When it comes to the process of European integration, one cannot help but note a 'carrot-and-stick' approach on the part of Germany. The carrot is a 'banking union', with elements like euro-wide deposit insurance, direct bank recapitalization, etc. The stick is a more comprehensive 'fiscal compact', with enhanced discipline and a reduction in national sovereignty by 'stealth'.
It is true that some degree of euro-wide 'order' on the fiscal front is necessary in order to address the moral hazard issues associated with greater European integration. And Germany is right to stress that fiscal/political union is a prerequisite for establishing a (more 'technical' in nature) banking union.
The key here is to focus on the dimension of time. Markets and market observers always urge for direct action, steps to be taken towards rectifying imbalances fast. They can afford to adopt a 'means to an end' approach, with demands for immediate implementation.
However, profound reforms such as the ones called for in Europe cannot be properly achieved in a matter of weeks or months. And when governments try to 'play with the market' and go for immediacy, the results leave a lot to be desired. A prime example of this is the insistence for harsh 'internal' devaluation in the 'bailed-out' countries as a means to regaining competitiveness; the more optimal/sustainable/growth-enhancing route of structural reforms simply takes 'too long' in political terms.
What is at stake involves the broader political issue of 'deciding to live together'; formation of a political union is the absolutely necessary bedrock of sustainable, genuine and enforceable economic/banking solutions.
Where the key lies here is twofold:
1) constructing a roadmap that is gradual (by necessity), credible (openly endorsed by political leaders without qualifications) and realistic (allowing for some degree of slippage along the way).
2) avoiding the existing approach of, just-in-time 'solutions', 'can-kicking' and persistent lack of 'one voice' (e.g. EU Commission vs. German officials) that has resulted in a series of 'half measures' so far. The most recent straw on the pile of half measures formed during the last two and a half years is the Spanish banking bailout. Its 'half' character is evident in the speed with which initial enthusiasm (merely short covering?) in financial markets fizzled.
The second point is equally important with the first. In fact, it is even more important in the short term, in order to start gaining credibility with the markets.
The longer half measures remain the main ingredient of policy response in Europe (notwithstanding voices in the background calling for a braver and faster-moving agenda on the fiscal front), the more will the crisis continue moving along (Greece, Spain, Italy next?). And the more the crisis continues moving along, the greater the consequences when the breaking point arrives.
Procrastination is not only a prelude to economic stagnation (or stagflation down the road, esp. if and when the ECB feels the time is ripe for it to 'blink'), but also the catalyst for 'predictable escalation' of contagion in Europe.
Interestingly, this has particular implications for Greece. Heroic approaches driven by narrow-minded political aspirations are always a dangerous path to follow. This is even more important now, as Greece is in the delicate (largely self-inflicted) position of potentially becoming the catalyst for a sea change in European politics. A Greek government that refuses to be pragmatic and/or cooperative runs the real risk of 'exclusion' from the 'next day' of Europe's modus operandi.
Things usually get going when a visible example of the alternative becomes a real picture. A non-compliant Greece could easily play that role. It would be the hard way for everyone, but especially for the Greek people.
Michael Tory writes in the FT:
"The answer to the question of where to draw the line between worthy and unworthy countries is simple: eurozone institutions will help those countries that first help themselves. So we should not continue this never-ending, confidence-sapping series of half-measures to buy yet more time: at best they will postpone defeat while magnifying its eventual effects. It is now time to let Greece go in order to catalyse and legitimise the measures needed to save the rest."
This line of argument has been gaining strength recently, but Greek leaders keep offering plenty of ammunition to proponents of the 'Grexit' view. Greek politicians should stop throwing extra straws on the back of a camel that is already near its breaking point. Because when it breaks, there is no turning back.
It would be fair to describe the Euro project as founded on Treaties of 'mutual distrust', not agreements aiming to bolster an existing trend that favours a voluntary (not PSI-style, of course..) arrangement to 'live together' (as opposed to being forced to live together). There is a real danger that the fiscal compact turns out to be just another of those Treaties, if the political capital behind it remains half-hearted. And the scale of the project, as well as its philosophy, do not leave much room for reluctance/wishful thinking.
Let us hope that a 'Greek accident' (รก la Lehman) does not provide the kind of fear that can nurture compliance, discipline and feet-dragging to a new set of rules, as this would only act to magnify inherent 'imbalances' in the system. Because the real tragedy could then come from extreme/nationalistic politics taking centre stage in Europe, with unforeseeable implications for everyone.
