Sunday, 6 November 2011

What a Fudge

6th October 2011
The Malta Independent on Sunday

The supposedly comprehensive solution negotiated at the EU / EURO summit on 26 October is a hopeless, useless, dangerous and patched-up fudge which offers no solution to the problem of the euro debt sovereign crisis. On the contrary, it puts the whole system more and more at risk.

This is no comprehensive agreement at all. Before you know it, we will have the EU leaders convening again for urgent crisis discussions, trying to put together the fourth, fifth or nth version of the supposedly definitive agreement. The EU political leaders are as usual behind the curve and hopelessly falling further behind. The supposedly EU leadership tandem of Chancellor Merkel and President Sarkozy have no idea, I repeat no idea, of what the problem is and consequently cannot even come close to defining a real solution which could convince the markets that they have things under control.

If Berlusconi is a buffoon, at least he lives up to his reputation and never pretends that he can lead the EU out of this crisis. If anything, Berlusconi has shown he is a political fox excelling in the art of survival. He uses the business acumen that turned him from a cruise-ship singer into a multi-billionaire businessman that sought refuge in politics to protect his private wealth, and outfoxed politicians with better credentials to have three Italians on the Board of the ECB while the Germans only have two and the French have only one − just like tiny Malta! This is no small matter as the ECB is the only institution standing between survival and the total economic disaster being cooked up by EU politicians.

This is no small matter for Malta. We have committed ourselves to financial obligations exceeding seven hundred million euro as part of our contribution to the European Financial Stability Fund (EFSF). These are no peanuts. This is more than 11 per cent of our GDP and 16 per cent of our existent national debt. It is equivalent to a commitment of €1,750 for every resident. If it were to offer a realistic hope of a solution to the euro sovereign debt crisis then one could say that the benefits of inherent stability essential for economic growth will make the sacrifice worthwhile and will make the actual drawdown on our commitment less likely. But it is nothing of the sort.

It has become insulting the way Germany is treating peer countries like us who are trying to save the euro, let alone the way they are treating debtor countries that need to be saved. Many examples show it is time for us to stand up and protest that this is not the EU we decided to join and that it is time for the EU to move back to the collegiality of its leaders and the Commission, and not to the bilateral Merkozy meetings.

Germany expected all euro member Parliaments to rubber stamp the definitive agreement reached on 21 July and showed impatience with Slovakia, which was rightfully dithering about approving the agreement to the point of bringing down a government coalition recently elected.

Germany insisted that all euro countries contribute proportionately, irrespective of whether they are founder members (and therefore have enjoyed benefits from the excesses of countries in distress) or recent entrants (who have not so benefited).

Germany is objecting to sensible proposals for the ECB to fund through defensive monetisation the bazooka needed to shock and awe the market with its preparedness to insulate illiquid economies like Italy, Spain, Portugal and Ireland from the solvency problems of Greece. Instead, Germany has forced peer governments to agree that their commitments to the EFSF could be dangerously leveraged up four times magnifying risks hundredfold. Germany has chosen the irresponsible leverage model that brought the world to its knees in the financial crisis of 2008 to avoid defensive monetisation, which in the current environment causes no risk of inflation the Germans still fear like the plague. Through their obstinacy and rigidity the Germans have chosen the larger, much larger of the evils on the menu.

Germany is obliging the EFSF to humiliatingly go cap in hand to the IMF and China begging for financial support when Europe is rich enough to self-help.
In a diabolic effort to avoid an unavoidable Greek default but still cut down Greek debt through ‘voluntary arrangements’, Germany has created a moral hazard that other countries cannot disregard without invalidating their democratic legitimacy. What arguments can governments of countries like Italy, Spain, Portugal and Ireland make to their electorates for choosing austerity rather than the Greek route of debt forgiveness?

There was a much more sensible and effective approach to find an effective solution to the sovereign debt problem. The solution does not involve any country putting in any money to help another, which goes against the very Treaty of Maastricht setting the euro rules. The solution was for the ECB to monetise a shock and awe fund to recapitalise EU banks that would be hit by allowing Greece to go bankrupt and negotiate down its debt as is quite normal to do in bankruptcy.

Bank recapitalisation would have happened instantly not on if-you-need-it basis. Banks would have had to take on fresh capital to protect their stability in these uncertain times where extra capital is much preferable to just enough. Banks should not be allowed time to shrink themselves down to the available capital as this works against economic growth so necessary for a truly lasting solution to the crisis.

The pity in all this is that the Germans are putting our money at risk by devising hopeless, defective and totally out-of-touch-with-the-market solutions. Our government and opposition should wake up and stop rubber-stamping whatever the Germans send us through the EU structures. It is our money, it is our future, and it is our survival that is at stake.

The Germans, after the summit of 23 October, called another meeting for 26 October as they wanted to run the deal through their Parliament for specific approval. The Germans are not the only democracy with a Parliament, as Luxembourg Prime Minister Junker so eloquently put it. The Greeks have now responded that they want the deal to be approved by the electorate in a referendum.

How about our politicians treating us with respect and subject further involvement that exposes us financially to specific parliamentary approval or indeed to a referendum? We have nothing less than the Germans and certainly nothing less than the Greeks.

Only if people from other EU countries like us, who like the Germans are putting their neck on line to save the euro, get involved in such decision-making, will the Germans finally shed their arrogance and intransigence and let the ECB do what Central Banks are supposed to do when facing a financial crisis. And if this would need a change to the ECB or German Constitution so be it; much better than putting our hard-earned money on the roulette table.

Alfred Mifsud

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