It may spread, but not to SA

This time it’s not the emerg­ing mar­kets

Finweek English Edition - - Front Page - GRETA STEYN gre­tas@fin­week.co.za

THE CRI­SIS IN GREECE is threat­en­ing to spread through­out Europe like the ebola virus. That was the word last week from Or­gan­i­sa­tion for Eco­nomic Co-Op­er­a­tion and Devel­op­ment (OECD) sec­re­tary gen­eral An­gel Gur­ria. Some have been wor­ried the cri­sis might spread closer to home, to South Africa and other emerg­ing mar­kets.

Gur­ria said: “It’s not a ques­tion of the dan­ger of con­ta­gion; con­ta­gion has al­ready hap­pened. This is like ebola. When you re­alise you have it you have to cut your leg off in or­der to sur­vive.” Gur­ria didn’t say so ex­plic­itly, but for some his com­ment im­plied Greece should leave the Eu­ro­zone and that the cur­rency union should dis­in­te­grate.

But that was never re­ally an op­tion, be­cause the €80bn that Eu­ro­zone coun­tries will con­trib­ute to its €110bn bailout is also help­ing them. Ger­man and French banks are heav­ily ex­posed to Greece, and the bailout of Greece was just an­other way of bail­ing out their own banks. The In­ter­na­tional Mon­e­tary Fund will con­trib­ute the rest of the funds, which many say only de­fers Greece’s prob­lems and doesn’t solve them. It also im­me­di­ately raises the ques­tion of what will hap­pen to Por­tu­gal and Italy, two other Eu­ro­zone coun­tries in fis­cal dire straits. Those coun­tries are the ones so pun­ished by the mar­kets that Gur­ria made his “ebola” com­ment.

The London Fi­nan­cial Times ’s Eu­ro­zone guru, Wolf­gang Mun­chau, wrote in the news­pa­per af­ter the an­nounce­ment of the €110bn Greek bailout by the Eu­ro­zone: “(Ger­man Chan­cel­lor) An­gela Merkel and her in­ex­pe­ri­enced eco­nomic ad­vis­ers have no idea about the dy­nam­ics of sov­er­eign crises. They never both­ered to look at the ex­pe­ri­ence of other coun­tries, no­tably Ar­gentina. Wait­ing un­til the moment a coun­try is about to fail – which is how the Ger­man Chan­cel­lor in­ter­preted the po­lit­i­cal agree­ment she ac­cepted in Fe­bru­ary – con­sti­tutes an ab­ro­ga­tion of lead­er­ship that’s bound to end in fi­nan­cial ruin. It means ev­ery­body, Ger­many es­pe­cially, has to pay bil­lions of euro more than would have been the case if the EU had sealed this in Fe­bru­ary.”

Mun­chau doesn’t say this, but re­ports over the past few months have re­peat­edly em­pha­sised the po­lit­i­cal dif­fi­cul­ties Merkel had in com­ing to Greece’s res­cue. Some even ques­tioned whether Ger­many’s con­sti­tu­tion al­lowed it. The fact of the mat­ter is that or­di­nary Ger­man cit­i­zens don’t see why their coun­try – which is in a fairly healthy fis­cal po­si­tion – should pay to help the prof­li­gate Greeks out of the hole they’ve dug for them­selves.

That’s a ques­tion South African sup­port­ers of South­ern African Devel­op­ment Com­mu­nity and, ul­ti­mately, African mon­e­tary union, should bear in mind. SA would be in the po­si­tion of Ger­many: the strong one that would have to come with a bailout, harm­ing its own econ­omy.

Lit­tle has been said about African mon­e­tary union in re­cent times. But that doesn’t mean it isn’t still on the agenda: no­body has said it’s off the agenda. The last time a time­line was given was by Deputy Re­serve

Bank Gover­nor Xo­lile Guma in a speech in Swazi­land in 2007. The speech was no­table for its com­plete fail­ure to take into ac­count how dif­fer­ent African coun­tries’ economies were (and re­main) and what a pipedream it was to think a har­mo­nious out­come could be achieved in the pe­riod set out.

