Increasingly, the sovereign debt crisis is getting a transatlantic dimension: On the eve of the next EU summit, scheduled for March 1st and 2nd, not only EU-Commissioner Olli Rehn but also US Finance Secretary Timothy Geithner and the International Monetary Fund (IMF) will urge the Eurozone member states to boost the European Stability Mechanism (ESM), already endowed with half a trillion Euros. However, the obvious assumption behind these demands is that Germany further opens its (allegedly deep) pockets and pours more "good" money into the rough and turbulent sea that is the financial markets.
From the perspective of the EU Commission, US Treasury or IMF it may seem understandable why these institutions put German Chancellor Angela Merkel and her Finance Minister, Wolfgang Schaeuble, under such pressure. Brussels and Washington, Luxemburg and Wall Street have a strong interest in hedging risks resulting from potential further shocks in the Eurozone. At the same time, neither the EU institutions nor the US are able or willing to deploy financial means of their own. Someone else has to be found to expose himself and eventually pay the bill. Berlin is fundamentally right in refusing to accept that role for at least two reasons.
First of all, nobody has proven so far that a "bazooka-strategy" seriously impresses the capital markets and their stakeholders, be they an ordinary pension fund or a high-risk investor. The true indicators for these investors are the fundamental economic and fiscal data of the bond-issuing countries and their political and societal willingness for structural reforms. Take Italy, for example: As soon as Mr Monti has taken over the Premiership and announced a series of painful reforms, the markets calmed down and interest rates on Italian government papers eased. In this light, the only chance for Greece to survive and remain inside the Eurozone is fundamental reforms and strong efforts to regain competitiveness, rather than simply relying on a boosted ESM. The main criterion for an investor is trust, not cash.
The second reason has to do with the (already critical) perception of the so-called EU rescue policy in German public opinion. Up to a certain degree Chancellor Merkel could count on her fellow Germans' supportive attitude vis-à-vis her strategy to stabilize the Eurozone. However, the upcoming write-offs on Greek bonds caused by the Greece haircut hit hard on the balance-sheets of banks such as Munich-based Hypo Real Estate. Since this institute is fully owned by the Federal State, taxpayers' money is directly affected. Ms Merkel's voters will not particularly like this. Yet, a lack of German public support for EU policy will also threaten the Union's stability as a whole. This is in nobody's interest, no matter which side of the Atlantic he or she sits.
Against the increasing pressure from Brussels and Washington D.C. to bulk up the ESM, Germany finds herself in a dilemma between solidarity and solidity. Through the fiscal compact, Ms Merkel and Mr Schaeuble have more or less imposed a regime of strict solidity not only on their EU partners, but also on Germany herself. The so-called "Schuldenbremse" (debt brake) sets the tone for many years to come. EU institutions as well as the US administration dress up unlimited financial aid and eventual the mutualisation of debt as a matter of European solidarity. In this moralizing perspective, backing the Euro at any price is regarded as an act of political correctness. And yet, markets respond to the hard facts: Debtor countries who refuse to accept the basic rules of austerity risk drifting out of the Eurozone no matter the size of any firewall. For those countries, instead, who show the willingness and capability to reform their labour markets, pension or tax systems, the door to capital markets will remain open while the default spooks shall disappear. Against this logic, boosting the ESM would undermine rational economic incentives.
Hans F. Bellstedt is a Managing Partner of hbpa, a consultancy firm.
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February 28, 2012
Krister I. Koskelo, Harvard University, (8)
Though the Americans do sometimes err on the side of advocating too much laxity, I would argue that in this case, they are correct in insisting that the ESM should be enlarged to relax market jitters. After all, the southern European countries need to see some sort of light at the end of the tunnel, so to speak, in the form of having to pay less punitive interest rates, as they engage in significant reforms. I am referring especially to countries like Spain, with deep structural issues-- in Spain's case, its rigid two-tier labor market-- but who have not been fiscally profligate. (Greece, on the other hand, is a mess, and I see little prospects for avoiding a default). Besides, enlarging the ESM would calm market fears without distorting/reducing incentives very much for Southern European countries to reform-- especially compared, to, say, a hypothetical large-scale bond-buying operation by the ECB on a scale much larger than what they are currently engaged in (which I have also seen proposed at times).
Fiscal rigour and stricter rules will only work in combination with greater solidarity on the European level, otherwise the southern European countries will have little incentive to push through needed tough reforms. For example, I would argue strongly in favor of mutualisation of debt in the form of Eurobonds to help support the southern countries and prevent future crises. On this point, I refer not to my humble opinion but to the former German finance minister, Peer Steinbrück, whom I recently had the privilege of meeting. He argued that now that the fiscal compact is in place, it should be complemented by the introduction of Eurobonds, perhaps up to the limit of 60% of each country's GDP as per the Maastricht criteria (i.e. the Bruegel proposal).
As for the support of the German public, I think that the German government has done a bad job of explaining to the German public what is at stake, as well as how much Germany has benefited from the euro so far and how much of an interest the country has in ensuring the future stability of the eurozone. Had they explained the options better, the German public could be expected to be more supportive of these sorts of necessary measures. I think it could still be done, and I would love to see Chancellor Merkel being more upfront about it to the German public, though I unfortunately doubt it will happen.