the dollar since last November, and the general view in Europe is that this is good news – indeed, one of the few pieces of good economic news to have come Europe’s way recently.  The argument goes as follows: euro weakness = more European exports = higher European economic growth.

Unfortunately, the real world is not as simple as that.  Inside the 16-nation eurozone, not every country benefits equally from the euro’s decline on foreign exchange markets.  As Carsten Brzeski of ING bank explains, what matters is not so much bilateral exchange rates as real effective exchange rates.  These take into account relative price developments and trade patterns, and their message for the eurozone is far from reassuring. Read more

There is a gulf separating Germany from France on how to cure the eurozone’s ills, and it does not bode well.

Germany identifies the eurozone’s chief problems as excessive budget deficits, weak fiscal rules and a general culture of over-spending in the region’s weaker countries.  The remedy, say the Germans, lies in austerity measures, tougher punishments for rule-breakers and better housekeeping.  Germany is so sure that it has got the answer right that it is introducing a €80bn programme of tax increases and spending cuts – not because the German economy desperately needs such measures, but because the government in Berlin wants to set an example to other eurozone states.

France knows the eurozone has a fiscal problem, but it disagrees with the German view that immediate and drastic austerity measures are essential.  The French contend that, if budget hawks win the day, Europe’s fragile economic recovery will fade away and there may even be another recession (as Paul Krugman notes, an example often cited in support of this argument is the “Roosevelt recession” of 1937, when President Franklin D. Roosevelt, having just about dragged the US economy out of the Great Depression, inadvertently caused another economic downturn with a premature attempt to balance the budget). Read more

Speaking with one voice.  Singing from the same song sheet.  Communicating clearly with financial markets.  Avoiding needless disputes with governments.  These are essential attributes of high-level policymakers at a modern central bank.  So what are we to make of an extraordinary speech given last Friday in the Moroccan city of Rabat by Lorenzo Bini Smaghi, an executive board member of the European Central Bank?

To put it bluntly, Bini Smaghi told the German government that it had screwed up Europe’s response to the Greek debt crisis. Germany’s ineptitude meant that the final price of the emergency rescue package ended up being far higher than necessary, he complained. Read more

Well, did he say it or didn’t he?  I am referring to President Nicolas Sarkozy of France.  According to El País, Spain’s most reputable newspaper, Sarkozy told his fellow eurozone leaders at a May 7 summit that France would “reconsider its situation in the euro” unless they took emergency collective measures to overcome Europe’s sovereign debt crisis.  The source?  Officials in Spain’s ruling socialist party, quoting remarks purportedly made after the summit by José Luis Rodríguez Zapatero, prime minister.

It would be extraordinary, if true – for two reasons.  First, if France were to leave the euro area, European monetary union would have no reason to continue.  It would collapse.  And that would be like dropping a financial nuclear bomb on Europe.  Secondly, it is inconceivable that France would consider it to be in its national interests to take such a drastic step.  We are left to conclude that if Sarkozy really did utter these words, it was just a bluff to get Chancellor Angela Merkel of Germany to sign up to the eurozone rescue plan that was ultimately agreed in the early hours of May 10. Read more

The €500bn eurozone stabilisation package agreed in the early hours of Monday, to be topped up by as much as €250bn from the International Monetary Fund, represents the first time since the Greek debt crisis erupted in October that European political leaders have moved decisively ”ahead of the curve”.  All along, the only way of calming financial markets was to produce an initiative that would exceed their expectations and convince them that Europe would do whatever was necessary to save its monetary union. Read more

One frequently aired proposal for overcoming the ever more dangerous strains in European monetary union is to encourage Germany, which enjoys a large current account surplus, to buy more from Greece and other southern European countries struggling with large deficits.  This, so the argument goes, would rectify the imbalances that are destabilising the eurozone and would demonstrate Germany’s sense of responsibility and solidarity with its 15 euro area partners. Read more

