martes, 12 de julio de 2011

The euro can be saved. Indeed.

Despite some people have been ignoring it, time has arrived for us to accept the fact that the structural imbalances of the Eurozone are no longer just a passing crisis beyond control, but a state of affairs that must be addressed for the future. Currency union has the effect of transforming bad news about one particular country into bad news for other countries, and for the system as a whole. Firstly, a simple revision of the Stability and Growth Pact has proved insufficient to convince the financial markets that the EU is serious about its economic governance.

The “good thing” about this nightmare is that crisis has led to an increasing consensus that political union is necessary to preserve the Eurozone. Certainly, crisis mechanisms have been set up by the EU (the European Financial Stability Mechanism - EFSM) and by the euro area (the European Financial Stability Facility - EFSF). But these measures have not been sufficient to restore calm in markets.

I honestly believe that a great deal of guilt comes from speculative markets, particularly financial interests and rating agencies from the USA, but EU governments (and even media) are to blame as well. Up to now the European public sphere has been characterized by an extreme mismatch between the importance of the integration process and the relevance the media attribute to it. Many groups and media use this mismatch as an instrument to control and counterbalance the pressures towards a European “statehood”.

The paradox is often that public opinion is asking the UE to act in a more incisive way to solve the crisis, whereas in practical terms the national governments are not willing nor giving the EU institutions the capacity to act on their own, which then leads to loss of confidence in these institutions. Probably this process is behind the lack of confidence in political actors, like the European Commission or even the European Central Bank.

At the same time, there is little willingness in Europe today to take drastic steps towards a political union. To save the common currency bailouts have been the answer so far. In fact, the interconnection of European economies and banking sector is an argument in favour of bailouts, despite increasing political costs for countries. But to be honest all of us are exposed in this bailouts (Spain is exposed to Greece by 27 bn of €). Without considering the possible moral hazard of issuing more bailouts, Germany is pushing to water down the new Basel III banking regulations, so probably German banks will continue to be undercapitalised or at least exposed to weaker Eurozone economies, though it is really hard (almost impossible) to have precise data of bank exposure. We don’t know the real cost of possible debt restructuring in Greece (with a debt level of 150% GDP).

So far reforms to address the crisis have been handled at national level, though agreed at EU level. But let’s face it, solutions adopted at Council so far have failed to bring back confidence. Nevertheless, it is still time to consider other options rather than the Greek default, which will be resolved by a possible second injection of capital (also private investors as Merkel had asked for) into Greek banks. By other options I mean Eurobonds or at least massive bond buying by the ECB, which could alter its balance sheet but would always be a better choice than simply let the euro collapse.

A single currency has requirements, particularly a fiscal union; the joint issue of Eurobonds can also be used to provide a boost to economic growth in the Eurozone. In a way, Eurobonds (by replacing national bonds) would bring into life this fiscal union where common debt would be guaranteed by all national governments. The amount of debt to be guaranteed should be within the limits of the Stability Pact. Otherwise, creditor countries should be given the right of fiscal control over debtors.

The Eurobonds would have less attractiveness for AAA countries, and this is why experts and academics suggest different solutions: a) blue and red bonds (Bruegel): participation in common Eurobond limited to given % of GDP (blue bond; senior); the rest is red bond (junior); b) differential interest rates (De Grauwe and Moesen): countries pay an interest rate related to fiscal position, etc.

Eurobond is a visible commitment where countries become jointly liable for the debt they have issued together. On top of this, Eurobonds would be able to compete clearly with the Dollar bond market, bringing liquidity to our market.

On the other hand, there is also a big paradox in Europe. Budgetary austerity is forcing now many governments to cut back on public investment projects, while public investments (infrastructure and education) are a significant variable in boosting economic growth. So we need public investment to foster economic growth, but EU countries are reasonably being asked to cut it in order to avoid an increase in debt burden, which is already unbearable.

In this context EU institutions play the game. And this is why democratic accountability has a role to play. Creditworthiness of the club is at risk, so whatever happens, reinforced economic governance has to be imposed, but this can't be properly done without measures to enhance the popular legitimacy of the EU institutions.

Do you think EU politicians are not facing these concerns? No doubt they are. They’re aware they need to transfer more decisions from the national to the EU level in a form of partnership altering policy-making at home for ever. Last developments and lack of confidence result in a weakened European Union with less capacity at home and globally.

Declarations by leaders and head of governments are not enough to convince about seriousness of commitment in the euro. The right path is to take steps towards more political integration. This lack of trust in the future of the euro zone leads to endemic instability.