The initial enthusiasm of the financial markets over the last European
summit was short lived as the new ''kick down the can, grand plan''
to solve the crisis was agreed upon.
To bolster the market, the remnants of the famous EFSF 440 billions
Euros - which, never forget, was also provided by the periphery countries
it was supposed ''to save'' - should be used to leverage new instruments
aimed at forming a potential of, say, 1 trillion euros.
The idea is to insure 20% of the newly issued sovereign debt of risk
countries and to create special purpose vehicles (SPVs) - a term that
conjures up flashbacks of the infamous toxic assets. These SPVs would
be composed mainly of risky sovereign debt with a dash of EFSF money
and a touch of IMF funds (so to get an AAA rating). They would then
be sold off to emerging countries.
This is all wishful thinking. The most cynical commentators (here,
here
and here)
have already pointed this out. Greek debt will be somewhat reduced,
but its competitiveness will not be restored. Markets will not be assured
by the insurance plan and emerging countries will not buy Europe’s toxic
assets.
Many authorities (e.g. here
and here),
along with the U.S. administration, have stated that only a firm ECB
unlimited offer to guarantee European sovereign debt can stabilise and
solve the present situation. This is without having to buy a single
bond. It would not solve the long-run European imbalances generated
by the irresponsible structural elements of the creation of the European
Monetary Union (EMU), but it would help.
For room to manoeuvre on carrying fiscal deficits, for the benefit of
kick-starting growth, a two-pronged initiative is needed from the ECB.
First, to force interest rates on all European sovereign debt, aiming
to return roughly to the German level. Second, for core European nations
such as Spain and Italy to focus on stabilising their sovereign debt
to GDP (no reduction) ratio.
This would be the start of a more comprehensive solution that would
require, inter alia, a stronger wage and price dynamics in core countries
and pro-active public industrial policies in the periphery.
We may wonder why Germany is against the ECB intervention. The ECB inherited
the Bundesbank’s role of watchdog on wage moderation at the inception
of the German ''economic miracle''. Pursuing wage and price moderation
has been a consistent element of German post-WW2 policy, taking advantage
of the various fixed exchange systems prevailing in this period - Bretton
Woods, the EMS and currently the EMU (Cesaratto
& Stirati 2011). Letting the ECB act as a genuine European central
bank, that is as the lender of last resort for all European governments
- as the FED, the BoE or the BoJ do - would undermine Germany’s mercantilistic,
i.e. extremely export oriented, growth model.
However, either Germany acknowledges a reshaping of this growth model,
beginning to act as the European locomotive and not as a separate entity
or it will have to accept a transfer-union. Otherwise the Euro will
rancorously collapse.
As many authorities have pointed out, too many German policy makers
still do not to understand the meaning of a currency union. They are
perpetuating a point of view characterised by a certain degree of ignorance
(here).
As in a classical gold standard, the countries with current account
deficits cannot make the adjustments alone. On the contrary, it must
mostly be achieved through the contribution of surplus countries if
avoiding disastrous debt-deflation troubles in deficit countries is
a shared aim (e.g. Unctad
2011, VI/D).
Mario Draghi (as well as Bini-Smaghi) knows all this very well, and
this is the reason why the world
is looking at him with hope of having a genuine central banker in
place. But there is a political limit to what super-Mario can do.
Last Sunday the Merkel-Sarkozy tag-team humiliated Italy in order to
find a culprit to conceal their inability to find a definitive solution
to the crisis. Instead of accepting the blame, the burlesque Italian
prime minister should have pointed out that in no sense is Italy responsible
for the current crisis (the Italian debt has been there for decades
without much trouble). The point is rather that German and French banks
are liable for the present situation; mostly resulting from the Germany’s
lack of what Charles Kindleberger would have called economic leadership
(here).
Italy and the rest of the periphery, as well as France, should refuse
the imposed deflationary measures as useless. A new consensus is emerging,
supported even by the IMF
and, it seems, by the troika supervising Greece (here
and here),
that an ''expansionary fiscal retrenchment'' only exists in the mind
of neoliberal columnists like Alberto Alesina. It is just a tragedy
that the surrounding European nations don’t unite to bring Germany back
to reason and reality, once again.
http://www.social-europe.eu/2011/11/from-the-failure-of-europe-to-a-possible-growth-in-the-real-economy/