The Euro and No­bel Peace Prize

The Pak Banker - - Front Page -

LON­DON

The award, two weeks ago, of the No­bel Peace Prize to the Euro­pean Union may have seemed awk­ward to those banks and risk con­sult­ing firms in Lon­don and New York who have bet for a decade on the likely death of the Euro cur­rency.

When it was cre­ated in 1999, Euro was sup­posed to bring back mone­tary sta­bil­ity in Europe and put an end to com­pet­i­tive de­val­u­a­tions from coun­tries like Spain or Italy. Ten years later, it ap­pears that the mone­tary union, ac­tu­ally, worked rather well, as the 17-mem­bers Eu­ro­zone yearly av­er­age in­fla­tion rate of no more than 2% would no­tably tes­tify. Yet, the mone­tary union was sup­posed to go to­gether with an eco­nomic union, which no­tably meant a bet­ter uni­fied fis­cal and bud­getary pol­icy, con­verg­ing rates of in­ter­est and nar­row­ing com­pet­i­tive pro­duc­tion costs be­tween the mem­bers.

As a whole, the Eu­ro­zone re­sults com­pare fa­vor­ably with oth­ers. Is it nec­es­sary to re­mind that the pub­lic deficit of Eu­ro­zone mem­ber-states rep­re­sents 3.3% of their GDP, ver­sus 8.7% in the US? Or that ex­ter­nal trade sur­plus is equiv­a­lent of 1.1% of their GDP, ver­sus mi­nus 3.1% in the US? The dif­fi­culty, how­ever, stems from the fact that the Eu­ro­zone is not a na­tional en­tity, and con­tin­u­ing com­pet­i­tive cost dis­crep­an­cies be­tween the mem­bers have con­trib­uted to widen the gap in terms of eco­nomic stag­na­tion, un­em­ploy­ment and re­spec­tive bor­row­ing rates be­tween north­ern and south­ern Europe.

At the same time, Europe was hit by a ter­ri­ble fi­nan­cial cri­sis pro­voked by a US real es­tate crash, it­self orig­i­nat­ing from crim­i­nal lend­ing poli­cies pur­sued by un­scrupu­lous bankers with the bless­ing of the US Ad­min­is­tra­tion. The mon­eys Euro­pean gov­ern­ments had to in­ject into their own con­tam­i­nated bank­ing sys­tem could have ob­vi­ously been used more use­fully else­where. Nec­es­sary bor­row­ings in­creased the level of pub­lic debts, whereas a grow­ing credit squeeze achieved to jeop­ar­dize any prospect for a much-needed growth.

In front of such ur­gency, Eu­ro­zone ac­tors re­acted in a dis­or­derly man­ner but in the end, a rather prac­ti­cal and ef­fi­cient one. First, the Euro­pean Cen­tral Bank agreed to buy un­lim­ited quan­ti­ties of bonds of any trou­bled mem­ber state, pro­vided it ac­cepts the con­di­tions of a bailout pro­gram. Sec­ond, a Euro­pean Sta­bil­ity Mech­a­nism was im­ple­mented, with a power strength of €500 bil­lion. Third, a Euro­pean Bank­ing Union su­per­vi­sion mech­a­nism, which was agreed in prin­ci­ple in last June, was even­tu­ally con­cretized last week and will be­come ef­fec­tive in 2013. Spain, sup­ported by Italy and France, would have pre­ferred it to be im­ple­mented ear­lier. Ger­many, on the con­trary, was able to stick to its cal­en­dar; but it fi­nally agreed that all banks be con­cerned – in­clud­ing its re­gional banks it wanted first to take out of the mech­a­nism. As al­ways hap­pens in Europe, agree­ments are based upon mu­tual con­ces­sions.

More im­por­tantly, Eu­ro­zone mem­bers have fi­nally con­vinced the mar­kets that Euro is an in­te­gral part of the Euro­pean con­struc­tion; its col­lapse would mean the col­lapse of the Union it­self – which is of no in­ter­est to any­one, es­pe­cially Ger­many and France the cu­mu­lated GDP of which rep­re­sents more than 50% of the global Eu­ro­zone GDP. In­ci­den­tally, one should al­ways re­mind of fun­da­men­tals when com­par­ing euro to dol­lar: Eu­ro­zone in­hab­i­tants are 320 mil­lion; its GDP rep­re­sents 75% of the US one and its share of the world trade fi­nance amounts to 25%. Look­ing at what some Repub­li­can of­fi­cials have in mind with re­spect to the han­dling of the US pub­lic debt – the so-called Gen­eral Mo­tors ac­cor­dion squeeze, one may won­der where the risk higher is.

Mean­while, eco­nomic ef­forts in the Eu­ro­zone should ob­vi­ously continue. Re­cent laws passed in Spain, Italy or France is a clear sig­nal of un­prece­dented moves which can­not but come to fruition. It is also true that a mone­tary and eco­nomic union re­quires a closer fis­cal and po­lit­i­cal union, what­ever the dif­fi­culty to move fast on such sen­si­ble is­sues marked by mil­len­ni­ums of his­tory. Yet, some re­sults such as the obli­ga­tion for a Eu­ro­zone mem­ber state to sub­mit its pre­lim­i­nary bud­get to the Euro­pean Com­mis­sion and to its peer, are be­ing reg­is­tered and will be pur­sued.

Ger­many would like to see many of them, when France would bet­ter pre­fer the onus to be put more on sol­i­dar­ity and growth. As rec­om­mended for in­stance by the IMF, a move by the Nether­lands or Ger­many to­wards fis­cal eas­ing and wages rises would con­trib­ute to stim­u­late their economies and bet­ter bal­ance trade ex­changes within the Eu­ro­zone (a mere 3% to 4% hike was con­sid­ered suf­fi­cient by the IMF). Greece or Spain would ob­vi­ously take ad­van­tage of it as they can hardly do more than what has al­ready been re­quired of them, whereas ev­ery­one knows that the Ger­man trade sur­plus may have fu­ture se­ri­ous ad­verse ef­fects at home. It is prob­a­bly where sol­i­dar­ity also comes in.

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