« Avec les politiques actuelles, une vague de defauts d’Etats et de faillites bancaires est inévitable. La plus grande partie de l’Union monétaire se dirige vers la dépression et la déflation », écrivent les auteurs de cette analyse - saluée par Paul Krugman - que publie le Centre for European Reform, un think tank libéral et pro-européen. Les auteurs dénoncent la lecture courante de cette crise, qui la présente comme le résultat d’une gestion irresponsable de nations du sud qu’il conviendrait aujourd’hui de punir. Ils insistent sur les causes structurelles qui ont provoqué de graves déséquilibres macroéconomiques. Une union entre des pays aussi disparates au plan économique produit un déséquilibre dans les échanges qui se traduit par un endettement des zones déficitaires. En l’absence d’une union budgétaire - c’est-à-dire de transferts entre régions - le sud était condamné. L’insistance mise aujourd’hui sur la rigueur exonère à bon compte les pays du Nord - entendre les pays exportateurs / créditeurs - de leur part de responsabilité. Si la BCE reste arcboutée sur ses dogmes et refuse de garantir les émissions espagnoles et italiennes, l’union va s’effondrer et la France devra l’abandonner à son tour, avertissent-ils.
par Simon Tilford and Philip Whyte, Center for European Reform, novembre 2011 - Extraits
European policy-makers have been reluctant to concede that the eurozone is institutionally flawed. Even now, many assert that the crisis is not one of the eurozone itself, but of errant behaviour within it. If certain countries had not broken the rules, they argue, the eurozone would never have run into trouble. The way to restore confidence, it follows, is to ensure that rules are rigorously enforced. These claims are wrong on almost every count. It is now clear that a monetary union outside a fiscal union is a deeply unstable arrangement ; and that efforts to fix this flaw with stricter and more rigid rules are making the eurozone less stable, not more.
the introduction of the euro spurred the emergence of enormous macroeconomic imbalances that were unsustainable, and that the eurozone has proved institutionally illequipped to tackle. North European policy-makers have been reluctant to accept this interpretation. For them, the crisis is not one of the eurozone itself, but of individual behaviour within it. If the eurozone is in difficulty, it is because of a few ‘bad apples’ in its ranks. In this interpretation, neither the design of the eurozone nor the behaviour of the ‘virtuous’ in the core were at fault. Ever since the eurozone crisis broke out, the North European interpretation of it has prevailed. It essentially sees the crisis as a morality tale, pitting those who sinned against those who stuck to the path of virtue. The major sins of the periphery were government profligacy and losses of competitiveness. The way out of the crisis, it follows, is straightforward. It is to emulate the virtuous core by consolidating public finances and improving competitiveness (by raising productivity, reducing wages, or both). If the periphery can achieve this, then the eurozone debt crisis can be resolved without an institutional leap forward to fiscal union.
The North European interpretation is by no means all wrong (no serious observer disputes that Greece grossly mismanaged its public finances). But it is damagingly partial and self-serving. It skates over the contribution played by the euro’s introduction to the rise of indebtedness in the periphery ; it wrongly assigns all the blame for peripheral indebtedness to government profligacy ; it makes no mention of the far from innocent role played by creditor countries in the run-up to the crisis ; and it does not acknowledge how the absence of fiscal integration has exacerbated financial vulnerabilities and made the crisis harder to resolve.
How did the euro’s introduction contribute to the current crisis ? The answer is that the removal of exchange rate risk inside the eurozone encouraged massive sums of capital to flow from thrifty countries in the ‘core’ to countries in the ‘periphery’ (where private investors thought the rates of return were higher). The influx of foreign capital cut borrowing costs in the periphery, encouraging households, firms and governments to spend more than they earned. The result was an explosion of current-account imbalances inside the eurozone. As a share of GDP, these imbalances were far bigger than those between, say, the US and China.
If the eurozone had been a fully-fledged fiscal union, it would not be in its current predicament. Its aggregate public debt and deficit ratios, after all, are no worse than the US’s. But it is not a fiscal union - which is why it faces an existential crisis, and the US does not. The absence of a fiscal union explains why economic imbalances between Germany and Spain matter in a way that those between Delaware and New Jersey do not. And it explains why some eurozone members face sovereign debt crises, while states in the US do not.
The current crisis, then, is not simply a tale of fiscal irresponsibility and lost competitiveness in the eurozone’s geographical periphery. It is also about the unsustainable macroeconomic imbalances to which the launch of the euro contributed (in creditor and debtor countries) ; about the epic misallocation of capital by excessively leveraged banks, notably in the core ; about the way in which financial vulnerabilities in distressed countries have been exacerbated by the absence of fiscal integration at European level ; and about the difficulties of adjustment in a monetary union that is politically (and therefore institutionally) incomplete.
Ever since the Greek sovereign debt crisis broke out, the thrust of eurozone policy has been to try and turn the region into a less Mediterranean and more Germanic bloc - that is a shared currency held together by increased discipline among its members. The centrepiece of the framework that has emerged is a ‘grand bargain’ between creditor and debtor countries. Creditor countries have assented to the creation of a European Financial Stability Facility (EFSF) to extend bridging loans to countries that are temporarily shut out of the bond markets. In return, debtor countries have agreed to much stricter membership rules. *
The grand bargain (or Plan A) has failed. The reason is that its underlying philosophy - that of ‘collective responsibility’ - is flawed. There are three problems. First, the demands of collective responsibility have been asymmetric : self-defeating medicine has been prescribed to debtor countries, while problems in creditor countries have been allowed to fester. Second, too much virtue has become a collective vice, resulting in excessively tight macroeconomic policy for the region as a whole. Third, stricter rules are no substitute for common institutions : they have left solvent countries vulnerable to catastrophic death spirals.