The financial rescue plan devised by eurozone governments for Greece doesn’t look like a rescue plan in the classic sense.  Like a thermonuclear weapon, it appears intended never to be used at all.  The idea is that the Greek government itself, backed by calmer financial markets, will succeed in overcoming its debt crisis without ever drawing on assistance from its 15 euro area partners. Read more

I take it that everyone has seen the insulting picture on the cover of the February 22 edition of Focus, a lightweight German news magazine?  Under the headline ”Swindlers in the euro family”, it shows the Venus de Milo statue, a monument of ancient Greek civilisation, sticking up a middle finger at Germany.  In this way the magazine’s editors convey, as offensively as possible, the idea that debt-ridden Greece is robbing Germany blind by forcing it to come to Greece’s financial rescue.

The Greek response has been predictably furious.  The Greek consumers’ federation has called for a boycott of German goods, commenting that Greeks were creating timeless works of art like the Venus de Milo at a time when Germans were “eating bananas in the trees”. Read more

You know that the European Union is in trouble when Russia offers more intelligent advice on the eurozone’s debt crisis than Spain, the country that holds the EU’s rotating presidency.  Dmitry Medvedev, Russia’s president, disclosed the other day that he had recommended to George Papandreou, Greece’s prime minister, that the Greek government should request assistance from the International Monetary Fund to sort out its problems.

This is exactly the course of action advocated by several non-eurozone EU countries as well as a host of distinguished economists and, dare I say it, the editorial writers of the Financial Times.  As it happens, I don’t agree – if by IMF assistance we mean financial help.  The IMF will be involved, along with the European Central Bank, the European Commission and eurozone finance ministers, in monitoring Greece’s public finances and providing technical aid as required. Read more

Today’s European Union summit in Brussels will set out the framework for a financial rescue operation for Greece.  This much is clear is from various briefings being given by officials from countries as varied as Austria, Lithuania, Poland and Spain.  But financial markets will have to wait until next week to see the full details of the plan.

The central question is how far Germany has been pushed to swallow its words and offer help for Greece, after weeks of denying that it would do anything of the sort.  Only this morning Otmar Issing, the German former chief economist of the European Central Bank, was telling German television viewers that Greeks enjoyed “one of the most luxurious pensions systems in the world” and it was unreasonable to expect German taxpayers to fund it. Read more

An unambiguous message of solidarity among eurozone states will come from Thursday’s European Union summit in Brussels, but it is still unclear if this will translate into a specific financial rescue plan for Greece.  Debate among governments is continuing.  However, expectations in financial markets have been raised so high over the past 24 hours, what with European Central Bank president Jean-Claude Trichet flying in for the summit from Sydney and officials in Berlin hinting at a German-led rescue, that it would be risky for the EU leaders not to commit themselves to some sort of initiative.

There are various possibilities: bilateral loans from Germany and France, with perhaps Italy and the Netherlands chipping in; an International Monetary Fund-style standby facility, organised among the 16 eurozone countries; or an EU-wide loan, involving a show of support from all 27 member-states.  It is quite likely that the IMF will be asked to continue providing Greece with expert technical advice, but I don’t think the eurozone countries will go further and call on IMF financial resources.  Apart from anything else, there is a fear that the US may raise objections on the grounds that the IMF’s firepower should be reserved for fighting emergencies not in prosperous Europe but in other, more disadvantaged financial hotspots. Read more

The expression “it never rains but it pours” may seem inappropriate for a Mediterranean country such as Greece.  But it was the phrase that sprang to mind when I heard last week that Greek tax collectors are planning to go on strike in protest at the government’s austerity measures.  Like the political manipulation of budget data, the inefficiency of the tax system is one of the Greek state’s most glaring weaknesses.  How will a tax collectors’ strike help matters?

