Yes, but no. This seems to be the direction the EU is taking with its existential doubts. An uncertain course with the pretence of treading water, buying time, hoping that the Eurozone will still be able to breathe, when the sun wants to rise over a horizon that today is still black, very black.
The governance of @Merkozy et al. pseudo-policy makers is at the very least cowardly, although we should really say irresponsible, inoperative and unaware of the danger of not commanding this ship in a surgical yet expeditious manner. Time is running out and analyses as clear-sighted as the latest letter published by George Soros are real pearls in a sea of delusions and political hallucinations. It is to his credit that he hits the nail on the head despite the distance from which he interprets the situation in Europe. But perhaps that is precisely why his analysis is so accurate. Let us therefore translate and comment freely on this letter, with which we agree almost 100%. In it he recapitulates the events so far in this debt crisis, gauges its significance and proposes the real and definitive solution to the current Euro crisis.
Soros begins by saying that the euro crisis is a direct consequence of the 2008 crisis, when Lehman Brothers disappeared from the map. The financial system began to collapse and had to be hooked up to life support. The flow of private credit had collapsed and was urgently replaced by sovereign injections via central banks. At a memorable meeting of European finance ministers in November 2008, a pact was made with the devil that no other major financial institution would fail, searing into everyone's skin the sadly familiar «too big to fail» argument. This devil's bargain involved both the Federal Reserve and the fledgling, bureaucratic, mammoth ECB.
Angela Merkel then declared that this guarantee should be exercised by each European country individually, not by the European Union or the eurozone as a whole. This sowed the seeds of today's euro crisis, as it revealed a hidden weakness in the construction of the new currency: the lack of a common treasury. That seed suddenly germinated in 2010, taking root in the heart of the Eurozone and sprouting violently on its periphery.
There is a certain similarity between the euro crisis and the subprime crisis that caused the 2008 crisis. In both cases, the supposed guarantees of «risk-free» assets have become a dead letter. In 2008 it was debt obligations (CDOs) and other polluting securitisations, largely based on mortgages; today it is European government bonds that have lost their solvency. In both scenarios, we could say that the system's most sacred assets have radically and unprecedentedly lost their value.
Unfortunately, the current euro crisis is more difficult to resolve than the subprime crisis. In 2008 the US authorities needed to handle the crisis were already in place and operational. By contrast, in the eurozone today, one of these authorities, the common European treasury, has neither been created nor does Germany currently intend to do so. And this requires, in the Europe we know, a complex political process involving a number of states, today, still sovereign. That is what has made this problem so serious. The political will to create a common European treasury is conspicuous by its absence, and from the moment the euro was created, the political cohesion of the European Union has deteriorated sharply - and this is what has made this problem so serious.very much so, I would say, and with the spectre of protectionism just around the corner.. As a result, there is no visible solution to the euro crisis. And without one, the authorities have been trying to buy time at exorbitant prices through the burning of cash.
In an ordinary financial crisis, those of the old normal, This tactic of buying time works, as panic diminishes over time. And confidence, analgesic for insolvency, is gradually being re-established. But in this case time has been running against governments. Buying time is of no use without economic growth and common political will, to implement solutions inversely proportional to the sovereignty of EU member states.
It takes a major crisis to make the politically impossible possible (a true United States of Europe). Under the pressure of a financial crisis, governments often take the necessary measures to keep the system cohesive. But nowadays they only do the minimum when it is absolutely necessary. And such timorous and belated measures are quickly perceived as clearly insufficient by the markets. This is why we emerge from one crisis only to fall into another in a matter of days or weeks. Hence Europe, with their current politicians, is condemned to indefinitely concatenated crises. Measures that would have worked if they had been taken months earlier become useless when politics ends up adopting them late and badly. That is the key to understanding the Euro crisis.
Where do we stand now? The embryo of the common treasury seems to be in the making, despite German opposition. The problem is that it is just that, an embryo whose father or mother does not even want it to be born. And in the meantime, the System claims urgently for several semesters a full-fledged adult Treasure. The European Financial Stability Facility (EFSF) and the European Stability Mechanism (ESM) - its successor from 2013 onwards - are the closest thing to the Treasury that the EU has managed to devise. But its remit is inadequate because its function is only to finance the bailout plans of three small economies, Greece, Portugal and Ireland. It is not even big and powerful enough to rescue Spain or Italy, let alone to act as the EU Treasury. Nor was it originally intended to deal with the problems of the banking system, although its scope has been expanded to include banks as well as sovereign states. Its main problem is that it is purely a fund-raising mechanism, and the authorities that decide how and how much money to spend for these smaller bailouts remain the governments of the member countries and not the EFSF itself. This makes such a Stability Fund a simple piggy bank that proves to be useless as a response to a crisis, as it has to wait for instructions from member countries simply to act according to the mandate for which it was created. That is nothing.