The challenges presented by Greece were always going to be daunting, given the dysfunctional nature of its political economy. But the medicine prescribed to the country - which was partly motivated by an urge to punish it and to take a stand against moral hazard - was doomed to failure. The policy consisted in giving an insolvent country liquidity support, in return for a more brutal than normal IMF-type austerity programme (because Greece could not devalue). The policy, inevitably failed. Although the government has slashed public spending, the economy has contracted even faster, further weakening the country’s public finances.
This asymmetry in treatment has deepened the crisis and increased the cost of resolving it. A year’s worth of punishing austerity and contracting activity has only succeeded in pushing Greece deeper into insolvency. Contagion has spread to Ireland and Portugal (which have been forced to accept bail outs and swallow the same medicine as Greece).
Individual virtue has become a collective vice
The emphasis on shared discipline has had perverse consequences on macroeconomic policy. ‘Bailed out’ countries have implemented fiscal austerity programmes ; countries at risk of contagion (like Spain) have done likewise ; and, perhaps to be seen to be setting a good example, creditworthy countries have done so too for good measure. The collective outcome has been a sharp tightening of fiscal policy at a time of weak private sector demand. Germany and the European Central Bank (ECB) believe that the faster budget deficits are cut, the faster private consumption and investment will pick up. The reverse has been the case
The ECB, meanwhile, has done too little to offset this synchronized fiscal tightening (in July, it actually raised its key official interest rate, citing “upside risks to price stability”). For a variety of reasons, the ECB has been deeply uncomfortable straying from the narrowest interpretation of its mandate. At times, the ECB has looked to be more concerned about inflation than about the eurozone’s survival.
The ECB’s reluctance to act as lender of last resort to governments, for example, has raised doubts in the financial markets about its commitment to the eurozone, and weakened confidence in solvent countries like Spain and Italy. The eurozone will not emerge from the debt crisis without economic growth. The region’s growth problem cannot be resolved by productivity-enhancing supply-side reforms in the Mediterranean alone (important though these are). Demand is also critical. But it is hard to see how demand can grow when private spending is being reined in and public spending is being cut. The current policy mix condemns the region to stagnation or worse : ECB is reluctant to use what little room it has left to ease monetary policy further ; and public spending cuts in a low interest rate environment are amplifying the contractionary impact on GDP.
Policy-makers now face a choice. They must either address the eurozone’s institutional underpinnings or risk a disorderly break-up. They need to agree on a number of long-term steps. The first is a partial mutualisation of sovereign borrowing costs, via the adoption of a common bond. The second is the adoption of a eurozone-wide backstop for the banking sector. The third is growth-orientated macroeconomic policy : the European Central Bank needs a broader mandate, member-states’ fiscal policy must be co-ordinated, and trade balances narrowed symmetrically. And finally, the participating economies must agree to deepen the EU’s single market - a shared currency cannot rest on a patchwork quilt of national markets. None of these reforms is sufficient. But each is necessary.
On current policy trends, a wave of sovereign defaults and bank failures are unavoidable. Much of the currency union faces depression and deflation. The ECB and EFSF will not keep a lid on bond yields, with the result that countries will face unsustainably high borrowing costs and eventually default. This, in turn, will cripple these countries’ banking sectors, but they will be unable to raise the funds needed to recapitalise them. Stuck in a vicious deflationary circle, unable to borrow on affordable terms, and subject to quixotic and counter-productive fiscal and other rules for what support they do get from the EFSF and ECB, political support for continued membership will drain away.
Faced with a choice between permanent slump and rising debt burdens (as economic contraction and deflation leads to inexorable increases in debt), countries will elect to quit the currency union. At least that route will allow them to print money, recapitalise their banks and escape deflation. Once Spain or Italy opts for this, an unravelling of the eurozone will be unstoppable. Investors will not believe that France could continue to participate in a core euro : the country has weak public finances and a sizeable external deficit. Participation in a core eurozone would imply a potentially huge real currency appreciation and a corresponding collapse in economic activity. Investors will calculate that the wage cuts (to restore competitiveness) and cuts in public spending (to rein in the fiscal deficit) would be politically unsustainable. In short, France will effectively be in the same position as Italy and Spain are at present. While it is impossible to put a timescale on this, the direction of travel is clear.
Eurozone leaders now face a choice between two unpalatable alternatives. Either they accept that the eurozone is institutionally flawed and do what is necessary to turn it into a more stable arrangement. This will require some of them to go beyond what their voters seem prepared to allow, and to accept that a certain amount of ‘rule-breaking’ is necessary in the short term if the eurozone is to survive intact. Or they can stick to the fiction that confidence can be restored by the adoption (and enforcement) of tougher rules. This option will condemn the eurozone to selfdefeating policies that hasten defaults, contagion and eventual break-up.
If the eurozone is to avoid the second of these scenarios, a certain number of things need to happen. In the short term, the ECB must insulate Italy and Spain from contagion by announcing that it will intervene to buy as much of their debt as necessary. In the longer term, however, the future of the euro hinges on the participating economies agreeing at least four things : mutualising the issuance of their debt ; adopting a pan-European bank deposit insurance scheme ; pursuing macroeconomic policies that encourage growth, rather than stifle it (including symmetric action to narrow trade imbalances) ; and lowering residual barriers to factor mobility.