That said, I do not share the view of German and French government officials who insisted vehemently last week that the solution to Greece’s problems lies almost entirely with the Greeks themselves.  If this were the answer, nothing would be simpler than for the Greeks to roll up their sleeves and get on with a 10-year programe of wage restraint and productivity growth. Read more

There is a need to clear up some misconceptions about how Greece, or some other fiscal miscreant in the 16-nation eurozone, would be rescued by its partners in the event that it was unable to refinance its debts.

Quite a few commentators seem to think eurozone governments would find it hard to sidestep the ban on bail-outs specified in European Union treaty law.  The European Central Bank, the European Commission and certain EU governments, not least that of Greece itself, have contributed to the confusion by insisting in public that a rescue is undesirable and unnecessary (while quietly planning for precisely this contingency). Read more

Greece’s fiscal emergency is a most mystifying crisis.  At one level, it is the most serious test of the eurozone’s unity since the launch of the euro in 1999.  Unless correctly handled, the problem with Greece’s public finances could shake the foundations of Europe’s monetary union.

At another level, however, Greece itself seems to be getting off remarkably lightly.  Germany suffered a 5 per cent slump in gross domestic product last year; Greece is expected to have suffered a fall of about 1.1 per cent.  Spain has a 19 per cent unemployment rate; Greece’s rate is only 9 per cent.  The Irish government is imposing extreme austerity measures on its citizens to protect Ireland’s eurozone membership; Greece’s government is, so far, doing nothing of the sort.  No wonder Greece’s 15 eurozone partners, the European Commission and the European Central Bank are furious with the political classes in Athens. Read more

Buried in this month’s “Annual Report on the Euro Area 2009″ from the European Commission is some absorbing material on competitiveness in the eurozone.  Some countries, above all Germany, Europe’s export champion, have consistently outshone others in terms of business competitiveness since the euro’s launch in 1999.  The result has been the accumulation of large current account deficits in countries such as Cyprus, Greece, Portugal and Spain – but also in Ireland, Malta, Slovakia and Slovenia.

As the Commission says, in impeccably understated language: “The build-up of large external liabilities has increased exposure to financial shocks…  In the current downturn, financial markets have become more responsive to the net external financial asset position for the euro area countries.  Even if to a large extent the net external position is related to the private sector, the public sector can be affected by private sector debt in the form of potential bail-outs and other fiscal implications.” Read more

From a European Union perspective, it’s somewhat surprising that the extraordinary financial crisis we’ve been living through has not generated more pressure for another big push at EU integration – if not in the political sphere, then at least in the economic one.  According to conventional EU wisdom, it usually takes a crisis to make Europeans understand why closer integration is a good thing.  But on this occasion, it’s not happening – or at least, not yet.

For the perfect explanation as to why this should be so, I recommend an article by Otmar Issing, the European Central Bank’s former chief economist, in the latest issue of the journal Europe’s World.  Issing’s article discusses the merits of issuing common bonds for the 16-nation eurozone – an initiative that would, in theory, mark a major step forward in European integration – and comes down firmly against the proposal. Read more

Mikolaj Dowgielewicz is truly a new Pole.  Not yet even 37 years old, he is a minister (for European Union affairs) in Poland’s centre-right government, speaks fluent English and French, was educated partly in the UK, and has spent more of his life in an independent democratic Poland than in a Soviet-controlled communist Poland.  When I was listening to him speak at a think-tank breakfast in Brussels this morning, it struck me with force that he would have been just a small boy when I first visited Warsaw, Krakow and Gdansk in the summer of 1980 and witnessed the emergence of the free trade union Solidarity.

Now, like other new Poles, Dowgielewicz talks breezily about Poland’s growing weight in the EU, which it joined five years ago, and its prospects for adopting the euro as early as 2012.  Poland doesn’t want or need the eurozone’s entry rules to be bent, he says.  “We’re not proposing any amendments to the entry criteria.  Not that we think they make absolute sense, but it’s not feasible.  You’d have to change the EU treaties.  We think the criteria strengthen the eurozone’s credibility.  It will have to be down to the merits of each individual country.” Read more