Dark clouds on the Eurozone Sky

 August 3, 2015

In Wolfgang Schaeuble’s Germano-centric EU, no institution is more important – apart from his Politburo-like Eurogroup and the Office of the Chancellor – than his Ministry’s Council of Economic Advisers. The most influential adviser among them is Professor Hans-Werner Sinn from Munich, a Christian missionary-manqué turned tele-economist.

Like any good German, Professor Sinn has but a few ideas, but fixed, which he peddles forcefully with evangelic zeal in the national and international media. That is, when he is not using them as ideological tonic poured regularly in his Finance Minister’s ear.

When he doesn’t appear on TV to explain to his nation why the euro-crisis is like a bottomless pit for German money, or impart advice to the lawyer-trained flock which dominates the Eurogroup, Professor Sinn presides the Ifo think tank in Munich where he benevolently enforces – according to his hapless colleagues – a virulent form of “intellectual despotism”.

One of the fixed ideas Professor Sinn has advocated in the media and to Wolfgang Schaeuble since 2012 is of course that of Grexit. He is apparently convinced that countries like Greece and Portugal would need an internal devaluation of their wages and pensions of between 30 and 40 percent in order to shore up their competitiveness, compared to a 10 to 20 percent devaluation in Spain and Italy. Such steep reductions would not possible without generating huge social strife within the European Union, therefore Greece or Portugal should temporarily exit the eurozone. Thus, instead of resorting to this internal devaluation (read drastic reductions of salaries and pensions), they would revert for a while to their national currencies, which could be devalued and used as shock-absorbers while at the same time reducing their debt load via haircuts.

This simplistic way of trying to “solve” a complex situation has been lapped up by Wolfgang Schaeuble, like he did with another incredibly stupid idea: the “schwarze null” option as the main goal of budgetary policy. (It seems that neither surpluses nor deficits are desirable in Schaeuble’s world.)

To make his ideas triumph, Hans-Werner Sinn has blown out of the water all other options, such as “dexit”, or two EU currency zones, which was put forward as early as 2011 by a much more thoughtful colleague of his from Munich, Professor Alfred Steinherr. How exactly has Sinn achieved that ? By presenting – in a 2013 Project Syndicate commentary – the dexit option as if it were just another zany brainchild belonging to George Soros, knowing full well that in European capitals the billionaire’s reputation alone would be enough to kill any further debate on dexit.

Since the 13th of July 2015 diktat from Brussels, Professor Sinn and the five “wisemen” from the German Council of Economic Experts have aggressively started a campaign aimed at arming the Eurozone with new rules and procedures that would make the eviction of financially-shaky EU members easier. As lawyer-trained politicians generally find it hard to grasp complex economic arguments, this proposal could become EU official policy tomorrow. This could only make matters worse, as the adoption of exit rules will not contribute substantially to addressing the euro’s and the eurozone’s plight.

 

Two-speed Europe

 October 31, 2011

The decisions agreed upon by EU leaders during the 26th of October summit – the leveraging of EFSP, the “voluntary” 50 percent reduction of Greece’s debt, improved coordination of fiscal policies within the eurozone countries, the appointment of a super-commissioner with fiscal oversight responsibilities – have all been judged as steps in the right direction by the financial community. Stock markets have reacted positively and so have a few major rating agencies.

Less enchanted with the outcome are, however, the leaders of the ten EU countries which are not currently part of the eurozone. As a result, the summit was the scene of harsh verbal exchanges between David Cameron and the French president, for example, but tensions were equally evident among the Swedish and Romanian delegations.

The non-members of the eurozone feel that the Union is heading towards a two-speed Europe. In other words, its core is made up by the 17 eurozone member countries, headed by Germany and France, whilst the rest are relegated to the periphery, geographically as well as economically. The UK’s chief concern, as the leading financial centre of the Union, is the insistence of eurozone member countries on introducing a financial services tax which could cripple the activity of the City of London. Romania, on the other hand, has expressed reservations about the measure to recapitalise EU banks with large exposure to the Greek, Italian or Spanish debts. As most of its banks are foreign-owned, that might lead to a drastic reduction in lending to local companies. All the other leaders feel already excluded from the important decision-making process, which will take place in the first instance within the euro-club and only afterwards discussed with the rest of the EU’s political representatives.

