It sounds like what the French call “l’oeuf de Colomb” – Columbus’ egg: the great man was asked how to stand an egg on its head and he simply cracked the bottom to keep it upright.
Here too we need to crack the bottom to keep the Euro upright and avoid sliding again in a deep recession – making it a double dip recession, the kind that is most frightening, because the second dip could be far worse than the first caused by the fall of Lehman Brothers. To those outside the Euro-zone who are gleefully watching the Euro collapse and congratulating themselves for not having joined in (and here I’m thinking of the British in particular), beware! If the Euro-zone area goes into an economic tailspin, it means European markets for British, Chinese, Japanese, American goods etc will dry up. International trade is a two-way street: if you block one end of the street, the traffic stops. So any excessive weakening of the Euro is highly contagious worldwide. I don’t need to go on, I think you get the picture.
What about this business of cracking the bottom of the egg? To paraphrase one of Bill Clinton’s famous slogan: to fix the Euro, fix the Maastricht parameters, stupid!
It seems that so far in this Greek-induced crisis, no one has thought of it. Everybody’s attention has been taken in by proximate causes, first among them, Greek corruption and profligacy. In this respect, many statistics could be quoted but one stands out: 40% of the Greek working population is employed by the Greek State! That’s incredible. Greece has been swept over by a tsunami of clientelism: every politician that has ever been in office has created a string of jobs for his voters. Of course, that game is over now. The Germans have no sympathy for this sort of thing, and in this at least they’re right. On the rest they’re wrong. In particular, in insisting on austerity measures that are so severe that they will push the economy into a long-lasting depression, some say ten years, ultimately making it impossible for the Greek Government to ever pay back its debt. This is not a win-win situation, but a loss-loss situation – or if you prefer to use a more sophisticated term: deflation. The Germans naturally have to share much of the blame for the depth – and probable length – of the Euro crisis. If they had been more cooperative and moved sooner in unison with the French (as they used to do in the past), we wouldn’t have the problem we have now.
More recently – as I indicated in my previous post – the ratings agencies have been pointed out as the villains of the piece. When Standard and Poor’s reduced Greek bonds to junk status a few days ago, there was an outcry in Europe, and a call to create a European ratings agency. It is true that the major ratings agencies – Standard & Poor’s, Moody’s etc – are all American. But that, in itself, is not the problem. Many countries – China, Canada, Japan – have created their own national ratings agency but these have no effect beyond national borders. The only ratings that count are precisely those issued by S&P’s, Moody’s etcc and no other. You can’t change capitalism overnight.
Creating national (or European-wide) agencies is not the answer. What’s wrong with the likes of S&P’s and Moody’s is not their nationality but that they are not independent. They’re in the pay of international finance. The ratings they issue are necessarily biased.
The solution would be to force ratings agencies to come clean about how they do their analyses and why. More transparency is what is needed. More transparency and more control by international agencies such as the International Monetary Fund that are entities independent from private finance. And when a rating is issued on a Euro member country’ sovereign debt, a vetting by the European Central Bank should be required. If the Bank is convinced of the soundness of the rating, then it could be issued. If not, then it should be stopped. But that implies a deep institutional change and it is likely to take time before all the major players concerned (the G20 and others) can come to an agreement on how to control the ratings agencies.
In the meantime, the drama goes on. Now speculators (and I mean hedge funds and other big investors), having cleaned out on Wall Street, are looking for new opportunities for a fast buck. They have turned their attention to sovereign debt. This is only natural. They always search for chinks in the armour: in the case of Wall Street, the chink was sub-prime mortgages embedded in derivatives. In the case of sovereign debt, it was first Dubai and they had to test whether it would be saved by the United Arab Emirates (it was). Now it’s Greece, and they have to test whether it will be saved by the European Union (it will).
But at what cost! And yet much of the pain could be easily avoided with a single stroke of the (Euro-zone) pen: move the Maastrich parameters from the present 3 percent rule (the ratio of debt to GNP) to something more realistic, say 5 or 6. The exact percentage is something economists could work out, but it should be in line with the capacity of the Euro-zone economies to function and recover from a down turn in the economic cycle. The problem for Greece is that it is asked to function and apply fiscal policies that would be appropriate for the German economic situation. The Greeks have to reign in their debt and adopt austerity measures, no one is arguing they shouldn’t. But the measure shouldn’t be excessive, or else they will kill the productive machinery of the Greek economy. So the deficit/GNP goal set by the Maastrich agreement should not be 3 percent. It is in any case hypocritical to argue that 3 percent is the right figure. It may have been at the time the Euro was established (although that too is arguable) but it no longer is so under present circumstances.