The situation has been further aggravated by the recent decision of the German Constitutional Court. While the court found the EFSF to be constitutional, it prohibits it from acting for the benefit of other states without the prior approval of the Bundestag's budget committee. This absolutely limits the German government's discretionary powers., and obviously from the rest of the countries, to cope with future crises.
The seeds of the next crisis have thus already been sown by the way the authorities responded to the last crisis. Politicians accepted the principle that countries receiving assistance will do so without having to pay punitive interest rates, i.e. at prices subsidised by the Eurozone as a whole, well below those set by the market. And it establishes the EFSF as a mere fundraising mechanism for this purpose. If that principle had been accepted a couple of years ago, the Greek crisis would not be so serious today, according to Soros. As we have seen and suffered in recent months, the contagion in the form of increasing inability to repay sovereign and other debt has spread to Spain and Italy, but these countries are not allowed to borrow below the market price. That is why the ECB has been forced to buy Italian and Spanish debt. at the margins of the current law, at night and with malice aforethought towards the richest in the Eurozone -Germany-. This contagion puts us Italians and Spaniards in a similar situation to Greece. In the case of Greece, the debt burden has clearly become unsustainable. Bondholders have been offered a «voluntary» restructuring to accept lower interest rates and deferred principal repayments, long deferred to almost infinity and beyond. But it has not yet been established a schedule of write-downs in line with the real possibilities of issuers to repay their debts.
These two shortcomings, denial of subsidised interest rates for Italy or Spain, and the lack of planning for a possible default and exit from the Eurozone by Greece, have sown an existential doubt so deep that it affects both the sovereign bonds of the rest of the periphery and the entire European banking system. As a temporary and desperate measure, the European Central Bank (ECB) is putting out fires by buying Spanish and Italian bonds in the bond market.. But that is not a viable solution, because he already did the same with Greece and yet (or with him;) that did not stop Greek debt from becoming unsustainable. If Italy, with its debt at 108% of GDP and growth of less than 1%, has to pay risk premiums of 3% or more to borrow money from Mr. Market, its sovereign debt will also become unsustainable. long before politicians realise it. It is only a matter of time.
The ECB's previous decision to buy Greek bonds was already highly controversial. Axel Weber, a member of the ECB's German council, resigned in protest. In this purchase of Greek debt, the line drawn by Germany was already blurred. (and other countries until four days ago) between monetary and fiscal policy, but the central bank has to do what is necessary to preserve the financial system. This is particularly true in the absence of a fiscal authority. Subsequently, the controversy of Weber's resignation led the ECB to oppose outright a restructuring of the Greek debt whereby, among other measures, the amortisation period would be extended, turning the ECB into an obstructionist force instead of the saviour role it had hitherto outlined. For the time being, the shadow of the hawks The ECB's resignation is still a long way off, and the EFSF has taken on the risk of possible insolvency of Greek bonds instead of the ECB. However, we are witnessing a process of «de-Germanisation» of the ECB worrying to say the least.
The resolution of this conflict has in turn made it easier for the ECB to embark on its current programme of buying Italian and Spanish bonds which, unlike those of Greece, are not so close to default. (again minimalist decisions on the edge of the abyss). These Spanish-Italian debt purchases, however, have been met with the same domestic opposition in Germany as the earlier intervention in Greek bonds, and hawks continue to abandon the Titanic. Jürgen Stark, the ECB's chief economist, resigned on 9 September. In any case, the current intervention has to be limited in scope because the EFSF's capacity to extend aid is practically exhausted by the rescue operations already underway in Greece, Portugal and Ireland. (sic)
Meanwhile, the Greek government is finding it increasingly difficult to comply with the conditions imposed by the bailout programme. The Troika overseeing the programmes (the EU, the IMF and the ECB) is not satisfied with the Greek banks, as for example they did not fully take up the recent Treasury bill auction, and the Greek government is running out of funds. less than 30 days ahead. In these circumstances, an orderly default and a temporary withdrawal from the eurozone may be preferable to endless agony. Yet nothing has been done about it. and it remains a shamefully taboo subject. A disorderly failure could precipitate a crisis similar to the one that followed the collapse of Lehman Brothers, but with a horrifying aggravation: This time the Authority needed to contain it does not yet exist, nor is there any intention to create one. -By contrast, certain international systemic oversight mechanisms, which did not exist in 2008, have been created.
No wonder financial markets have panicked. Risk premiums that must be paid to buy government bonds have risen. And stocks have plummeted, with European banking stocks leading the way. Even the euro has recently broken out of its downward trading range quite violently. Market volatility is reminiscent of the 2008 crisis, Soros proclaims in his letter. However, the prices at which companies are trading are much lower, and their profits much higher, than they were then.