The emergence of the two-speed Europe could have been avoided by the northern kingdoms if they had agreed to join the eurozone from day one. At the time, countries like the UK and Sweden, for example, sported healthy finances and a fiscal discipline which were in accordance with the criteria established at Maastricht. All is not lost, however. Membership of the eurozone is still open to them in the future, if only they could overcome their reluctance to join. The newer EU members, such as the Czech Republic, Poland, Romania and even Bulgaria are all making strenuous efforts to reduce their budget deficits, improve tax collection and prepare their economies for becoming full members of the eurozone in the years to come.

Viewed in this light, the existence of a eurozone core that could act as a catalyst for change upon the “periphery” is not altogether as negative a development as some EU political leaders wish to present it to their electorates. (sources: Der Spiegel, Reuters, Le Monde, The Economist, The Guardian)

Uncertainty Plagues the Eurozone

 September 9, 2011

Major trouble, we learn from the Chinese, can be likened to a tunnel we have to go through until we reach the other side. It is hard to say whether the sovereign debt crisis that hit the eurozone two years ago is about to be dealt with more decisively this fall. To be sure, a few austerity packages and hundreds of billions of euros later, Greece’s public debt is as high as at the beginning of the crisis. Even more alarming, the size of Italy’s public debt has started to worry the international markets in August, and the United States has been close to defaulting on its 14,000 billion dollar debt, losing its coveted AAA credit rating.

There are a few glimmers of hope, if not as yet light at the end of the tunnel. The new IMF chief, Christine Lagarde has strongly urged western governments to soften austerity measures and to adopt pro-growth policies instead. On the other side of the Atlantic, Warren Buffett has publicly called on his fellow billionaires to accept a 50 % tax rate in order to help reduce America’s debt. In France, sixteen prominent billionaires have published a manifesto stating their agreement with the introduction of a temporarily higher tax rate for the rich – a call supported by many leading French industrialists. The Italian, Hungarian and even Romanian parliaments – believe it or not – are considering introducing a special tax payable by those with incomes of 25,000 euros or more (Hungary) or of 90,000 euros or more per annum (Italy). For now, however, the Italian government has quickly withdrawn its proposal, while the Romanian 1 percent “solidarity tax” (a rather ridiculously low rate, considering that for the past twenty years the country’s “business” elite has achieved this status by pillaging Romanian banks and enterprises and by systematically siphoning off funds from the national budget) still needs debating…

At the EU’s periphery, austerity is slowly but surely choking off growth, in both the UK and Greece. Undaunted, the British government wishes to buck the trend and reduce the 50 % top tax rate for the rich, in spite of popular discontent which has erupted beyond expectations in August. Greece has recorded a second year of negative growth, but again, any talk of imposing extra taxes on the rich is still taboo.

Economists and bankers worldwide are hotly debating the euro’s future. Scenarios on the table range from an imminent implosion (Roubini, Alan Greenspan), to a possible shrinking of the eurozone (Kenneth Rogoff, Florin Aftalion) which would leave some of the Mediterranean countries – unable to reduce their public debt – out. American historian Harold James strikes a more optimistic note, pointing out that over the past two years the exchange rate of the euro has held steady despite the turmoil around it. Ironically, the most affected currencies have been the Swiss franc, the Australian dollar and the Japanese yen.

The eurobond issue seems dead and buried after the German Constitutional Court decision handed down on September 7, and the fiscal policies’ convergence seems to be in. At this point in time it is far from clear, however, whether the light at the end of the eurozone tunnel is within reach. We will probably find out by the middle of next year. (sources: Reuters, Le Monde, Deutsche Welle, La Vanguardia, Courrier International, Project Syndicate, The Economist).