I know I sound like I am arguing about abstract percentages rather than the real world. But there is nothing abstract about the so-called Maastricht parameters. Why? Consider what the Euro is based on. To make the currency work, Eurocrats were faced with a real difficulty. They were able to set up a Central Bank but had to replace with an agreement the fact that there is no overall Euro-zone financial ministry. That’s what the Maastricht parameters are all about: iron-clad guidelines for all Euro-zone members, dictating how far into debt they are allowed to go. Three percent and no more. Of course, since the beginning of the Euro that three percent rule has been repeatedly broken, first by the French and the Germans. Then everybody got into the act, though it was done discreetly. But it was done. In other words, the Greeks weren’t the first to break the rules, even if they did so with greater abandon than anybody else, and for years kept hidden from view how far they had sunk into the red.
The Euro is not (not yet) the currency of a United Europe. The American dollar has a huge advantage: it is protected by a central bank (the Federal Reserve) which has political clout (the US Treasury). The European Central Bank hasn’t got that kind of clout. Why ? Because every Euro-member has jealously guarded its sovereignty over fiscal and financial matters. There is no Euro-zone Treasury or federal financial ministry, like in the US. When an American State goes bankrupt, or nearly so like, say, California, nothing happens to the dollar. When Greece threatens to fail, so does the Euro. The European Central Bank can do nothing about it, except take Greek bonds as collateral even if rated junk, and perhaps buy up Greek bonds as needed. I write “perhaps” because so far it hasn’t said it would do so. Jean-Claude Trichet, the head of the European Central Bank, has recently told the press that so far the matter hadn’t even been considered. And this should come as no surprise. Mopping up Greek bonds from the market is a measure of last resort, something it is rumoured (probably rightly so) that the Germans are opposed to. And of course, somebody has to finance the purchase of bonds by the European Bank. In other words, Euro-zone financial ministers have to agree to it. Fat chance!
So what is the solution? Some have suggested Greece should drop out of the Euro, others that Germany should. Such suggestions make no sense whatsoever. Dropping out of the Euro for any Euro member would mean declaring bankruptcy. Should Greece do so, all the banks across Europe that hold Greek debt would be endangered – and many would fail. Remember, French and German banks hold between them well over €100 billion in Greek debt. Then there’s the rest of Europe (Italy, Spain etc) who also hold Greek bonds.
Such a scenario is obviously unthinkable.
I believe that so far the right policy decisions have been taken and the Euro-zone’s bailout plan for Greece makes sense. What does not make sense is the severity of the austerity measures imposed today on Greece, tomorrow on Portugal, and next Spain.
Austerity is required but not to the point of jeopardizing economic recovery. The way out of this dilemma is to fix the Maastricht parameters, introducing sufficient flexibility in them to safeguard recovery. It won’t be easy because it is a political decision. The Euro-zone finance ministers have to get together and agree on a new set of guidelines to govern the debt/GNP ratio (and several other related matters). But they must do something fast, or else speculation against the Euro will continue unabated. If nothing is done, we’ll be heading straight into a Big Recession – perhaps a bigger one than the one we are so painfully climbing out – a recession that will affect not only Europe but the rest of the world too. Remember, because of international trade, any imbalance in the system is instantly globalized. There is no escape.
Do you agree? If I have convinced you, please help me in spreading the word. We need to make our political class aware of the danger. Ms. Merkel has already lost enough time before accepting to bail out Greece, there is no more time to lose.
We MUST change the Maastricht parameters as soon as possible. It may not be easy – anything involving politics never is – but it IS FEASIBLE. It’s a matter of political will.
Send my blog around, make comments, add to it, do whatever you like but spread the word to your friends and everyone you know.It is our only chance to keep speculators at bay and stop them from wrecking havoc and causing untold poverty and suffering.