Ac­cord­ing to Guma’s speech, we’re now at Stage 3 in the process, which lasts from 2009 to 2014. Over that pe­riod macroe­co­nomic in­di­ca­tors of con­ver­gence in­clude: in­fla­tion of less than 5%; an over­all bud­get deficit as per­cent­age of gross do­mes­tic prod­uct of less than 3%; elim­i­na­tion of cen­tral bank fi­nanc­ing of bud­get deficits; for­eign ex­change re­serves of six months of im­ports or more; re­duc­tion of cur­rent ac­count deficits to a “sus­tain­able” level; pur­suit of debt re­duc­tion ini­tia­tives on pub­lic debt as a per­cent­age of GDP to a “sus­tain­able” level, as well as achiev­ing and main­tain­ing a high and sus­tain­able rate of growth in real GDP.

By 2015, the idea was to launch an African cen­tral bank and to in­tro­duce into cir­cu­la­tion a com­mon African cur­rency. There would be a tran­si­tional pe­riod dur­ing which sub-re­gional (such as SADC) cur­ren­cies would op­er­ate along­side an African cur­rency.

The temp­ta­tion is to laugh when you look at the con­ver­gence cri­te­ria. Many of them aren’t even met by SA – the lead nation – and even coun­tries that aren’t failed states would bat­tle to get debt down to “sus­tain­able” lev­els. More im­por­tantly, in the Eu­ro­zone coun­tries that joined con­verged but the “Great Re­ces­sion” of 20072009 showed how frag­ile that con­ver­gence was and that those healthy in­di­ca­tors could, in fact, catch ebola.

The ques­tion is whether it would be bet­ter for Greece to re­main in­side or out­side the Eu­ro­zone. Cit­i­group econ­o­mist Willem Buiter asks: “Is a fis­cally chal­lenged coun­try likely to want to leave the euro area? The brief an­swer is no – quite the con­trary: a fis­cally weak coun­try is bet­ter off in the euro area than out­side it.”

Buiter says the only ar­gu­ment for leav­ing the Eu­ro­zone is that the in­tro­duc­tion of a new na­tional cur­rency would lead to an im­me­di­ate sharp nom­i­nal and real de­pre­ci­a­tion of the new cur­rency and a gain in com­pet­i­tive­ness, which would be most wel­come. “It also wouldn’t last... Un­less the bal­ance of eco­nomic and po­lit­i­cal power is changed fun­da­men­tally, a de­pre­ci­a­tion of the nom­i­nal ex­change rate would soon lead to ad­just­ments of do­mes­tic costs and prices that would re­store the old un­com­pet­i­tive real equi­lib­rium.”

Greece has agreed to re­duce its bud­get deficit from 13,6% of GDP to be­low 3% by 2014 and to sta­bilise its pub­lic debt at around 140% of GDP, even though it’s ex­pected to peak at al­most 150% of na­tional in­come. As a re­sult, Greece’s econ­omy will be in re­ces­sion for years, with of­fi­cial fore­casts of a con­trac­tion of 4% this year and 2,6% in 2011.

In­vest­ment So­lu­tions econ­o­mist Chris Hart says it’s ironic to note the “global” fis­cal cri­sis is con­fined mainly to de­vel­oped coun­tries, with emerg­ing and de­vel­op­ing coun­tries com­ing out very well in com­par­i­son. For that rea­son, he doesn’t be­lieve con­ta­gion will spread to coun­tries such as SA.

SA’s last Bud­get deficit was 6,8% of GDP and its Govern­ment debt is ex­pected to peak at 40% of GDP – be­low the Maas­tricht cri­te­rion of 60% of GDP that Euro­pean coun­tries were re­quired to meet if they wanted to join the Eu­ro­zone.

It seems the rest of the Eu­ro­zone didn’t look closely enough at the nuts and bolts of Greece’s econ­omy when they al­lowed it to join. Hart says Greece is the “poster boy for the un-sus­tain­abil­ity of so­cial­ist poli­cies”. He says the Greek govern­ment takes up around 52% of GDP and the rest of the econ­omy – the pri­vate sec­tor, which has to gen­er­ate the taxes to fi­nance a mas­sive wel­fare state – was in de­cline and also very de­pen­dent on govern­ment for busi­ness.

“Cer­tainly, too many leaps of faith were taken,” Hart says of Greece’s ac­ces­sion to the Eu­ro­zone. He notes that, even though the size of govern­ment in Swe­den is more or less the same as Greece’s, Swe­den has a vi­brant pri­vate sec­tor able to gen­er­ate the taxes to fi­nance its govern­ment.

Sec­re­tary Gen­eral of the Or­gan­i­sa­tion for Eco­nomic Co-Op­er­a­tion and Devel­op­ment (OECD)

hands over the an­nual re­port to Ger­man Chan­cel­lor in Ber­lin, April 28

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