November 29, 2020

High & Low Finance: Europe Must Choose a Currency Union or a Financial Union

European leaders seem to be willing to accept that reality. But persuading publics may be far more difficult.

After more than a year of claiming that Greece could be bailed out without significant costs either for lenders or the rest of Europe, European leaders pledged on Thursday to pump in large amounts of money to try to revive the Greek economy while delaying repayment and reducing interest rates on existing loans.

It appears that the deal will mean solvent European nations will have to write some very large checks. Lenders will suffer losses, and some banks may need more bailouts, which Europe will pay for through a collective fund that will be authorized to borrow money backed by European states individually and collectively.

That fund, called the European Financial Stability Facility, will also take over lending to Greece, at rates close to what the facility is forced to pay when it borrows money.

Other parts of the communiqué issued by the European leaders after their summit meeting in Brussels promise there will be more central control over national budgets and tax policies.

Call it the federalization of Europe.

Unlike in the first Greek bailout, in spring 2010, the European leaders now accept that the Continent has a responsibility not just to prevent collapse but to get the Greek economy moving again.

In effect, the new decisions recognize that a strategy that might have been called “prosperity through austerity” was a hopeless failure. While there is little doubt that Greek profligacy was an important cause of the mess it is in, a combination of reducing government spending and seeking to raise tax collections was never going to produce a recovery that would make it possible for Greece to pay its debts.

Over the 12 months ending in March, the Greek economy shrank by 5.5 percent, while unemployment, at 12.2 percent when the country was first bailed out, rose to 15 percent.

“We call for a comprehensive strategy for growth and investment in Greece,” said the statement. While it removed a reference to “a European ‘Marshall Plan’ ” that was in a preliminary version of the statement leaked earlier Thursday, it promised that the rest of Europe would “work with the Greek authorities on competiveness and growth, job creation and training.”

Pouring money in will not, in and of itself, make Greek industries competitive again and enable the nation to flourish. In fact, it was money pouring in for most of the past decade that helped to create the problem. Then investors were willing to lend money to Greece for basically the same rate they charged Germany, on the theory that a common currency should mean common interest rates. Those savings — Greece’s effective borrowing rate was cut by more than half from 1998 to 2005 — enabled the government to spend more and tax less than it otherwise would have been forced to do.

That was not what advocates of the euro forecast when it was being created more than a decade ago. Then the theory was that countries would enact reforms — in labor markets, fiscal policies and even work habits — to become more like Germany. They would do that because a failure to do so would result in a country losing competitiveness as its costs rose more rapidly than those of Germany while the prices it could charge could not do so, since both countries used the same currency.

Now, Europe claims it will change, but there is obviously some resistance to detailed commitments. The leaked draft included a promise to “introduce legally binding national fiscal frameworks” by the end of 2012. The final communiqué took out the words “legally binding.”

The countries previously promised not to run large budget deficits, but they all did when the world went into recession. This time, though, we are assured they really mean it.

Article source: http://feeds.nytimes.com/click.phdo?i=ab662cb147211621e5bc97395953e9d9

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