It may spread, but not to SA
This time it’s not the emerging markets
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