Eurozone leaders' comedy of errors brings monetary union to the brink
‘I love deadlines. I like the whooshing sound they make as they fly by,” said Douglas Adams.
There’s a thin line between tragedy and comedy, and this weekend the finance ministers of the euro area blundered over it. They gathered in Washington in the shadow of the darkest economic clouds since the collapse of Lehman Brothers, with the world’s eyes upon them.
Even as they met, stock markets around the world suffered their worst day since those dark months of recession. The MSCI World stock market index dropped into technical bear market territory. European sovereign debt teetered on the brink of insolvency and its banking system threatened to topple.
G20 sources finally conceded that it is now a question of when, not if, Greece will default. And in the face of this hideous storm what did they come up with? A deadline. In fact, that’s not quite it: they set themselves a deadline to come up with a timetable. You couldn’t make it up. Euro leaders have been given six weeks to devise a legal framework to implement measures which, if they are lucky, may have a fighting chance of saving the euro.
Of course, if ever there were a bunch of people you could count on to miss a deadline like this, it is the eurozone’s ministers. It is their prevarication throughout the recent crisis – whether over addressing their public finances, recapitalising their banks or addressing the rot at the heart of the single currency – which has left us where we are today.
Having tried to coerce them through economic rationale and behind-the-scenes exhortation, ministers from outside the eurozone are finally losing patience. Tim Geithner’s unprecedented visit to the Ecofin summit in Poland last weekend was precisely what it looked like: a desperate bid to shame the euro finance ministers into coming up with a deal. And behind the scenes in Washington over the past few days frustration has turned to anger.
Ministers are now privately conceding that Greece is bound to default – though Portugal and Ireland may survive. They are quietly preparing their economies for even more financial turmoil and readying themselves for what could conceivably be a repeat of 2008. And they are losing faith in the capacity of the Europeans to resolve their own problems.
Of course, there are differences between 2008 and today. Three years ago there was inadequate awareness of the threat posed to the economy by a perilously unstable banking system. But what leaders lacked in foresight they made up for in brute monetary reaction.
This time around it’s far clearer how the euro crisis might be solved: more fiscal union or less monetary union. The problem is that there isn’t the political will to address it. So instead we have that deadline. Quite what it entails is intentionally vague. George Osborne’s take is that there are, in fact, two discreet deadlines.
By the time the G20’s finance ministers meet in Paris in mid-October they must have implemented the bail-out proposals euro leaders came up with in July, including properly establishing the European Financial Stability Fund (EFSF), renegotiating some of the Greek debts and making the bail-out loan terms more generous.
Then, by the time of the G20 heads of state meeting in Cannes at the start of November the euro plan must have been improved: the EFSF expanded, banks re-capitalised and plans laid down for a healthier, better-functioning euro system. And you thought solving the euro crisis would be complex.
The real problem, though, is that most of the above measures rely on parliaments around the eurozone ratifying them, and possibly imply reforms to the European Constitution, which could necessitate further referendums. And, given that the Germans, for one, are already rebelling against their Chancellor for even hinting that euro membership may entail chunky fiscal transfers from north to south, you can see the difficulty.
There is no public appetite for the foul-tasting remedy. It’s fashionable to blame politicians for this, but for the most part they are only reflecting what their voters are telling them. The Greeks don’t much like austerity; the Germans don’t fancy subsidising their work-shy Mediterranean cousins.
Their respective leaders, meanwhile, are desperate not to allow the euro to collapse because membership has enabled them to avoid facing difficult questions about the inherent weaknesses in their economies. Greeks have become accustomed to a standard of living that simply isn’t supported by their economic performance: unit labour costs, to put it another way, are disproportionately high and productivity disproportionately low.
Germans assume that booming exports to Europe and further afield are their birth-right. Were the euro to collapse overnight, the new deutschmark would be catapulted higher – a disaster for an economy so deeply reliant on exports. Greece’s cost of borrowing would go through the roof, starving the country’s citizens of the cheap credit that gave them the sensation of relative wealth.
A euro break-up, in other words, would be extremely painful for all concerned – particularly since the Greeks and Germans are both so accustomed to these perks that they’ve forgotten that they are ephemeral. It is only when euro members feel a little of that pain that they will really construct a successful rescue package. Deadlines on their own are unlikely to be enough.
Much of the talk this weekend in Washington has been over how politicians can somehow conjure up the “spirit of London”, referring to the 2009 London Summit when G20 leaders came together and vowed to spend as necessary to save their economies.
But, as Alistair Darling has since admitted, it was fear that galvanised the politicians back then. By March 2009, politicians had felt the collapse of Lehman Brothers, they saw the statistics showing them that the world was deeply in recession.
We haven’t reached that moment this time around. But behind the scenes most major economies are now making contingency plans for a “Lehmans moment”.
The smart money is on a Greek default sometime before the end of the year – although most probably after the eurozone ministers miss that G20 deadline. The hope – and it is a perverse one – is that the chaos this engenders actually pushes the euro ministers (or more accurately their electorates) towards a solution to the crisis.
In the meantime, there are short-term plans afoot to boost the EFSF, which is the main element of the latest euro bail-out package. These plans, which moved a step closer to crystallisation in Washington, involve allowing the EFSF to guarantee euro government debt and, in the event of a loss, absorb the first 20pc or so of losses.
This would increase the potential firepower of the EFSF (which has around €300bn [£262bn] left) five-fold overnight.European officials are delighted with this elegant solution. However, like every clever European plan, it is a fiddle to avoid democracy. For the euro to survive, the currency area needs a fiscal union, but eurobonds will need to be ratified in parliaments across the area. The EFSF is a Trojan Horse eurobond. Ignoring democracy has always been a pretty successful modus operandi for euro officials, but it’s questionable how much longer such tactics can work.
George Osborne’s diagnosis of the eurozone crisis is that “bad politics” is leading to “bad economics” – a political stand-off fuelling an economic disaster. He does not go far enough. The entire euro project is bad politics (anti-democracy) built upon bad economics (monetary union without fiscal union).
Perhaps euro leaders will, at the 11th hour, recognise the dangers they’ve concocted and try to address them.
But even they must now realise it’s too late to save Greece, and, potentially, monetary union as we know it.
This article originally appeared in The Daily Telegraph