Kharacheban A.A.
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EURO CRISES: NEW
CHALLENGES
The aim of the
article is to show now European need try to stem the euro crisis.
The pattern has gown
tiresomely familiar. Bond markets shift sharply against weak euro-zone members.
Leaders hold a crisis summit to save the euro with more forceful rescue
measures. The initial euphoria lasts a few, weeks a few days or even just a few
hours – and the cycle begins once again.
To judge from this
week is summit between German’s Angela Markel and Frances Nicolas Sarkozy, the
answer is no. The two came together in the holiday season partly because the markets
had moved on from an assault on Italy to attack France, a core AAA-rated euro
member. Investors hoping for a deal to expand the euro zone’s bail-out fund, the European Financial
Stability Facility, or to start issuing mutually guaranteed Eurobonds Instead
the two leaders did little beyond repeating previous accords, promising
stronger euro zone economic governance and putting up such distractions as a
financial-transactions tax, harmonized corporate taxes and constitutional
commitments to balance budgets-along with more euro-zone summits in future.
The markets were
unimpressed. A day later the European Central Bank was again buying Spanish and
Italian government bonds, having spent 22 billion the previous week. The latest
shockingly low growth figures for the euro zone in the second quarter may
partly reflect austerity but they also suggest that it will be harder than ever
for troubled economies to grow out of their debt burdens.
It is
understandable that Mrs Merkel, in particular, should be loth to embrace bold
new rescue plans. She is cautious by nature, more a follower than a leader. She
recognizes the deep hostility of her voters to big fiscal transfers to weaker,
more profligate euro-zone countries. She is already finding it hard to persuade
her coalition partners to support in parliament the deal she struck in July to
expand the EFSF`S powers and let buy up government debt. She is mindful that
the Bundesbank is vociferously against a big ECB programmer to buy government
bonds. And she fears that her country’s constitutional court may rule all euro
zone bail-outs to be illegal.
Yet Mrs Merkel need
to be mindful of something else as well: that the current rescue plan for the
euro is just not working. The markets continue to price in default by Portugal
as well as Greece. The attempt to limit the trouble to these three and stop
contagion spreading to Spain has manifestly failed: instead Italy and now
France, both of which seem to be solvent, have been infected. A year ago it was
said that the euro zone could take care of two or three small countries but
that Spain was too big to fail. Today, with Italy and even France looming into
the picture, the very survival of the euro is coming into question.
A break-up of the euro may not be
unthinkable, but it would certainly be damaging, painful and very expensive.
This is most obvious for debtor countries whose banks and governments would go
bust, but Germany and other creditors would also pay an extremely high price.
And the consequences would be scarily unpredictable: Europe’s single market,
and even the European Union itself, might be at risk.
Mrs Merkel must
know that it is worth paying a lot to avoid all this. That means, at minimum, a
large expansion of the EFSF, to at
least 1 trillion, though though there is a limit to how much bigger it can get
without denting some creditor countries ratings. It is likely to require
further large-scale bond-buying by the ECB. It involves accepting of Greek and
maybe other debt. In may even necessitate mutually guaranteed Eurobonds.
Any or all of these
measures have three things in common: they involve stronger countries giving
more support to weaker countries, to offset this, they require intrusive
outside control of national fiscal
policies. They thus constitute a step towards political union. That is what
airy labels like “economic government”
or «deeper integration» actually mean.
The problem is that most governments have no
mandate from voters to move in this direction. Politicians therefore need to
start explaining to their electorates the choices they face, and the
consequences of those choices. If Europe’s leaders sign up for a level of
integration deeper than voters want, the backlash could split the EU apart-exactly
the outcome they are trying to avoid.
Literature:
1. Interactive Map of the Debt Crisis Economist Magazine,
9 February 2011
2. Budget deficit from 2007 to 2015 Economist Intelligence Unit 30 March 2011
3. Nick Malkoutzis: Greece – A Year in Crisis
Friedrich-Ebert-Stiftung, Juni 2011