Sunday, October 2, 2011

We must defend citizens, not banks

Europe is on the verge of  collapsing. The eurozone crisis seems unstoppable and  despite of  measures taken so far by the European governments, the European Central Bank as well as other central banks from other countries,  it still feeds panic in financial markets.

European governments now recognise that they have to do more if they want to save the eurozone.  They have to tackle several problems at the same time, e.g. the rescue plan for Greece,  recapitalization of the banks, protect from contagion Spain and Italy. But there is no consensus so far  on a comprehensive plan which provides a durable solution to the eurozone.

An elaborated proposal  has been put forward recently by  G.Soros  who writes :  "Financial markets are driving the world towards another Great Depression with incalculable political consequences. The authorities, particularly in Europe, have lost control of the situation. They need to regain control, and they need to do so now". He suggests three main steps: "first, the governments of the eurozone must agree in principle on a new treaty creating a common treasury for the eurozone. In the meantime, the major banks must be put under the direction of the European Central Bank in exchange for a temporary guarantee and permanent recapitalization. Third, the ECB would enable countries such as Italy and Spain temporarily to refinance their debt at a very low cost".

In a pure financial logic, this would contribute to 'calm the markets'. We should give him some credit given  his expertise in financial speculation, but he understands that capitalism is digging its own grave  and that a collapse of the euro would have dramatic consequences for the entire world economy.

The first proposal requires a change in the EU Treaty and cannot be readily be implemented as it would require the unanimity of all Member States. But, despite political difficulties, it would certainly be a step forward toward the creation of a fiscal union which would then imply the emission of eurobonds. In the meantime, who will fill the vacuum:?  The European Central Bank is not a political authority and even an intergovernmental body would require the approval of the Bundestag and other EU countries.

The second one is more problematic. The proposal is to use the European Financial Stability Facility (EFSF) to recapitalize major banks  which are heavily exposed on sovereign bonds of Greece, in particular. This would be done under the aegis of the ECB, which will monitor risks, and so doing will the remove the incentive to de-leveraging. In return, the ECB would lower its discount rate to relieve the pressure on Spain and Italy.  The conclusion is that these measures would be sufficient to ensure an orderly default of Greece without 'causing a global meltdown' and the "EFSF could underwrite a “voluntary” restructuring at, say, 50 cents on the euro. The EFSF would have enough money left to guarantee and recapitalize the European banks, and it would be left to the IMF to recapitalize the Greek banks".

The second rescue plan, which was agreed on 21 July still needs ratification from the Bundestag in October.   After the latest austerity measures imposed to Greece - with thousands of public sector jobs to be axed -  there is a chance that Greece  will get (hopefully by mid-October) another tranche to replenish its budget. If Greece meets its 'targets', the rescue plan - perhaps in a revised form- will in fact be used to repay the creditors (such as Deutsche Bank), which, in fact were largely involved in the plan. But in exchange of the 'voluntary' restructuring, banks will ask for being recapitalized, which means benefiting from another injection of tax payers money.
 Europe's debt crisis is now turning into a banking crisis.   Eurozone banks heavily exposed on sovereign debts are likely to cause 'collateral damage' and contagion for other eurozone countries  But, despite the measures taken and the amounts of money devoted to stimulate the economy through banks, the amount of credit provided to the 'real economy' is still very low. In fact, the money which will be mobilised will pay back the banks for their high risk investments. Greek people will not benefit from the new rescue plan, which will just reimburse the banks and continue feeding international speculation. Actually, they suffer from severe budget cuts which affect directly their living conditions:  higher prices, lower wages, poorer health and education services.

Before deciding on a further recapitalization, there are certainly other options which could be pursued while preserving the general interest. In a recent interview, Jacques Delors, former president of the European Commission said: "The ideology of finances which frightens us continues to dominate. It is necessary to restore the balance of politics, economics and people’s needs, which definitely existed during the creation of united Europe".  We risk the collapse of not just the euro but the whole European project, which was built up with political vision and perseverance. Now, the high tide risks to throw away everything and citizens will have to pay a high price for it.

1 comment:

  1. In an open letter to the Eu leaders, Soeos and 95 'concerned citizens' writes:
    'We, concerned Europeans, call upon the governments of the eurozone to agree in principle on the need for a legally binding agreement that would: 1) establish a common treasury that can raise funds for the eurozone as a whole and ensure that member states adhere to fiscal discipline; 2) reinforce common supervision, regulation and deposit insurance within the eurozone; and 3) develop a strategy that will produce both economic convergence and growth because the debt problem cannot be solved without growth'
    See the letter in FT 12 October