We’ve got to make the politicians listen to us.Please help out and spread the word! CHANGE MAASTRICHT!
Here too we need to crack the bottom to keep the Euro upright and avoid sliding again in a deep recession – making it a double dip recession, the kind that is most frightening, because the second dip could be far worse than the first caused by the fall of Lehman Brothers. To those outside the Euro-zone who are gleefully watching the Euro collapse and congratulating themselves for not having joined in (and here I’m thinking of the British in particular), beware! If the Euro-zone area goes into an economic tailspin, it means European markets for British, Chinese, Japanese, American goods etc will dry up. International trade is a two-way street: if you block one end of the street, the traffic stops. So any excessive weakening of the Euro is highly contagious worldwide. I don’t need to go on, I think you get the picture.
What about this business of cracking the bottom of the egg? To paraphrase one of Bill Clinton’s famous slogan: to fix the Euro, fix the Maastricht parameters, stupid!
It seems that so far in this Greek-induced crisis, no one has thought of it. Everybody’s attention has been taken in by proximate causes, first among them, Greek corruption and profligacy. In this respect, many statistics could be quoted but one stands out: 40% of the Greek working population is employed by the Greek State! That’s incredible. Greece has been swept over by a tsunami of clientelism: every politician that has ever been in office has created a string of jobs for his voters. Of course, that game is over now. The Germans have no sympathy for this sort of thing, and in this at least they’re right. On the rest they’re wrong. In particular, in insisting on austerity measures that are so severe that they will push the economy into a long-lasting depression, some say ten years, ultimately making it impossible for the Greek Government to ever pay back its debt. This is not a win-win situation, but a loss-loss situation – or if you prefer to use a more sophisticated term: deflation. The Germans naturally have to share much of the blame for the depth – and probable length – of the Euro crisis. If they had been more cooperative and moved sooner in unison with the French (as they used to do in the past), we wouldn’t have the problem we have now.
More recently – as I indicated in my previous post – the ratings agencies have been pointed out as the villains of the piece. When Standard and Poor’s reduced Greek bonds to junk status a few days ago, there was an outcry in Europe, and a call to create a European ratings agency. It is true that the major ratings agencies – Standard & Poor’s, Moody’s etc – are all American. But that, in itself, is not the problem. Many countries – China, Canada, Japan – have created their own national ratings agency but these have no effect beyond national borders. The only ratings that count are precisely those issued by S&P’s, Moody’s etcc and no other. You can’t change capitalism overnight.
Creating national (or European-wide) agencies is not the answer. What’s wrong with the likes of S&P’s and Moody’s is not their nationality but that they are not independent. They’re in the pay of international finance. The ratings they issue are necessarily biased.
The solution would be to force ratings agencies to come clean about how they do their analyses and why. More transparency is what is needed. More transparency and more control by international agencies such as the International Monetary Fund that are entities independent from private finance. And when a rating is issued on a Euro member country’ sovereign debt, a vetting by the European Central Bank should be required. If the Bank is convinced of the soundness of the rating, then it could be issued. If not, then it should be stopped. But that implies a deep institutional change and it is likely to take time before all the major players concerned (the G20 and others) can come to an agreement on how to control the ratings agencies.
In the meantime, the drama goes on. Now speculators (and I mean hedge funds and other big investors), having cleaned out on Wall Street, are looking for new opportunities for a fast buck. They have turned their attention to sovereign debt. This is only natural. They always search for chinks in the armour: in the case of Wall Street, the chink was sub-prime mortgages embedded in derivatives. In the case of sovereign debt, it was first Dubai and they had to test whether it would be saved by the United Arab Emirates (it was). Now it’s Greece, and they have to test whether it will be saved by the European Union (it will).
But at what cost! And yet much of the pain could be easily avoided with a single stroke of the (Euro-zone) pen: move the Maastrich parameters from the present 3 percent rule (the ratio of debt to GNP) to something more realistic, say 5 or 6. The exact percentage is something economists could work out, but it should be in line with the capacity of the Euro-zone economies to function and recover from a down turn in the economic cycle. The problem for Greece is that it is asked to function and apply fiscal policies that would be appropriate for the German economic situation. The Greeks have to reign in their debt and adopt austerity measures, no one is arguing they shouldn’t. But the measure shouldn’t be excessive, or else they will kill the productive machinery of the Greek economy. So the deficit/GNP goal set by the Maastrich agreement should not be 3 percent. It is in any case hypocritical to argue that 3 percent is the right figure. It may have been at the time the Euro was established (although that too is arguable) but it no longer is so under present circumstances.
