I write this before this weekend’s 20th save-the-Euro meeting of Eurozone leaders in the last two years has even started. Twentieth time lucky?
A lot of posturing has gone in the run-up for this meeting. A supposedly growth pact with funding of EUR 130 billion, equivalent to 1% of the GDP, was agreed to support infrastructure investment, across Euro nations. In reality these are mostly reclassification of funds already allocated but unused on other votes and involve projects with lead time that offers little hope for positive immediate impact to create the internal demand required to stem Europe’s rapid slide into a double dip recession. It was more a face saver so that Hollande, Monti and Rajoy will have something to show to their domestic constituencies for the concessions they will have to make as they agree to cede important components of their national sovereignty to a central authority dominated by Germany.
To achieve an instant injection of growth it would be far more effective if core countries with stable fiscal conditions would loosen their purse and give tax rebates so that their consumers will generate instant demand for imports from deficit countries. But strong core Euro countries, Germany in particular, continue to sing praises to the policies of surplus when they should be going into deficit to permit periphery deficit countries to shift into surplus.
At this 20th summit there will be a clash of two conflicting and embedded positions. It has taken a long time to get to this, nineteen meetings to be exact, each time hatching a patched-up band aid solution to a problem which clearly required deep surgery. Now there is realisation that band aid won’t work anymore and something has to give. In this 20th meeting serious stuff is finally being addressed.
Finally there is consensus that a standalone monetary union has no future. It requires support from a common fiscal policy, from a banking union with a common regulator and a Euro-wide deposit insurance scheme, from a central debt agency which controls the borrowing of the individual sovereign components of the Eurozone, and from some form of debt mutualisation to remove the wide differences in the borrowing costs of Euro members. But there is no agreement about the proper sequencing of events to get from here to there. On the contrary there is vicious conflict about such sequencing.
The Germans, always suspicious of the dolce vita attitude of Euro Med countries, want to see central control of fiscal and debt policies fully executed before they would agree to support debt mutualisation. This clearly is a process requiring several months, probably years, as new Treaties would have to be agreed, then endorsed by at least 17 national parliaments and in some cases would require referendum approval and changes to the national constitution. The French and the Euro Med countries maintain that debt mutualisation is required instantly as otherwise the Euro system will blow up and there will no monetary system to support through central control of fiscal and debt policies.
It has really become a chicken or egg situation. In such situation I cannot help wondering whether Malta’s best interest would be best served by staying or leaving the Euro. We are one of the few countries with the luxury to give practical effect to such a decision without undergoing nightmarish metamorphosis. Our economy is largely self-financed and we do not rely on external lines of credit which could be withdrawn if we exit the Euro. Our ‘home’ currency is not internationally traded and its external value could be managed by the authorities to reflect its level of competitiveness.
In fact we could make the Maltese Euro as our currency with a full one to one conversion to the Euro so that the change over from the Euro to the Maltese Euro would go virtually unnoticed. We would be operating a one to one currency board with the Euro and until new currency notes could be procured the existing notes may continue to circulate just as the Pound Sterling used to freely circulate alongside the Maltese Lira in the Sterling Area days prior to 1971.
Germany and Spain do not have this luxury. If Germany were to revert to the Deutsche Mark its value would revalue sharply against the Euro forcing instant loss of international competitiveness, loss of export orders and a quick rise in unemployment probably leading to deep recession. If Spain were to consider such a move the Peseta would fall in value forcing Spain to default on its debt either outright or by enforcing its conversion to Peseta at artificial non-market rates.
What would we gain by so doing? Above all else we would free ourselves from the onerous restrictions to participate in bailing out this, that or the other, involving substantial exposure to grave financial losses, if in spite all efforts, the Euro cannot be saved. Let me test the two options, staying in or leaving the Euro, in the scenario of each of the four possible outcomes from this summit and the ones that will follow.
If the Euro stays together by limping forward as we muddle through from one band aid solution to another, this will involve more bailout commitments as unavoidably the economic uncertainty will spread the contagion and more healthy members of the Euro will be forced to join those already in the sick bay. In such a situation there will be more commitments to finance and these would be spread on a shrinking population of the healthy members. Ultimately unless addressed the system will collapse leading to substantial loss on the bailout exposure. In this scenario pushing the ejector seat button now would be the far better option.
If the Euro stays together by broad based agreement to do the necessary pooling of fiscal, banking, economic and political sovereignty to achieve the necessary discipline which needs to underpin the process of debt mutualisation, we would need to decide whether this is where we want to go as through Euro membership we would be getting a totally different deal from the one we bargained for when we joined the EU in 2004 and the Euro in 2008. The main two reasons a slim majority of Maltese voted for EU membership is because they were promised an inward positive transfer of funds and central discipline on the fiscal largesse of home grown politicians. Instead through Euro membership we are being forced to enter into financial commitments which could translate into a sharp outward flow of our hard earned money and is forcing our politicians to incur more debts than is necessary in order to finance such external commitments. If the two main perceived benefits of Euro membership are shifting into a liability, would the loss of sovereignty over crucial parts of our economy be justified?
If the Euro breaks up in a disorderly manner it is better if we disengage now and free ourselves of bailout financial commitment. Given a choice even a pilot would eject from a plane nose-diving irretrievably, let alone an innocent passenger.
If the Euro breaks up in an orderly manner it would be better if we are on the outside and capable of taking an intelligent decision as to which part of the broken up Euro we would prefer to link our fortunes to. Orderly break-up will possibly involve the creation of two distinct Euro areas with two different currencies, the Hard Euro for the strong core countries and the Soft Euro for the weak periphery countries. This will force us to choose between joining Germany and its satellites in the hard Euro which could seriously compromise our external competitiveness, our attraction for foreign direct investments and our capacity for job creation. If we join the soft Euro it would upset our price stability mechanism and brand ourselves as belonging to the weaklings.
If such orderly break-up were to happen when we are operating a currency board it would be possible to link our own currency not to one of the hard or soft divisions of the Euro, but to a basket composition of both reflecting our trade flows so that we preserve both our external competitiveness as well as our internal price stability.
This is a complicated issue with long term consequences and therefore needs thorough analysis and preparation for all scenarios, some of which could unfold with astonishing speed that would leave little time for clear thinking.
My objective is not to give a blueprint of what we should or should not do but to raise sensitivity to the risks we are incurring if we do nothing and pretend that the status quo will be eternally sustainable. It is not and that much is pretty clear. My suggestion is not that we should press the Euro eject button now unless the Euro plane continues flying nose down. My suggestion is that we should not exclude this option if our bigger colleagues round the Euro table will continue to argue whether the chicken or the egg came first, rather than do what needs to be done to put more roast chicken on the table.