Euro Crisis: Greece is not the Problem, Germany Is!
Image by infomatique via Flickr
The Euro crisis is precipitating. European banks have yet to recover from the 2008 financial crisis, markets are in a panic. When the world policy elite met in Washington on Saturday 24 September at the World Bank and the IMF, the Americans insisted, especially with Germany, that something be done. But European leaders hummed and hawed, acknowledging that their July plan (still not applied) was a little weak, that more needed to be done. Two days earlier, the BRICS countries (Brazil, Russia India, China, South Africa) had met in New York, playing up the might of their $4 trillion reserve and what they might do with it.
Both meetings had but one topic: the Euro and how to save it.
Both meetings resulted in nothing.
Maybe this week will bring some news from Europe. Maybe not. In Germany, any bailout proposal has to go through parliamentary approval. A vote is scheduled next week, but who knows how it will go now that Merkel's political capital is at its lowest.
Yet none of this need have happened if only Merkel had moved earlier, as soon as the Greek crisis had started over a year ago. But she constantly dragged her feet and listened to her business-supported minority party that objected to a Greek bail-out and accused the Greeks of immoral profligacy. That particular political platform however, has not been a success: it has brought that party from a respectable 18% share to a miserable 2% at the last elections in Berlin! One may presume that the German business community is not particularly happy with a position that threatens both the Euro and world economic stability!
Sure, everybody in the financial world knew the Greeks had cooked their debt numbers in order to enter the Euro zone. Everybody knew that democracy in Greece was a corrupt game of You Vote for Me/I Give You a Job, a Pension, a Promotion, in short a vote-for-goodies system.
Every democracy has this sort of problem to a certain extent, from pork-barrel politics in the US to energy scandals in India. So the Greeks have invented nothing new here.
But it's German obtuseness that is causing the problem.
Almost from the beginning of the crisis, the financial measure that could have saved the situation was proposed: euro-bonds backed by all 17 Euro zone members. First Juncker and the Italian Finance Minister Tremonti proposed it. Most recently Mario Draghi, the new President of the European Central Bank is pushing the idea (he will succeed Jean-Claude Trichet next month).
But the Germans have always refused. NEIN! It must be said that Christine Lagarde supported that position when she was still French Finance Minister. Now that she is the head of the IMF she has changed her point of view and is no longer pushing for fiscal austerity. Instead she is talking about measures to kick start economic growth. One up to her: that is a huge change in the IMF traditionally wedded to fiscal rigor.
Indeed, it's about time that our policy elite realized that the real problem is not the deficit but the threat of recession - indeed, the Greek economy has already contracted by some 5%. How can you expect these people to ever repay any debt if you don't focus on economic growth??
Another thing that is crystal clear: if Greece defaults, Italy is next.
And after Italy? Why, Germany itself will totter. That's what the US Treasury Secretary Geithner delicately calls the European "cascading default threat".
And so will the rest of the world, starting with the US. The BRICS are painfully aware that they risk losing their best markets for a very long time!
And to think that Germany has been the MAIN beneficiary of the Euro! Speak of ingratitude...
What beats me is why the Germans won't accept Euro-bonds. It's such a simple, elegant solution. It spreads the risk equitably, everyone ends up participating and being taxed in proportion. And it would still leave some 40 % of a country's national debt in its own hands. It would cover only 60% of the debt (in line with the Maastricht agreements), thus forcing countries to take responsibility for their own economic and fiscal policies (mistakes will lead to higher rates on their own bonds).
Sure, it means Germany will pay more on 60% of its debt - not around the 2% it's paying now, but probably around 4% or 5% (I don't have a crystal ball, but I would guess that's the range). On the rest of debt funding, it will continue to get the nice rate it is so proud of. Though, as its economic is currently slowing down, it's not very likely that this rate will remain at that nice low level for that much longer...
All this reminds of a family deciding to put its patchwork bits of bed cover together and create one big cover to keep warm. There's a bit of cover for everyone, but if one (Germany) decides to keep all the cover it can for itself, leaving others naked in the cold (Greece, Ireland, Portugal), well...it's not nice! You don't pull all the cover to yourself and the others be damned! When you got into this cover agreement, you knew that you'd have to take responsibility for sharing the cover...
So why did Germany enter the Euro if it didn't want to take on any responsibility for the common currency? Why didn't it stop Greece (and the others) from entering?
Really, it looks like Germany is the one who shouldn't have entered...
But now, there's no time to be lost in throwing the blame on anybody. The damage is done, no matter whose fault it is. The EURO NEEDS TO BE SAVED ASAP. That means:
(1) launching Eurobonds to stabilize the financial markets - that's what the markets expect and are waiting for!
(2) strengthening the proposed €440 billion bailout scheme, the so-called European Financial Stability Facility (EFSF): make it work, dammit! Recapitalize European banks with it!
(3) support consumer demand, don't dampen it with taxes and other austerity measures! If you insist on balancing the budget, then you have to adjust tax rates to weigh more on the rich, reform social security entitlements to align with demographic and economic realities, fight tax evasion and every other form of stealing the State, including false invalidity pensions. In short, in balancing the budget, never forget to stimulate growth, it is key to avoid European recession followed by global collapse!
What do you think? Do you see any other solution to save the Euro and the world from recession?