I know I sound like I am arguing about abstract percentages rather than the real world. But there is nothing abstract about the so-called Maastricht parameters. Why? Consider what the Euro is based on. To make the currency work, Eurocrats were faced with a real difficulty. They were able to set up a Central Bank but had to replace with an agreement the fact that there is no overall Euro-zone financial ministry. That’s what the Maastricht parameters are all about: iron-clad guidelines for all Euro-zone members, dictating how far into debt they are allowed to go. Three percent and no more. Of course, since the beginning of the Euro that three percent rule has been repeatedly broken, first by the French and the Germans. Then everybody got into the act, though it was done discreetly. But it was done. In other words, the Greeks weren’t the first to break the rules, even if they did so with greater abandon than anybody else, and for years kept hidden from view how far they had sunk into the red.
The Euro is not (not yet) the currency of a United Europe. The American dollar has a huge advantage: it is protected by a central bank (the Federal Reserve) which has political clout (the US Treasury). The European Central Bank hasn’t got that kind of clout. Why ? Because every Euro-member has jealously guarded its sovereignty over fiscal and financial matters. There is no Euro-zone Treasury or federal financial ministry, like in the US. When an American State goes bankrupt, or nearly so like, say, California, nothing happens to the dollar. When Greece threatens to fail, so does the Euro. The European Central Bank can do nothing about it, except take Greek bonds as collateral even if rated junk, and perhaps buy up Greek bonds as needed. I write “perhaps” because so far it hasn’t said it would do so. Jean-Claude Trichet, the head of the European Central Bank, has recently told the press that so far the matter hadn’t even been considered. And this should come as no surprise. Mopping up Greek bonds from the market is a measure of last resort, something it is rumoured (probably rightly so) that the Germans are opposed to. And of course, somebody has to finance the purchase of bonds by the European Bank. In other words, Euro-zone financial ministers have to agree to it. Fat chance!
So what is the solution? Some have suggested Greece should drop out of the Euro, others that Germany should. Such suggestions make no sense whatsoever. Dropping out of the Euro for any Euro member would mean declaring bankruptcy. Should Greece do so, all the banks across Europe that hold Greek debt would be endangered – and many would fail. Remember, French and German banks hold between them well over €100 billion in Greek debt. Then there’s the rest of Europe (Italy, Spain etc) who also hold Greek bonds.
Such a scenario is obviously unthinkable.
I believe that so far the right policy decisions have been taken and the Euro-zone’s bailout plan for Greece makes sense. What does not make sense is the severity of the austerity measures imposed today on Greece, tomorrow on Portugal, and next Spain.
Austerity is required but not to the point of jeopardizing economic recovery. The way out of this dilemma is to fix the Maastricht parameters, introducing sufficient flexibility in them to safeguard recovery. It won’t be easy because it is a political decision. The Euro-zone finance ministers have to get together and agree on a new set of guidelines to govern the debt/GNP ratio (and several other related matters). But they must do something fast, or else speculation against the Euro will continue unabated. If nothing is done, we’ll be heading straight into a Big Recession – perhaps a bigger one than the one we are so painfully climbing out – a recession that will affect not only Europe but the rest of the world too. Remember, because of international trade, any imbalance in the system is instantly globalized. There is no escape.
Do you agree? If I have convinced you, please help me in spreading the word. We need to make our political class aware of the danger. Ms. Merkel has already lost enough time before accepting to bail out Greece, there is no more time to lose.
We MUST change the Maastricht parameters as soon as possible. It may not be easy – anything involving politics never is – but it IS FEASIBLE. It’s a matter of political will.
Send my blog around, make comments, add to it, do whatever you like but spread the word to your friends and everyone you know.It is our only chance to keep speculators at bay and stop them from wrecking havoc and causing untold poverty and suffering.
We’ve got to make the politicians listen to us.Please help out and spread the word! CHANGE MAASTRICHT!
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