Thursday, October 27, 2011

Has Europe Been Saved? Did It Need to Be?

In France, former president Valéry Giscard d'Estaing has said that the
crisis has been "exaggerated for political purposes." Implicit in his
remarks was the allegation that Sarkozy intends to run his re-election
campaign on the theme "I saved Europe." If this was the plan, it has
foundered on Sarko's capitulation to Merkel on all salient issues. He
is now being portrayed in the French media as "the man who caved to
Merkel," Europe's new Iron Lady, rather than as Europe's savior.

Nevertheless, let us consider for a moment Giscard's charge. Are there
grounds for thinking that the crisis has been exaggerated? Not for
Greece, surely: as Yanis Varoufakis (see previous post and this one) and many others have
argued, imposed austerity is ripping up the Greek social contract and
precipitating a severe depression. Elsewhere, however, the required
fiscal adjustments have been less dire. Berlusconi's coalition may
sink after being forced to raise the legal age of retirement and
swallow other bitter pills, but widespread wage and benefit cuts of
the sort imposed on Greece have thus far been avoided. Spain's
difficulties are different from the others, stemming essentially from
a construction bust, which has left the country with a very high level
of unemployment. But will high spreads on Italian and Spanish debt
continue, or are these signs of a temporary panic? If so, the
agreement reached in the wee hours this morning may suffice to calm
things down, since it is being reported in much of the press as a
"success," pace Varoufakis's comments. For example: "European leaders,
in a significant step toward resolving the euro zone financial crisis,
early Thursday morning obtained an agreement from banks to take a 50
percent loss on the face value of their Greek debt."

Europe has yet to overcome its contractionary mindset, to be sure, but
then neither has the US. So a decade of no growth may lie ahead. But
is that any reason to prophesy the collapse of the euro and perhaps
even the end of the EU? Are European leaders really fiddling while
Rome burns, or are they playing a gentle nocturne, hoping to lull the
bond vigilantes (who may not exist in the US but are certainly
pressuring PIGS sovereign debt) back to sleep? The 50% Greek haircut
does not really threaten European banks, many claim. Will
the new capital requirements really stanch the flow of credit,
assuming that genuine investment opportunities emerge? One can doubt
this. Giscard might therefore be right.

So, what's wrong with this argument?


FrédéricLN said...

"what's wrong with this argument?"

What was wrong, is that Greece was at days or weeks from bankruptcy (the Illinois way), and our Heads of States did not agree with that.

Apart from that, Giscard is quite right: the euro is not at risk, and a bankruptcy might be a smoother way to get out the crisis, as would be the fall of the cards-castle EFSF the EU is trying to rebuild.

Unknown said...

But Frédéric: Greece is bankrupt. Its bankruptcy has been declared, its bonds have been written down, its banks have been nationalized. The agreement only increased the writedown. But the point is that even if Greek debt were written down to zero, the European banking system, many argue, would not collapse and would not have collapsed even without increased capital requirements.