This is an extract of the Essay HOW TO SAVE tHE EURO published in JANUARY 2012 ( the full essay is available on the blog)
Chapter 4: The social case for burden sharing
The obvious objection
that would arise in surplus countries is the usual ‘why should we carry any burden
to make good for the laxity or nonchalance of the weak countries?’
Political leaders of
surplus countries are particularly exposed to such demagoguery pressures. Political
leaders get the democratic credentials from their home base but at the same
time leaders like Chancellor Merkel of Germany and President Sarkozy of France
are today responsible for the economic health of the entire Euro area.
This often presents
them with difficult situations of split loyalties, at least in the short term. Whose
interest are they going to defend?; the interest of their domestic audience on
whom they depend for democratic legitimacy or the interest of the wider Euro
area which in certain situations requires solidarity and burden sharing
arrangements to restore it to health, which solidarity and burden sharing is
perceived by their domestic audience as a form of taxation without
representation.
I make emphasis that
such conflicts or split loyalties are more apparent than real. They are
certainly present if a short term narrow view of things is taken but these
conflicts fade away if the long term objectives are brought into focus
overcoming the short term pain with the promise of long term gain.
It is a situation
analogous to the situation of the United States after the Second World War. With Europe in tatters needing substantial
reconstruction with many countries suffering outright poverty, the United
States learned from the misguidedness of the Versailles Treaty after the 1st
World War .
Treaty of Versailles
Of the
many provisions in the treaty, one of the most important and controversial
required Germany to accept responsibility for causing the war (along with
Austria and Hungary), to disarm, make substantial territorial concessions and
pay heavy reparations to certain countries that had formed the Entente powers.
The total cost of these reparations was assessed at 132 billion Marks (then
$31.4 billion, £6.6 billion) in 1921 which is roughly equivalent to US $442
billion and UK £217 billion in 2011, a sum that many economists at the time,
notably Lord J M Keynes deemed to be excessive and counterproductive and would
have taken Germany until 1988 to pay. The Treaty was undermined by subsequent
events starting as early as 1932 and was widely flouted by the mid-1930s.
The
result of these competing and sometimes conflicting goals among the victors was
compromise that left none contented: Germany was not pacified or conciliated,
nor permanently weakened. This would prove to be a factor leading to later
conflicts, notably and directly World War II.
Instead of forcing reparation
obligations on Germany and Italy, the US included them as major beneficiaries
of the Marshall Plan
The Marshall Plan
Europe was devastated by years of conflict during World War II. Millions of people had been killed or wounded. Industrial and residential centres in England, France, Germany, Italy, Poland, Belgium and elsewhere lay in ruins. Much of Europe was on the brink of famine as agricultural production had been disrupted by war. Transportation infrastructure was in shambles. The only major power in the world that was not significantly damaged was the United States.
From 1945 through 1947, the United States was already assisting European economic recovery with direct financial aid. Military assistance to Greece and Turkey was being given. The newly formed United Nations was providing humanitarian assistance. In January 1947, U. S. President Harry Truman appointed George Marshall, the architect of victory during WWII, to be Secretary of State.
In just a few months, State Department leadership under Marshall with expertise provided by George Kennan, William Clayton and others crafted the Marshall Plan concept, which George Marshall shared with the world in a speech on June 5, 1947 at Harvard. Officially known as the European Recovery Program (ERP), the Marshall Plan was intended to rebuild the economies and spirits of Western Europe, primarily. Marshall was convinced the key to restoration of political stability lay in the revitalization of national economies. Further he saw political stability in Western Europe as a key to blunting the advances of communism in that region.
Sixteen nations, including Germany, became part of the program and shaped the assistance they required, state by state, with administrative and technical assistance provided through the Economic Cooperation Administration (ECA) of the United States. European nations received nearly $13 billion in aid, which initially resulted in shipments of food, staples, fuel and machinery from the United States and later resulted in investment in industrial capacity in Europe. Marshall Plan funding ended in 1951.
Results
Marshall Plan nations were assisted greatly in their economic recovery. From 1948 through 1952 European economies grew at an unprecedented rate. Trade relations led to the formation of the North Atlantic alliance. Economic prosperity led by coal and steel industries helped to shape what we know now as the European Union.
Source: George C. Marshall Foundation
The problem in
politics is that the short term is much more visible than the long term. The short term is here and now whereas the
long term is a pie in the sky. It takes
a high dose of political leadership that can do a Truman and persuade the US
electorate that it is in their self- interest to use their tax money to help
the “enemy” which has been defeated to reconstruct and enter the western area
of political influence.
Unfortunately today such
political leadership is lacking. The main European leaders are focused on the
short term as they face their domestic audience for re-election in 2012 in case
of President Sarkozy and in 2013 in case of Chancellor Merkel. They have not and are not doing enough to
prepare their domestic electorates to understand the long term benefit of
saving the Euro and what short term burden sharing is needed to achieve such
long term benefits.
On the contrary they
are jockeying for positions to appear as strong leaders in the eyes of their
electorates by forcing deficit countries to take all the adjustment pain on
their fragile shoulders in order to become more like Germany and to abandon the
Mediterranean ‘joie de vivre’ which is depicted as having brought them into
trouble. They are clearly adopting a narrow viewpoint giving priority to their
political status in the eyes of their domestic audience at the expense of the
quality leadership which is required at European level. They seem not to have
what it takes to lead their domestic audience the way America did vs. Europe
after the Second World War. They are
adopting the Versailles approach when the situation requires a Marshall Plan
approach. This will backfire!
