Completing the Eurozone Rescue: What More Needs to Be Done?

Edited by Richard Baldwin and Daniel Gros, this new CEPR e-book features a number of short essays on this topic.  The overview chapter can be read here; the full PDF is here; the individual chapters are available here; my own contribution is here.

20 replies on “Completing the Eurozone Rescue: What More Needs to Be Done?”

There is no defence. We want and know the euro has to fall as we have borrowed far too much, to ever repay! Let all the pension funds sink their clients funds into euro loans to sovereigns! Then let them fall in value by say one half over five or ten years.

Let us have more private pension schemes. They must be compulsory…..

Once we have borrowed these 100,000,000,000 Euro then we can start to repay by earning in dollars SFr or whatever. We’ll all be rich ……

Paul de Grauwe writes “There can be little doubt that the survival of the Eurozone depends on its capacity to embed itself into a political union.”

I think there is some doubt. Jacque Melitz wrote last month: “If substantial political unification is the price that must be paid for the survival of Eurozone, as some respected observers think, then once again, the Eurozone probably has no long-run future.”

I’m with Melitzon this one. The proposals De Grauwe and many others have in mind would require a new Treaty. The last Treaty — a boring and administrative affair — only passed after having its name changed and with various versions of it being rejected by France, Netherlands and Ireland.

There appears to be an implicit assumption that because some economists think centralised fiscal transfers are a good idea, that the European public will go along with another major Treaty. The evidence at this point doesn’t seem to support this.

@Karl: I share your doubt that Europe will move towards fiscal (and political union). (I also doubt that some of the wilder suggestions about depriving countries of voting rights will come to anything, for the same reason.) But this does not per se invalidate de Grauwe’s claim that the survival of the Eurozone depends on such a move — that is a separate issue. You could both be right, in which case I guess the Eurozone would eventually disintegrate.

For obvious reasons, there needs to be a crisis of the correct sort to enable any political integration to progress. Should not be too difficult in these times, given the poor quality of any Irish opposition, certainly. The Irish will be pathetically grateful. The Germans may be a problem?

1916? What was that exactly, if it wasn’t an exercise in getting rid of hotheads via English machine guns? How the Gombeens must have laughed!

The Roman Empire goes from strength to strength! Hail! Hail! Ein volk, ein Reich!

I guess the ez will pass

That is no way to stoke hysteria. Give it another try! Here we all agree that the green guernsey is useful. What if interest rates go to 20%? Get the capital cost down!

A timely and excellent overview and collection of essays. However, I think the potential for technocratic (and, ultimately, political elite-driven) solutions – devised and implemented without sufficient popular awareness or consent- no longer exists. It is precisely these types of “solutions” that got us into the current mess.

The PIGS need to placed under the formal “protection” of the EU with a temporary and time-limited suspension of their sovereignty in fiscal, monetary and financial matters. Greece is already there, Ireland is close and it’s only a matter of time before it happens to Spain and Portugal. None of the national governments of the PIGS have an immediate political future and should volunteer for “protection”. And there needs to be a restructuring of net sovereign and bank debt within the EZ. The pain of adjustment has to be spread in a manner that conveys some public perception of equitability. Bondholders who failed to exercise due diligence do not have a divine right to escape unscathed. (I suspect many have sold out already and the vultures now holding them are seeking to extract on unearned pound of flesh.)

And then the hard graft on supply-side inefficiencies and rigidities needs to begin.

In passing, I, perhaps, should not be surprised that the SB Post story on plans for semi-state privatisation
seems to have passed without comment on this board.

An appropriate business unit and financial structuring of the ESB and BGE followed by a sale could yield up to €9 billion and reduce electricity and gas prices by up to 10%.

But why should we be bothered with something sensible like that?

Business and former UCD lecturer John Teeling today outlined how the gap between the economies of Portugal, Italy, Greece and Spain (PIGS) and Germany is simply too large for the euro to survive. “Hardworking German taxpayers are not going to fund their Greek counterparts to retire at 53 on an 83% pension. Monetary union, without fiscal and political union cannot survive, so the euro in its current form must break” he said.

Teeling believes that one of three things will happen over the next five years; the currency will struggle on as more and more euros are printed and sold to international pension funds; a two tier system will emerge with the PIGS devaluing against the Deutschmark group or a flexible euro might evolve where internal exchange rates can vary against a base level. “It is important to remember that none of these outcomes are positive in terms of the Irish economic outlook” he cautioned.

We hear a lot about countries on the periphery but countries on the eastern periphery are eager to join the Eurozone.

Marek Belka, the new Polish central bank governor, former PM and European IMF director, has spoken of Poland joining by 2015 and he also endorsed Germany’s fiscal approach.

1) It’s fanciful to think that Germany would abandon the euro.

2) It’s unlikely that Greece, Portugal and Spain would risk the disruption of leaving the euro; they export little beyond the Eurozone and the currency of the Greek shipping industry is the US dollar; without the FDI sector, Ireland would be another Albania.

