Let us introduce the euro as a prisoner sentenced to death row, waiting to be executed at any moment. And just as his dying hour was at hand, EU leaders postponed sentencing to give a little life of the common currency. Markets cheer as after each of the previous four summits to “euro crisis” – until you understand that the fundamental problems yet to be countered.
Such is the opinion of the Nobel laureate Joseph Stiglitz expressed in a publication of Project Syndicate.
The good news after the meeting that EU leaders finally realized the cycle of their existing activities – lending to banks to save their governments, then governments to survive the banking systems.
Similarly, now recognizes that emergency loans that give new priority over other creditors worsen the position of private investors who are just beginning to require higher interest rates.
Really disturbing thing in the whole situation is how long it took the European leaders to see something so obvious. Yet the decision was taken at the last meeting, was not significantly different from previous ones. A year ago, the EU finds that Greece can not be restored without growth, but growth is not achieved with the regime’s austerity. Yet little has been done about it.
The latest proposal includes recapitalize the European Investment Bank as part of the growth package worth 150 billion dollars. But politicians are too good at “repackaging” and the new money will be too small fraction of that amount and will not even be able to enter into circulation immediately.
In short, these measures are too little and untimely and founded based on an erroneous assessment of the problem and flawed economic model.
The hope is that markets reward virtue – in this case the regime of austerity. Unfortunately markets are more pragmatic.
If austerity measures weaken economic growth and thus undermine the ability to pay the debt, and as expected, then interest rates will fall. Investment will decrease and so will follow an inexorable downward spiral for any Greece and Spain have already made.
Eurobonds and the overall bailout fund can support growth and to stabilize interest rates for governments in crisis. Lower rates may exempt such funds in countries with large budget constraints, which can be spent on investments to promote growth
The situation in the banking sector is much worse. Since each government supports the banking system in his country, the situation of banks is directly dependent on the ability of government to support them. Even a well-run banking system will fall into trouble in an economic downturn the size of that of Spain and Greece. Pyrenean banks are even more endangered after the bust of real estate.
In their enthusiasm to create a “single market”, European leaders realized that governments provide a hidden subsidy to domestic banking systems. So if the problem rears all rely on the government would help banks and trust so they will be maintained. But some governments are in a much better position than others and so hidden subsidy is much greater for them.
In the absence of level playing field why not leave money to weaker economies and institutions run into more stable? The remarkable fact is that in fact we do not see quite as massive flight of capital. Leading figures in Europe were reported this danger, which could easily be avoided by the provision of general guarantees. This would be corrected as market disturbances provoked by internal hidden subsidy.
The euro was flawed from the outset, but it was clear that the effects will be felt only in times of crisis. The introduction of the euro was realized with the best economic and political intentions. The principle of the single market is supposed to contribute to more efficient allocation of resources such as capital and labor.
But details are important. For example, tax competition can not send capital where his social returns will be greatest and the most advantageous deal. Domestic subsidies for banks means that German banks have an advantage over those of other countries. Therefore, workers can leave Ireland and Greece, but not because their productivity is low there, but because that will be able to escape from debts incurred by their parents.
The main objective of the European Central Bank is to ensure price stability, but inflation is far the biggest problem for Europe today.
Germany is worried that without strict controls on banks and budgets will have to “untie the purse strings” for more profligate neighbors. But this argument is omitted a key point – namely, that Spain, Ireland and other affected countries had budget surpluses before the crisis and economic downturn just cause deficits, and not vice versa.
If these countries have made a mistake, it is only that trust in the markets too (as does Germany now), and allowed the bubble to inflate assets unattended. If you implement adequate policies and establish a more stable institutions, which not only means more austerity and better oversight of banks, budgets and deficits, the growth can be restored and affected countries to cope with debt and without recourse to the general guarantees. But in any case, Germany would have to pay a great price, whether the euro collapse or collapse the economies of indebted countries.
Europe has many strengths but also weaknesses. These include mainly wrong policies and institutional arrangements. These shortcomings can be easily overcome, if they are recognized and considered more important than any individual structural reforms in individual countries.
Structural problems can be weakened competitiveness and GDP of some countries, but they are responsible for the crisis. So their solution will lead to greater stability in Europe.
The European approach to making time to the crisis and delay important changes will not work forever. We not only trust in the EU periphery decreases, but the survival of the euro put into question more often.