October 10, 2024

Inside Europe: Euro Zone Still Looking for a Handle on Crisis

PARIS — What if German savers were to help rescue Greece, Portugal or Spain by investing in their state assets and companies rather than bailing them out with taxpayer-backed loans? That novel idea for recycling Berlin’s huge current account surplus, avoiding fire-sale privatizations in the weakest euro zone states and fueling growth in southern Europe comes from the French economist Olivier Garnier.

Mr. Garnier, the chief economist of Société Générale, argues that creating an agency in charge of purchasing, restructuring and privatizing state-owned assets could, over time, solve several of Europe’s deep economic problems.

Such a “European Treuhand (Trust) Agency” would offer a “debt-for-equity conversion” that could repair the public finances of the euro zone’s bailed-out states, reduce North-South current account imbalances in the 17-nation currency area and generate investment in Europe’s periphery.

Mr. Garnier argues that the idea would offer German savers a better return than parking their surplus cash in domestic bank deposits earning zero nominal interest, and would be politically more palatable for Germans than risky taxpayer loans to governments that might never be able to repay the debt.

The fact that such long-shot proposals are doing the rounds four years into the bloc’s debt crisis highlights how few of the underlying problems that caused it have been resolved.

This idea may be timely as Chancellor Angela Merkel tries to soften Berlin’s image as Europe’s stern austerity enforcer and show a gentler side with initiatives to help fight youth unemployment in crisis-stricken euro zone countries. But to bitter Greeks or Spaniards, it might look more like an exercise in German colonization than a helping hand. While Dutch, Austrian or Finnish savers might join, the “European” agency would inevitably be dominated by German money.

When the top-selling German daily newspaper Bild ran a headline at the start of the debt crisis in 2010 screaming “Sell your islands, you bankrupt Greeks! — and the Acropolis, too,” it caused fury, rekindling resentments smoldering since World War II.

Quoting Finance Minister Wolfgang Schäuble’s comment that “we want to show that we are not just the world’s best savers,” Mr. Garnier says: “He should have added that the Germans have to show they can be wiser investors, making a more efficient use of their savings and of their related taxpayers’ guarantees.”

His idea has a German precedent. After the fall of the Berlin Wall and German unification in 1990, a trustee agency known as the “Treuhandanstalt” was set up to restructure, wind up or sell off East German state enterprises. Some top talents of West German business were recruited to help shake out and spin off eastern companies.

But this example points to some of the obstacles to Mr. Garnier’s proposal. The Treuhandanstalt was criticized for laying off nearly 2.5 million workers of the 4 million it had inherited and for closing businesses that critics said were profitable. It contributed to East-West resentment over the social and financial costs of unification, and its first president was assassinated by (West German) Marxists.

Privatizing state-owned companies and property are a key part of the bailout programs prescribed by the European Union and the International Monetary Fund for the euro zone’s debt-laden governments. Yet Greece’s consistent failure to meet its privatization revenue goals highlights just how hard it is to attract serious investors to countries mired in deep recession, and to sell even profitable businesses for a fair price.

An attempt by Athens to sell its natural gas company, Depa, collapsed in June, blowing a hole of €1 billion, or $1.3 billion, in its bailout plan, and raising further doubts about plans to hawk the state gambling monopoly and the money-losing railroad.

Elsewhere in the region, so-called vulture funds of private equity investors are looking to pick up stakes in blue-chip Spanish companies at knock-down prices after bailed-out banks were forced to divest.

With Mr. Garnier’s model, a long-term investment vehicle funded by both private sector savings and the German government, or with a state guarantee, would buy up the assets, taking them off their governments’ books, then restructure and run them until they could be sold off profitably.

The German economists Daniel Gros and Thomas Mayer suggested last year that Germany should create a sovereign wealth fund, like those of Norway, Singapore and Saudi Arabia, to invest excess savings. Such a fund would be a safer and more efficient way to place German savings than in unremunerated deposits, they argued, and would have the side benefit of lowering the euro’s exchange rate, which would benefit struggling south European economies.

Mr. Garnier would put that money to work inside the euro zone. He notes that Germany’s state-owned development bank, KfW, is already dipping a toe in these waters by providing loans through its Spanish counterpart to credit-starved small and medium-size businesses.

Mr. Garnier’s proposal raises three other issues: Would the agency be able to run the assets more efficiently than current owners? How would the risk to German savers’ capital be mitigated? And how could the assets be valued at prices acceptable to all?

His answer to each question is that the status quo is worse: The assets are moldering while governments desperately need the money. Germans face risks from the bailed-out countries as taxpayers, so why not get some return on their savings? And the assets could be priced in a way that allowed for some upside for south European states if they fetch more on the market.

“I see all the hurdles, but it would be ill-advised to rely only on fiscal transfers to share risks among euro zone economies,” Mr. Garnier said in an interview. “A European fiscal union raises even bigger obstacles than this — abandoning budget sovereignty — and writing off official debt would be fraught with legal and political obstacles.”

Paul Taylor is a Reuters correspondent.