It is highly
debatable whether the Mediterranean ‘joie de vivre’ could be blamed for the
difficulties that peripheral countries are facing inside the monetary
union. France itself is a Mediterranean
country and should not agree too quickly with the German argument that the
periphery has to become miniature economic replicas of Germany. Malta, a small
and resource-less island is right at the heart of the Mediterranean Sea
enjoying a high dose of ‘joie de vivre’.
Yet Malta has not had any perceivable problems inside the monetary union
it joined in 2008.
Furthermore if
everyone were to become a German type surplus manufacturing base who is going
to run deficits to mirror the surpluses? Is it not more realistic and
economically expedient if the Mediterranean countries while running balance of
trade deficits run comparable services surpluses by offering quality tourism
and other services (financial services, back office operations, ICT services
etc) just as Malta does for which the ‘joie de vivre’ would be an essential
ingredient rather than a perceived liability?
The core countries have to realise that
it is in their interest to save the Euro system as the cost of its blowing up
is much, much more than that of reforming it on sustainable level as I propose
in this Essay. But I would go beyond that. Surplus countries have an obligation
to burden share the adjustment process of the weak countries, for some or all
of the following reasons:
·
The weakness of some members of the
Euro, in particular Greece, Italy, Spain and Portugal, was known in advance to
all as argued in Chapter 2 of this Essay. Accordingly strong members share some
of the responsibility for admitting into the Euro Club members who were clearly
not ready for the commitment.
·
Also as argued in Chapter 2, Germany
and France were the first countries to openly breach the Euro rules in 2003 and
they demanded impunity, indeed demanded and obtained weakening of the rules,
setting a bad example for the weak countries and weakening the ability of the
European Commission to impose discipline on offenders. If you cannot throw the
book at Germany why should you be able to throw the book at Greece?
·
When Greece was clearly floundering on prudent
fiscal housekeeping and anyone with eyes to see should have suspected that
Greece statistical submissions were, politely put, inaccurate, most countries
simply looked the other way and pretended not to notice.
·
All Euro members allowed the markets to
imply that whatever is stated in black and white in the agreements ultimately
there is a sense of inbuilt solidarity among Euro members and no Euro country
would be allowed to default. In particular Mr Jean Claude Trichet when
President of the ECB gave many verbal assurances that no Euro country will
default on its debts.
ECB Press
Conference in Franfurt – 9th June 2011
Question: The euro area finance ministers
last night agreed to set up a working group to study how a bond exchange roll
over could be structured to avoid Greece being declared at default. First, do
you think it is possible that we can get a commitment from the private sector
to buy new Greek bonds without triggering a credit event?
Second, if the ECB, the private sector
and the European finance ministers were to agree to such a voluntarily roll
over, and then the rating agencies declared this to be a credit event, would
that make any difference as to whether the ECB would accept these new bonds as
collateral?
Trichet: Let me re-state our position, which I
trust is very well known. First, we are not in favour of restructuring and
haircuts. We exclude all concepts that are not purely voluntary or that have
any element of compulsion. We call for the avoidance of any credit events and
selective defaults or default. This is our position, which we have made clear
for a long period of time: it is the position of the Governing Council and all
governments know that position. We are not in dialogue with one particular
government. Do not forget that we are the central bank for 17 countries: we
issue the currency in 17 countries and have a dialogue within the Eurogroup,
which is the grouping of the 17 countries. We are fiercely independent. Let me
make two additional remarks: Whatever happens and it is not our decision, as
this is the responsibility of the governments, we will apply our rules and our
framework as regards both the soundness of our counterparties, I mean the
banks, and the quality of the collateral that we take in our refinancing
operations. This is crystal clear and has been communicated to governments.
·
Strong countries made a feast out of
the problems of weak countries[i]. Greece’s balance of payments deficits are
the surpluses of Germany. A UBS research paper[ii] shows that the benefit
being enjoyed by the surplus countries is so large that it is much cheaper for
the surplus countries to help the deficit countries to overcome their
difficulties through responsible burden sharing than it would be if the Euro blows
up.
· The crisis itself has been as much an economic bonus for surplus
countries as much as it has been an economic distress of the deficit countries.
The crisis has weakened the Euro against other major currencies making core
surplus countries, whose economy is export oriented beyond the borders of the
EU, even more competitive than it would have been if there were no crisis.
·
The crisis has also been a bonus for
surplus countries in that their borrowing cost have reduced just as the
borrowing costs of deficit countries have shot up. The crisis has triggered investors to take
risks off their portfolios and seek capital security in preference to yield.
There is a strong case
for surplus countries to rise above the egoistic narrow view of the situation
and explain to their electorates that not only it is in their interest to save
the Euro but that they also have a moral duty to support the deficit countries
to overcome their problems. This has to involve a fair burden sharing arrangement
which is in the long term interest of the surplus countries as an indispensable
step to save the Euro. Collapse of the Euro will be highly detrimental to the
economies of surplus countries, apart from other political, social and possibly
even security considerations.
[i] See this Report in Der Spiegel
International to understand how Germans are unperturbed by the Euro crisis: http://www.spiegel.de/international/germany/0,1518,801388,00.html.
[ii] UBS Investment Research dated 6th September 2011 “Euro
break-up – the consequences” authored by Deo/Donavan/Hathaway.
