♠ Posted by Emmanuel in Credit Crisis,Europe
at 5/03/2010 12:47:00 AM
Following George W. Bush in Iraq and Wen Jiabao at Cambridge, I've come to the conclusion, boys and girls, that you're nobody in this world until people start throwing shoes at you. Recently, we almost had one such occasion here at the LSE as Yiannos Papantoniou, Greece's finance minister as it entered the Eurozone, came to speak. He is of course responsible for the use of currency swaps to (temporarily) disguise Greece's debts from national accounts to meet EMU entry criteria. It seems Goldman Sachs is in hot water on both sides of the Atlantic as Eurocrats are looking into its nefarious activities in implementing the Greek swaps. When queried about this, he's already said something along the lines of "everybody else did it, so why couldn't we?" Still, this sort of Enron-inspired accounting--since banned by the EU--has not endeared him to watchers of the current crisis unfolding in Hellas.At any rate, he appeared last week for an LSE event on "The Greek Fiscal Crisis and the Future of the Euro-Zone." Maybe he should have appended "...And How I Helped Put It There." Snark aside, his evident non-disclosure of his less wholesome activities occasioned a rather outspoken member of the audience to berate him to the point that the moderator had to rein things in (catch the podcast and video of event in the link above for those). Suffice to say, he's lucky that he didn't get shoes thrown in his general direction!
What follows is the prepared text of his talk. Somewhat surprisingly, his suggestions make at least some sense. Particularly interesting is his suggestion that California is in as dire straits as Greece is, but the former benefits from the US having complementary fiscal and monetary mechanisms whereas there is asymmetry in the European project. There's also discussion of issuance of pan-European sovereign debt--something Germany is unlikely to assent to as he points out. As you'll read, his three main suggestions are: (1) beefing up enforcement and sactioning powers under the Stability and Growth Pact; (2) issuance of the aforementioned Eurobonds; and (3) emergency funding via a European Monetary Fund or suchlike:
Within the Eurozone, discussion has already started for longer-term arrangements aiming at improving economic governance. The issues involved include the reinforcement of the Eurogroup’s fiscal authority, the issuance of Eurobonds and the creation of a European Monetary Fund.Still, you get the sense that had Greece managed its finances a bit less recklessly, he wouldn't have to talk about these things.
Stronger coordination of fiscal policies is essential for preventing diverging behaviour on the part of the member-countries of the Eurozone. Reinforcing the authority of the Eurogroup and the ECOFIN Council will improve the effectiveness of fiscal policy, particularly as regards meeting targets as well as redressing imbalances. Germany’s model, consisting in relying on export growth while constraining internal demand, has been heavily criticized recently. Germany’s surplus is mirrored in other countries’ deficits. And, when private demand is weak as is presently the case, external deficits are translated into fiscal deficits leading to credit crises.
Common budget policies and rigorous supervision of their implementation are a sine qua non condition for the efficient functioning of the Eurozone. They will also create a more balanced framework of cooperation with the ECB. Fiscal and monetary policies must function in better harmony in relation to the current situation so that the targets for growth, employment and inflation are more effectively pursued.
The issuance of Eurobonds covering the whole of the Eurozone could help relieve the pressure emanating from credit crises. Such bonds, however, are viewed with suspicion by Germany, which is reluctant to finance overindebted partners. A compensation mechanism imposing a corresponding charge on the weaker economies could help remove Germany’s reservations while serving her long-term interest in sustaining the stability and credibility of the common currency.
A more radical solution to the bail-out problem for failing economies would be the creation of a European Monetary Fund along the lines of the IMF. This fund could extend low-interest loans tied to strict conditionality ensuring the return of the deviant countries to fiscal balance and financial stability.
Unless the Eurozone develops procedures designed to transform it into a fully-fledged economic union, approaching the US model, the future of the euro will be clouded with doubt. Without strong institutions in the fiscal and financial field, the Eurozone will essentially remain a club of countries willing to adhere to certain principles of economic policy, such as price stability and fiscal discipline. Experience, however, suggests that voluntary adherence to principles does not stand the test of time. Deviance is a risk inherent in the life of any system. And if deviance is neither prevented nor controlled, the system faces the risk of dissolution.
It is, therefore, critical for the Eurozone to strengthen its system of governance. The effective conduct of economic policy in the USA contributes to the achievement of substantially higher rates of economic growth compared to the Eurozone. This, quite apart from the risks of break-up or dissolution, should suffice for mobilizing energies in Europe to speed up the integration process.