Article source: http://www.nytimes.com/2013/07/23/business/global/23iht-inside23.html?partner=rss&emc=rss

Today’s Economists: Simon Johnson: Introducing the Latin Euro

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Peter Boone is chairman of the charity Effective Intervention and a research associate at the Center for Economic Performance at the London School of Economics. He is also a director of Salute Capital Management Ltd. Simon Johnson is the Ronald A. Kurtz Professor of Entrepreneurship at the M.I.T. Sloan School of Management and former chief economist at the International Monetary Fund.

The verdict is now in. Traditional German values lost and the Latin perspective won. Germany fought hard over many years to include “no bailout” clauses in the Maastricht Treaty (the founding document of the euro currency area) and to limit the rights of the European Central Bank to lend directly to national governments.

Today’s Economist

Perspectives from expert contributors.

But last week, the bank’s governing council – over German objections – authorized the purchase of unlimited quantities of short-term national debts and effectively erased any traditional Germanic restrictions on its operations.

The finding this week by the German Constitutional Court that intra-European financial rescue funds are consistent with German law is just icing on this cake, as far as those who support bailouts are concerned.

With this critical defeat at the E.C.B., Germany is forced to concede two points. First, without the possibility of large-scale central-bank purchases of government debt for countries such as Spain and Italy, the euro area was set to collapse.

And second, that “one nation, one vote” really does rule at the E.C.B.; Germany has around one-quarter of the population of the euro area (81 million of a total of around 333 million), but only 1 vote of 17 on the bank’s governing council – and apparently no veto.

The balance of power and decision-making has shifted toward the troubled periphery of Europe. The “soft money” wing of the euro area is in the ascendancy.

This is not the end of the crisis but rather the next stage. The fact that the European Central Bank is willing to purchase unlimited debt from highly indebted nations should not make anyone jump for joy. The previous rule forbidding this was in place for good reason; the German government did not want investors to feel they could lend freely to any euro-area nation and then be bailed out by Germany.

Now investors know they can be bailed out by Germans, both directly through fiscal transfers and through credit provided by the European Central Bank. How does that affect the incentives of borrowers to be careful?

Prime Minister Mariano Rajoy of Spain has now opened the next front in the intra-European credit struggle. Despite the announcement of E.C.B. support, Mr. Rajoy remains elusive regarding whether he would seek the money.

His main concern is that the E.C.B. is insisting that the International Monetary Fund, along with the European Union commission and perhaps the central bank itself, negotiate an austerity program with any nation that needs funds. Such an austerity program is the “conditionality” that the E.C.B. had to assert would exist in order to justify the large bailouts they are promising.

So the battleground moves from whether the European Central Bank can bail out nations to whether austerity programs should be required for bailouts. The peripheral countries will fight this issue tooth and nail, and they will win.

Unemployment in Spain is now around 24.6 percent; in Greece it is 24.4 percent (with unemployment for those 14 to 24 at 55 percent). Both Portugal and Ireland have made progress with their austerity programs, but they are not growing, and their debts remain very large (gross general government debt is projected by the I.M.F.’s Fiscal Monitor to be 115 percent of gross domestic product next year in Portugal and 118 percent of G.D.P. in Ireland).

The current Italian government is well regarded, but large political battles loom, and it is also burdened with big debts (to reach 124 percent of G.D.P. in 2013).

At the same time, European countries outside the euro – including Britain, Sweden, Poland and Norway – are all seen as faring much better.

The Germans will be increasingly drawn toward one plausible conclusion: perhaps the euro area is simply the wrong system. If tough austerity programs do not wrest nations free from high unemployment and overindebtedness, then how are they to get back on the path to growth?

If a one-time devaluation could help release nations from their troubles rather more quickly, perhaps Germany should instead acknowledge – or insist – that the single currency is a failed exchange-rate regime.

The European Central Bank is now fighting for its survival as an organization. Its president, Mario Draghi, and his colleagues have stretched the rule book in order to open the money spigots to purchase troubled nations’ debts. The leaders of troubled nations will fight hard to get all they can with as few promises in return as possible. Elected officials must do this, or they will lose elections.

Europe has strong institutions, including good property rights and vibrant democracy. An independent central bank was long seen as an important manifestation of such institutions. But powerful interests have shifted toward wanting easy credit above all else. And the more the E.C.B. provides such credit, the more powerful those voices on the periphery will become.

We’ve seen such a dynamic operate time and again around the world. When strong regional governments are fighting for resources against national governments, there is a tendency for regions to accumulate large debts, then demand new bailouts at the national level. These battles often end in runaway inflation, messy defaults or both (think Argentina many times or Russia in the 1990s).

The European Central Bank has handed the euro zone’s peripheral governments a great victory at the expense of those who hoped to keep the euro area a solvent, “hard currency” zone through disciplined public finance.

It may be difficult to imagine that wealthy European nations could follow the tragic path to inflation and defaults seen for so long in Latin America. Yet with each “step forward” in this euro crisis, Europe moves further along that same route.

Article source: http://economix.blogs.nytimes.com/2012/09/13/introducing-the-latin-euro/?partner=rss&emc=rss