eurozone

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

The European Union’s fiscal rulebook, known as the stability and growth pact, has fallen into such discredit since the euro’s launch in 1999 that almost any change is likely to be an improvement.  But are the reforms that EU finance ministers agreed in Luxembourg on Monday good enough?  I have my doubts.

There are many flaws in the stability pact, but the essential problem is enforcement.  How can outsiders compel a government, with sovereign control of its budget, to observe fiscal discipline?  The pact contains a provision for imposing fines on countries that run up high budget deficits and ignore recommendations from other member-states and the European Commission to take corrective measures.  Predictably, however, no country has ever paid a fine or has even been asked to pay a fine throughout the euro’s 11-year history.  Governments have shrunk from punishing other governments because they know that the tables may one day be turned on themselves.

In any case, it has always seemed potty to slap fines on a country with a large deficit.  The penalties would simply exacerbate the country’s budgetary difficulties.  No wonder Romano Prodi, the former Commission president, once called the stability pact “stupid”. Read more

Slowly, too slowly perhaps, the eurozone is delivering its response to the collapse of market confidence triggered by the European sovereign debt crisis.  An important step appears likely to be taken at a finance ministers’ meeting in Luxembourg on Monday.  They are set to agree the terms on which a Special Purpose Vehicle will be able to borrow up to €440bn on the markets to help a eurozone member-state that is experiencing borrowing difficulties.

On the face of things, this initiative goes considerably further than the €110bn rescue package arranged last month for Greece. The Greek aid is based on bilateral loans from other governments in the 16-nation eurozone. But the SPV will be a self-contained entity, operating under Luxembourg law, that will issue bonds backed by member-state guarantees.

You could almost call them “common eurozone bonds” – except that, for political reasons, this is an all but unmentionable term.  Opposition to common eurozone bonds is exceptionally strong in Germany, where the prevailing view is that such a measure would simply benefit wastrels like Greece and impose higher borrowing costs on countries that practise fiscal discipline – i.e., Germany itself.  Nonetheless, the German government has taken an energetic role in designing the structure of the SPV.  It is a big moment for Germany and one which shows that the German commitment to making a success of European monetary union is not to be underestimated. Read more

For anyone wondering why Europe’s leaders are so determined to avoid a restructuring of Greek sovereign debt, I recommend a remarkable piece of research published on Monday by Jacques Cailloux, the Royal Bank of Scotland’s chief European economist, and his colleagues.  (Unfortunately, it seems not to be easily available on the internet, so I’m providing links to news stories that refer to the report.)

The RBS economists estimate that the total amount of debt issued by public and private sector institutions in Greece, Portugal and Spain that is held by financial institutions outside these three countries is roughly €2,000bn.  This is a staggeringly large figure, equivalent to about 22 per cent of the eurozone’s gross domestic product.  It is far higher than previous published estimates.  It indicates that, if a Greek or Portuguese or Spanish debt default were allowed to take place, the global financial system could suffer terrible damage. Read more

I didn’t know whether to laugh or cry when I heard the news on Tuesday that the German authorities were to impose a temporary ban on certain types of transactions – known as “naked short-selling” – in eurozone government securities.  Laugh, because it seems more than a coincidence that the announcement was made just before parliament in Berlin was due to open a debate on authorising Germany’s contribution to the €750bn international rescue plan for the eurozone. The ban looks like a piece of raw meat thrown to legislators who labour under the delusion that the eurozone’s debt crisis is all the fault of “speculators” and are eager for revenge.

Cry, because the German announcement underlines how the eurozone’s leaders, after finally appearing to get on top of events with the financial stabilisation plan unveiled on May 10, are once again misjudging the dynamics of the crisis.  To cite another example, Italy’s central bank has just decreed that Italian banks will not be required to adjust their capital ratios if eurozone government bonds in their portfolios fall in value.  What this will mean in terms of the credibility of financial data published by the banks, I hate to think. Read more

The first 11 years of the euro have exposed several flaws in the design of Europe’s monetary union.  One is the fact that, contrary to expectations, the experience of sharing a common currency with advanced, northern European economies did not spur but held back structural reform in weaker, southern member-states.  Another was the ineffectiveness of the stability and growth pact, the eurozone’s so-called fiscal rulebook.  In a nutshell, too many governments ran up large budget deficits and didn’t bother to cut public debt when they felt like it – and this, by the way, includes Germany, the self-styled paragon of fiscal discipline, under former chancellor Gerhard Schröder. 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

With all eyes on Europe’s last-ditch efforts to save the eurozone from collapse, it is hardly surprising that a thoughtful, 46-page report on the European Union’s long-term future has gone almost completely unnoticed.  But the study, commissioned by EU heads of state and government in 2007 and published last weekend, is worth taking a look at.

It was written by a group of 12 experts led by Felipe González, the former Spanish premier, and including Mario Monti, the distinguished former EU commissioner, Jorma Ollila, chairman of Finland’s Nokia mobile phone company, and Lech Walesa, the ex-Polish president and hero of the opposition Solidarity movement in communist times.  There was a good mix of northern, southern, western and eastern Europe on the panel.

They begin with a disturbing observation: “Our findings are neither reassuring to the Union nor to our citizens: a global economic crisis; states coming to the rescue of banks; ageing populations threatening the competitiveness of our economies and the sustainability of our social models; downward pressure on costs and wages; the challenges of climate change and increasing energy dependence; and the eastward shift in the global distribution of production and savings.  And on top of this, the threats of terrorism, organised crime and the proliferation of weapons of mass destruction hang over us.” 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