Wednesday, 27 March 2013

And now what?

Jean Claude Juncker
immediately missed
as head of the Euro group
So Cyprus has been bailed-out.   It joins the ranks of Greece, Ireland, Portugal and Spain who have already been bailed out.

Each country has had a different bailout model.  

Greece has had its bailout conditional on a 70% haircut on most of its external sovereign debt.

Ireland has had to force losses on the holders of subordinated debts of its banks and in case of Anglo Irish Bank also of its senior debt holders.

Spain has used its weight to arrange for the bailout to go straight to recapitalisation of its banks in distress without passing through the sovereign.  It has thus avoided increasing the public debt to capitalise its distressed bank which would have put further strain on its fiscal position.

Cyprus would much have wished a similar treatment  as Spain whereby the recapitalisation of its banks would have been effected directly by the ESM.    But either because the Cyprus banks were in deeper state of insolvency ( mainly caused by the losses they suffered through the Greek sovereign debt haircut and by the losses incurred by Cyprus banks largish operations in Greece where the economy is trapped in a never ending recession) or because Cyprus was too small to offer negotiating resistance such approach was refused.

Not only that but the Cyprus bailout established new precedent where for the first time substantial losses were forced on uninsured but ordinary deposits sending a message that bank deposits in Europe were no longer to be considered safe.

The inexperience of  New Euro Group chief Jeroen Dijsselbloem fanned market uncertainty with contradictory statements about the Cyprus rescue and angered colleagues with his glib negotiating style. This never would have happened under his predecessor, say his critics. He is over his head in this new job and must be taught to speak less and with caution.   He could have easily explained that Cyprus presented a unique set of circumstances which required an exceptional bailout approach involving uninsured deposits.  Instead he put his foot in concrete when he is reported to have said that the Cyprus approach could be a template model for any future bailout involving recapitalisation of banks in distress.   He later tried to backtrack on his words but it is difficult to put toothpaste back in the tube.

But the question remains : and now what?   Out of 17 Euro countries, 5 have been bailed out and are in the sick bay.   Two others are in serious condition as Slovenia and Italy may be heading in the bailout direction.

Are we solving any problem by forcing extreme austerity on countries seeking bailout as the EU tries to force harsh internal devaluation to Germanise them and make them export competitive again?   Can we do so by wasting idle resources in the form of lost growth and high youth unemployment which risks becoming chronic and irreversible?

What nobody seems to be asking are these simple questions:

  • Is it logical to expect that so disparate countries as Greece and Germany be locked in the same monetary union?
  • Can external competitiveness for countries in distress be regained merely through never ending rounds of austerity?
  • Should not surplus countries also be taking corrective measures to bring back macro-economic equilibrium among Euro member states?

The present bailout pattern is unsustainable.   As more members join the sick bay the members outside will become fewer and less able or willing to carry the load.

We are adopting a Versailles method when we really need a Marshall Plan method.

Anyone who thinks that the German taxpayer is being short changed by having to finance the bailouts of countries in distress should take a cold shower and look reality in the face.

Germans haven't just paid for the crisis, they profited from it.  The savings in interest payments, which Germany have enjoyed since the beginning of the crisis, amounted to €10 billion last year alone. Plus there are the interest payments from debtor nations. The reality of the euro crisis is this: The poor of Athens are paying the rich in Germany.

And above all Germany is benefitting from export led economic growth as the Euro crisis is keep the Euro value on the foreign exchange market much softer than would have been the case if under similar conditions Germany's currency was still the Deutsche Mark.

The Euro crisis is in fact a party for the Germans.   But they cannot expect it to last long.   They have been warned.   Italian elections have given the biggest share of the popular vote to anti democratic Beppe Grillo who is speaking much the same language as Mussolini used to speak to erode trust in politicians and pave the way for the scrapping of democracy.

Such experiments failed in the past, and they will fail in the future. Europeans will not allow it. As Germans keep cheering on their Chancellor, they should mark the words of former Euro Group chief Jean Claude Juncker: 

"Anyone who believes that the eternal issue of war and peace in Europe has been permanently laid to rest could be making a monumental error. The demons haven't been banished; they are merely sleeping."
Whoever is the next German Chancellor, he/she must switch from Versailles to Marshall Plan mode or otherwise what was gained in six decades since the origins of the EU will be washed down the drain.

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