A simpleton, or a con-man,
might attempt to persuade the richer members of a club, like the Germans the
Dutch and the Finns in the Euro-zone, to accept the mutualisation of European
governments debt through the large scale issue of Eurobonds with joint and
several responsibility of all members. For inevitably those richer members
would end up paying for all. No other kind of Eurobonds would solve the euro
crisis, whether project bonds or mini-Euro-bills on a small scale, or with
pro-rata responsibility, or Eurobonds issued by any European agency other than
the European Central Bank (that is statutorily prevented from issuing them) and
which in view of the minute size of the EU budget would be necessarily treated
as junk bonds.
A simpleton or a con-man, or
perhaps a wrecker, someone knowingly making unacceptable suggestions thus providing
an alibi for the refusal of more plausible, useful suggestions, such as raising
the size of the European Stabilisation Mechanism, or re-balancing and reflating
the German economy.
Why, then, have Mario Monti
and Francois Hollande so insistently and persistently, indeed obsessively
pressed for the issue of such Eurobonds, ignoring loud and clear, repeated
refusals? That Hollande should do it should not surprise: he is a well-meaning
socialist, and an ill-advised beginner with no previous experience in
government. But why Monti, the shrewd economist and experienced former
Eurocrat?
There is a rational
explanation. By knowingly making an unacceptable demand, Mario Monti gave the
German Chancellor a wonderful opportunity to take a spectacular stance: “Not
in my lifetime!”. It is no accident that according to a poll conducted after the
EU summit her popularity rating rose to the highest level recorded in the last
three years. The poll also confirmed strong support for her stance in the
euro-zone debt crisis, showing that 66% of Germans were satisfied with her
performance, an increase of eight percentage points from a month before and the
highest reading since 2009 when she won a second term. “Some 58% of Germans
believe Merkel's stance in the euro crisis is correct and decisive, although
85% of those polled also expect the crisis to get worse.” (Eurointelligence.com,
7 July).
At the same time, Angela
Merkel obliged by making, in return, moderate, ambiguous and double-edged
concessions, that involved support for the re-capitalisation of Spanish banks,
the deployment of ESM funds to provide Monti’s “anti-spread shield” through the
purchase of virtuous governments’ bonds (and not just to finance imbalances by
rogue governments under troika’s supervision), as well as the Europe-wide
monitoring of major banks with ECB involvement, a step construed as an
anticipation of a banking Union. Francois Hollande got a modest investment
injection of 120-130 bn euro, of which only 10 bn could be regarded as
additional to already available resources. A win-win solution for all, then?
Certainly enough for Mario Monti to return home to a hero’s welcome, portrayed
on Facebook like the footballer Balotelli who on the same day scored the
crucial winning goals against the German team. The threat of the Monti
government crisis subsided. Italy’s 10 year bonds’ spread over German Bunds
fell significantly though temporarily.
It is immaterial whether
Merkel and Monti staged a concerted Double Act, or Merkel reacted predictably
to Monti’s Eurobonds pressing, with Monti then demanding a modest reasonable
concession which Merkel made more comfortably than otherwise might have been
the case.
That Merkel’s concessions
were moderate, ambiguous and double-edged it became clear very soon; indeed it
took financial markets only 48 hours to have second thoughts about the deal.
Partly, the devil is in the details, and the concessions were downsized when
the details were specified.
The ESM was expected to
inject equity directly into banks, breaking the link between banks and
government debt, whereas it was clarified by officials that a national
government guarantee would be retained; and the Karlsruhe
Constitutional Court is taking its time to study the ESM and Fiscal Pact before
taking a decision; and the ESM involvement will have to wait
for new Europe-wide monitoring of banks to be established to the ECB
satisfaction, probably not before 2013.
The size of the ESM remains
what it was before, 500 bn euro of which 275 bn are already earmarked and
committed to the support of Greece, Portugal, Ireland and Spain. The maximum
liability that might be incurred by the Germans as a result of ESM operations therefore
remains unchanged, in spite of the broadening of ESM responsibilities towards
banks and holding down spreads of “virtuous” countries. We do not know yet what
the spread ceiling will be; the ESM intervention will not be automatic but will
require a specific request by a country, which might be deterred from making it
by the stigma that will necessarily be attached to such a request. The ESM will
buy government bonds through the ECB as its agent, thus to a Martian the
process will be initially indistinguishable from the ECB acting as Lender of
Last Resort to Governments; but any earthly investor will be aware that the ECB
intervention will be limited at the very outset to the residual 225 bn funds
uncommitted at present and, as pointed out cogently by Paul de Grauwe, will
start selling his bonds of the governments involved long before those modest
funds come to an end, thus triggering off the rise instead of the fall of the
spread.
“Monti obtained
the Anti-Spread Shield”. “Yes, and he was given a brand new Damocles’ sword in
return” (a cartoon in Il
Fatto Quotidiano of 10 July). The so-called Anti-Spread Shield
provides a mouthful of oxygen ("una boccata d’ossigeno",
commented an Italian former Premier, or rather we should call it "una
Bocconi d’ossigeno"). It is not a solution, but a way of “buying
time for a solution without actually providing one” (Paul Collier, 10/07/2012).
At a cost, of course: the probability of a crisis is reduced, at the cost of
making the crisis all that much more serious if and when it occurs - not
necessarily a superior trade-off.
At a Press Conference of 9
July in Rome, Monti was asked whether he regarded the current and unchanged
size of the ESM as adequate. He answered that interventions could be effective
even on a small scale, but that he “might be wrong”. So he might, just
think how the UK and Italy were kicked out of the European Monetary
System by a couple of Hedge Funds in 1993.
Clearly the time
has come now to forget and bury Eurobonds, even in the long term. To recognise
that so-called structural reforms will have no positive effect on growth for at
least the next five years; and that austerity has already gone too far and more
austerity can only yield more recession, worsening debt/GDP ratios and spreads. That the ESM size needs
increasing, the sooner the better, and/or be granted a banking licence so as to
enable to ECB to legitimately lend to it and raise the scale of its operations.
And that the time has come for Germany to end its rabid obsession with inflation
and austerity, and raise wages and public and private expenditure reducing its
external imbalance (surplus) and turning on its growth wheels.
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