The authorities are only doing what they can to avoid an immediate collapse. The Greeks are meeting the Troika's demands in order to receive the next instalment of the bailout package. The ECB is allowing banks to borrow in dollars for up to three months instead of just one week, as before. Because it should be borne in mind that the ECB can provide a free bar in EUR, but not in USD, and this need for financing in dollars is another sign of the real leadership of currencies in times of crisis.. The Bundestag will pass the legislation establishing the EFSF in the coming days. And with all this hot air, the detonation will be delayed until December, when there are substantial new maturities of Greek debt.
Unfortunately, the ability of the financial authorities to take further action has been severely curtailed by the recent ruling of the German Constitutional Court. It seems that the authorities have reached the end of the alley in their policy of kicking the can. Even if catastrophe were to be averted in extremis, But one thing is inevitable: the pressure to reduce the deficit will condemn the eurozone to a prolonged recession. And this will have incalculable political consequences, so much so that this euro crisis could jeopardise the political cohesion of the European Union.
There is no escape from this bleak scenario, as long as the authorities persist in their current course. But they could, however, take the right turn. They could recognise that they have reached the end of the alley and make a radical turnaround. Instead of cowardly acquiescing to the absence of a solution and trying to buy time, we could look for a remedy and then chart a path (albeit a painful one) that will lead us towards it. That path must be sought in Germany, which is not in vain the largest creditor in the EU and the country with the best solvency rating. And that is why we must accept it and promote it as the country that should decide the future of Europe. That is the approach George Soros proposes to explore.
To resolve a crisis in which the impossible becomes possible, it is necessary to think about the unthinkable. To begin with, it is necessary to prepare for the possibility of default and the exit of Greece, Portugal, and perhaps Ireland from the eurozone. To avoid a financial collapse, according to Soros, we must take four steps: First, bank deposits have to be protected. Because if a euro deposited in a Greek bank risks being lost in the insolvency of the financial institution, a euro deposited in an Italian or Spanish bank would have a lower value. (because of the risk involved) than one in a German or Dutch bank, and there would be a flight of foreign exchange from banks in other loss-making countries to banks in more solvent countries. (this is already happening, albeit incipiently).. Secondly, some banks in defaulting countries should be propped up to avoid the collapse of the system. Third, the European banking system would have to be recapitalised and placed under European control instead of the current national control that each country exercises sovereignly. Fourth, the sovereign bonds of the other deficit countries must be protected from contagion. The last two requirements should apply even if no default occurs.
All this costs money. But under the existing agreements there is no more money and no new provisions will be allowed without the authorisation of the Bundestag, according to the latest decision of the German Constitutional Court. There is no alternative but to give birth the missing ingredient: a European Treasury with the power to levy taxes and thus to borrow. This would require a new treaty, the transformation of the EFSF into a fully-fledged treasury.
That would be a radical change of heart, of the essence of the vision of Europe, especially in Germany.. German citizens still think they have a choice whether to support the euro or leave it. But they are wrong, according to Soros. The euro exists and the assets and liabilities of the financial system are so intertwined on the basis of a common currency that he is convinced that its collapse could cause a crisis beyond the authorities' ability to contain it. He argues that the longer it takes for the German people to realise this, the greater the price they and the rest of the world will have to pay.
The question is whether the German public can be convinced by this argument. Angela Merkel may not be able to persuade her own coalition, but as an opposition she could be in a privileged position in the future. Having solved the euro crisis, she would have less to fear in the next election, says Soros.
The fact that provisions are made for the possible default or defection of three small countries does not mean that these countries are abandoned to their fate. On the contrary, the possibility of a pre-determined reordering, paid for by eurozone countries and the IMF, would offer Greece and Portugal good policy options. It would also put an end to the vicious circle that now threatens all eurozone deficit countries, whereby austerity dooms their growth prospects, driving investors to demand prohibitive interest rates, which in turn forces their governments to cut public spending further.
Leaving the euro will make it easier for them to regain lost competitiveness. And if they are willing to make the necessary sacrifices, they could also regain their place within the single currency. In both cases, the EFSF would protect bank deposits and the IMF would help recapitalise the banking system. That would help these countries escape the trap they are currently in. It is clearly against the interests of the European Union that these countries should be allowed to collapse and drag the global financial system down with them, which is not in the mood for much turmoil by the way.
Soros acknowledges that it is not up to him to explain the details of the new treaty, and that it has to be decided by the member states. But the debate must start immediately because, even under extreme pressure, the discussions to reach an agreement will take a long time, probably too long. Once the principle of the creation of a European Treasury is agreed, the European Council can authorise the ECB to recapitalise itself to hedge against the risks of insolvency that may loom over it. That is the only possible way to avoid a financial collapse and another Great Depression.