Stephen King: Now opened, the door to exit eurozone can no longer be shut
Economic Outlook: In truth, the existing eurozone rules are broken by the many, not the few
Monday 07 November 2011
It's apt that the latest shenanigans involving Greece should have lifted the lid on the Pandora's box buried far beneath the euro's surface. According to Greek mythology, Pandora was the first woman on earth, created from clay by Hephaestus under orders from the mighty Zeus. Pandora was given a box (more accurately, a jar) that was never to be opened. Unfortunately, she couldn't resist. As she opened the box, all the evil within spread around the world. All that was left was hope.
Last week, the Pandora's Box was opened not by the Greeks – although Prime Minister George Papandreou's referendum threat certainly helped to identify its location – but, instead, by German Chancellor Angela Merkel and French President Nicolas Sarkozy ("Merkozy" for short). Thanks to their attempts to bully Greece into submission, we now know that Europe's leaders are prepared to accept the previously unthinkable – namely, that countries can exit the euro. Merkozy's box has been prised open. What evil awaits?
To be fair, Merkozy's bullying seems to have done the trick for the near-term. The referendum was cancelled, following German and French insistence that the vote would have to be on Greece's future relationship with the euro and the EU and not the latest bailout package, as Mr Papandreou had originally planned. That the Greek government relented suggests that leaving the euro (and, according to European law, the EU as well) was a journey down the River Styx too far.
While Merkozy's brinkmanship may have paid off, it has come at a considerable cost. Joining the euro was always supposed to be a one-way ticket. A country entered the single currency, the door behind was slammed shut and the key thrown away. The single currency was the ultimate political commitment.
Following last week's developments, we now know that this may no longer be the case. Misbehaving countries can choose to – or, more accurately, be encouraged to – leave. Athens' prevarication has led its eurozone partners to press the nuclear button. Greece now has a key to a door marked "exit". And if Greece can leave, who else might head in the same direction?
The answer, it seems, is those who can't stick by the rules. But whose rules? The eurozone crisis reveals that, in so many areas, there are no workable rules. Admittedly, it's difficult to offer Greece a great deal of sympathy, given its earlier fantasyland fiscal arithmetic and its citizens' competitive advantage in tax avoidance. The eurozone crisis has revealed, however, that, given the option, countries prefer to play a childish game of blame and counter-blame than to deal maturely with the systemic problems that may eventually drag even Germany into recession.
The views expressed are often contradictory. Germany, for example, wants to see price stability both in Germany and across the eurozone as a whole, but also insists that the solution to the problems facing Italy, Spain and other southern European nations rests with improvements to their relative competitiveness, through significant reductions in prices and wages (often referred to as the "Latvian option", following the Baltic state's hard-won success in this area). But if, say, average eurozone inflation rate is 1.9 per cent – in line with the European Central Bank's target – and southern European nations deliver inflation rates of around zero, consistent with Germany's demand that they should improve their competitiveness, it follows that Germany's own inflation rate will have to be well above 2 per cent to make all the numbers add up. That's how averages work. In the eurozone, however, this kind of straightforward logic too often plays second fiddle.
In truth, the existing eurozone rules are broken by the many, not the few, and the rules that need to deal with the increasingly fractured relationship between debtor and creditor countries simply don't exist.
Blaming Italy for having excessive government debt, for example, might seem like a neat ruse but excessive government debt didn't prevent Italy from joining the eurozone in the first place. And, if Italy has excessive government debt, so does virtually every other country in the eurozone. The Maastricht convergence criteria demand that government debt for countries within the eurozone should be no more than 60 per cent of national income or, if it is above that level, it should be coming down at a satisfactory pace. On that criterion, it's a bit rich for Germany (debt/GDP ratio in 2010 of 83.2 per cent, according to Eurostat) and France (82.3 per cent) to put all the blame on Italy (118.4 per cent) and Spain (61.0 per cent). They are all fiscal sinners.
And there has been a total failure to deal with the responsibilities of those in northern Europe who lent on such generous (possibly irresponsible) terms to those in the south. Put simply, Germany and its fellow creditors see themselves as the abstemious good guys, all the while regarding the debtors of southern Europe as no more than lazy reprobates who need to learn how to work harder. Yet if, as a nation, Germany chooses to save more (with its rising balance of payments current account surplus in recent years, this has clearly been the case), it must follow that other nations will have to borrow more. You can't have creditors without debtors. It's a bit like saying you've solved your alcohol addiction by forcing your neighbour to drink all your bottles of vodka: you may have solved your own problem but the challenge of alcoholism hasn't gone away.
In the absence of new rules, or any commitment towards some kind of fiscal union that embraces collective responsibility, it's difficult to see how the opening of Merkozy's box spells anything other than trouble. Now that countries can apparently leave, markets will surely start to price in the risk of departure. Already, Italian bond yields had risen to painfully high levels, owing to investors' – prescient – perception that all was not well. With Merkozy's box open, it's going to be a lot more difficult for Italy, on its own, to get yields back down, no matter how much fiscal austerity is delivered.
As the crisis has evolved, we appear to have ended up with playground politics, where only a couple of rules are necessary: (i) Don't mess with the biggest and strongest because, no matter how stupid they are, they will always beat you up; and (ii) Remember that, no matter how bad things are in the playground, you can eventually escape: children, after all, grow up.
What a shame that a once-grand vision has come to this. Up on Mount Olympus, the Greek gods must be totally dismayed.
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