Europe Must Pool Its Debts to Survive
In the next few days, the G-20 is due to return to the question of boosting the resources of the International Monetary Fund so that more funds can be made available to European countries struggling to stay above water.
At the February meeting of the G-20 in Mexico, the European Union was told to show the color of its own money before international financial institutions would consider contributing. After the EU summit in March, EU leaders made their so-called “big bazooka” firewall appear as large as possible by expressing its size in U.S. dollars. The headline figure is $1 trillion (€800 billion), but closer analysis reveals that once existing commitments are discounted and the phased transfer of fresh capital is taken into account, the actual size of the firewall is nearer to €500 billion.
But even if a firewall of €1 trillion were in place, would it be sufficient and durable if other countries such as Spain and Italy get sucked into the vortex of higher debt repayments, deeper austerity measures and eventual default? Why are EU leaders so reluctant to make progress on a structural solution that would reduce the actual debt pile, while resorting instead to endless band-aids that do nothing to heal the wounds below?
The two years since Greece first owned up to the dire state of its public finances have seen numerous attempts to put a lid on the crisis. But the problem has proved notoriously difficult to contain. Greece is partway through its second bailout and may require a third. Ireland and Portugal have also both had recourse to the hastily drawn-up EU rescue fund, the European Financial Stability Facility, which has so far made €200 billion available to shore up national fiscal solvency.
On German Chancellor Angela Merkel’s insistence, EU member states (the U.K. and Czech Republic excepted) have also signed up to an intergovernmental pact, renewing their vows of fiscal consolidation and budgetary propriety in a further effort to convince the markets that Europe is serious about changing its ways.
But recent worries about the state of Spain’s finances and its budget deficit have led to higher bond yields and pressure on the markets: a wake-up call to finance ministers caught dreaming that the euro crisis is over. It is not. The Spanish state is indebted to the tune of €750 billion, and Italy owes about €2 trillion. A Greek-style run on those economies would wipe out the trillion-euro firewall and leave the rest of the euro zone dangerously exposed.
Recent optimism is largely based on two successful long-term refinancing operations conducted by the European Central Bank, which injected substantial new liquidity into the banking sector. Some members of the ECB executive board have intimated that such action could be repeated if necessary. But Germany remains particularly reluctant to countenance more such intervention, fearing that it might provoke a risky inflationary spiral. But if Europe’s main paymaster will not accept ECB bond-buying, even on secondary markets, nor open-ended commitments to euro-zone countries in difficulty, what options are left?
Essentially there are only two, both of which accept that the concept of a single currency zone has political limits. The first option is simply to unravel the monetary union, although almost any such scenario would spell economic mayhem. The other is to take the logic of economic and monetary union one step further, by accepting some form of joint and several liability principle for collective euro-zone debt.