3) There will never be a perfect union but the current crisis will result in a more credible governance system.

The Euro: Despite the markets and prophets of doom, the common currency is safer than ever

“In its latest Quarterly Review, the Bank for International Settlements came out with some shocking figures. German banks have a $200bn exposure to Spain, $175bn to Ireland, and $50bn, respectively, to Greece and Portugal, making a total exposure to the four countries of almost $500bn, more than 20% of German GDP. French banks have an exposure of $250bn to Spain, $80bn to Ireland, $100bn to Greece, and $50bn to Portugal, also almost $500bn in exposures, but more than 25% of French GDP. Total foreign bank exposures are well over $1100bn to Spain and $800bn to Ireland. Add the four countries together, and you are arrive at more than $2 trillion”.

Is this new info? Are we punters ultimately paying the price for the actions of reckless German / French etc Bankers? They’re scarier than Irish credit unions? That might explain the drive to austerity? Right? I’m only a punter but this sounded quite insane to me when I read it. Has a hint of ‘reparations’ about it?

There is no rescue of the Eurozone per se, so it is difficult to complete a task that has not begun.

There is however a €750bn bailout of the bondholders of European sovereign debt, who are overwhelmingly European banks. Concidentally, at the time of the bailout the ECB’s Stability Review put European banks’ bad debt problem at €740bn.

Not a cent has been advanced to any of the European countries that might actually get them out of the current crisis, for investment, modernisation, jobs programmes or the like. Worse, the credit extension comes at the price of austerity measues which drive down all incomes, and therefore the government’s tax revenues. As the ratings’ agencies have noted, the austerity measures have led to downgrades as government revenue streams slow to a trickle.

It’s not all banks that are being bailed out, just those with large net external assets. Hence Belgium is saved despite having one of the highest stock of public debts, and France is exempt despite havng a deficit of 8% of GDP compared to Italy’s 5%.

The ‘rescue’ is a bank rescue- a multinational, multilateral NAMA.

Michael Burke
Yes! Finally, a response. But the whole point is that the EZ can create as much money, loans, etc as is required. So yes we could have a NAMA, but we won’t, because there are consequences to money creation that the Germans, uber alles, know well. But the GFF still have no clue!

So no real rescue until the euro is at an appropriate level. The Greeks will have to get much more real. They are 2% of the EZ? Ireland is 1%. We jus’ hangin’ fer the ride!

Steady on, Michael. These are the pension and insurance funds to which German and other north European workers have contributed their hard-earned dosh. Having taken the economic pain of German unification and the further pain of building a lean, mean high-value industrial economy no German politician has the brass neck to tell them that their nest eggs will shrink to bail out the greedy, stupid and fiscally incontinent PIGS. It is they, utlimately, who are being bailed out – and not the PIGS. Some measure of protection is being extended, very grudgingly, to shield the PIGS from the wrath of the bond market, but it lacks the commitment to remove the market uncertainty.

And it lacks commitment because it undermines the credibility of the ECB and because it lacks democratic legitimacy. Does anyone think German voters will consent to fiscal transfers to be overseen by politicians in the PIGS who have royally screwed up and over whom they exercise no control?

In recent months, Germany appears to have been more the focus of blame for the plight of the small number of countries of the Eurozone which
who were monumentally mismanaged during the international credit boom, than the individuakl countries themselves.

The underlying theme of much of the criticism is that the Germans should again write blank cheques and apologise for their recent economic success.

According to Prof. Hans Werner Sinn of the Ifo institute, Germany’s net investment rate in the period 1995-2008 was the lowest of the OECD countries.

In 2008, only 40% of German savings were invested domestically.

In 1995-2008, German GDP growth was 22%; Portugal 33%; Spain 56%; Ireland 124% and Greece 61%.

As recently as 1995, the average interest premium for original EMU members (except Germany ) over German bunds was 2.6% and some were above 6%.

After the launch of the euro, markets mispriced risk and Sinn says Germany running high trade surplus was the counterpart of the export of capital while domestically, wage growth was very low and house prices actually fell for some of the period.

Convergence takes a very long time as is evident in Germany where in the former East German economy, unemployment can exceed 20% in some urban areas and special annual transfers from west to east amounted in 2008 alone to roughly €12bn.

In addition to direct cash transfers (Greece received €44bn in support of its infrastructure in the period 1994-2006), private capital flows that had the potential to promote convergence were not all misused. They were a big help for countries in Eastern Europe.

The lack of a mechanism to instill fiscal discipline was of course a major flaw in the EMU system and while German banks and others should have been much more prudent, the cold reality is that this particular well has run dry.

As for easy panaceas such as devaluation, earlier this month the UK reported that it’s trade deficit with the EU widened in April.

Sterling has fallen on a trade-weighted basis of about 25% over the past three years and in 2009, total UK exports recorded their biggest fall since records began in 1947.

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