Immediate checkpoints that will drive markets in the short term are the Greek election (17/6) and the Fed meeting (20/6).
The Fed seems to stand increasingly ready to act, but (as does the ECB) would like to see what comes out of Greece first.
Below, an interesting interview of Jim Bianco (Bianco Research), who argues that Fed accomodation is actually holding the US economy back.
It is true that some degree of euro-wide 'order' on the fiscal front is necessary in order to address the moral hazard issues associated with greater European integration. And Germany is right to stress that fiscal/political union is a prerequisite for establishing a (more 'technical' in nature) banking union.
The key here is to focus on the dimension of time. Markets and market observers always urge for direct action, steps to be taken towards rectifying imbalances fast. They can afford to adopt a 'means to an end' approach, with demands for immediate implementation.
However, profound reforms such as the ones called for in Europe cannot be properly achieved in a matter of weeks or months. And when governments try to 'play with the market' and go for immediacy, the results leave a lot to be desired. A prime example of this is the insistence for harsh 'internal' devaluation in the 'bailed-out' countries as a means to regaining competitiveness; the more optimal/sustainable/growth-enhancing route of structural reforms simply takes 'too long' in political terms.
What is at stake involves the broader political issue of 'deciding to live together'; formation of a political union is the absolutely necessary bedrock of sustainable, genuine and enforceable economic/banking solutions.
Where the key lies here is twofold:
1) constructing a roadmap that is gradual (by necessity), credible (openly endorsed by political leaders without qualifications) and realistic (allowing for some degree of slippage along the way).
2) avoiding the existing approach of, just-in-time 'solutions', 'can-kicking' and persistent lack of 'one voice' (e.g. EU Commission vs. German officials) that has resulted in a series of 'half measures' so far. The most recent straw on the pile of half measures formed during the last two and a half years is the Spanish banking bailout. Its 'half' character is evident in the speed with which initial enthusiasm (merely short covering?) in financial markets fizzled.
 |
| Spanish 10yr sovereign bond yield |
The second point is equally important with the first. In fact, it is even more important in the short term, in order to start gaining credibility with the markets.
The longer half measures remain the main ingredient of policy response in Europe (notwithstanding voices in the background calling for a braver and faster-moving agenda on the fiscal front), the more will the crisis continue moving along (Greece, Spain, Italy next?). And the more the crisis continues moving along, the greater the consequences when the breaking point arrives.
Procrastination is not only a prelude to economic stagnation (or stagflation down the road, esp. if and when the ECB feels the time is ripe for it to 'blink'), but also the catalyst for 'predictable escalation' of contagion in Europe.
Interestingly, this has particular implications for Greece. Heroic approaches driven by narrow-minded political aspirations are always a dangerous path to follow. This is even more important now, as Greece is in the delicate (largely self-inflicted) position of potentially becoming the catalyst for a sea change in European politics. A Greek government that refuses to be pragmatic and/or cooperative runs the real risk of 'exclusion' from the 'next day' of Europe's modus operandi.
Things usually get going when a visible example of the alternative becomes a real picture. A non-compliant Greece could easily play that role. It would be the hard way for everyone, but especially for the Greek people.
Michael Tory writes in the FT:
"The answer to the question of where to draw the line between worthy and unworthy countries is simple: eurozone institutions will help those countries that first help themselves. So we should not continue this never-ending, confidence-sapping series of half-measures to buy yet more time: at best they will postpone defeat while magnifying its eventual effects. It is now time to let Greece go in order to catalyse and legitimise the measures needed to save the rest."
This line of argument has been gaining strength recently, but Greek leaders keep offering plenty of ammunition to proponents of the 'Grexit' view. Greek politicians should stop throwing extra straws on the back of a camel that is already near its breaking point. Because when it breaks, there is no turning back.
It would be fair to describe the Euro project as founded on Treaties of 'mutual distrust', not agreements aiming to bolster an existing trend that favours a voluntary (not PSI-style, of course..) arrangement to 'live together' (as opposed to being forced to live together). There is a real danger that the fiscal compact turns out to be just another of those Treaties, if the political capital behind it remains half-hearted. And the scale of the project, as well as its philosophy, do not leave much room for reluctance/wishful thinking.
Let us hope that a 'Greek accident' (รก la Lehman) does not provide the kind of fear that can nurture compliance, discipline and feet-dragging to a new set of rules, as this would only act to magnify inherent 'imbalances' in the system. Because the real tragedy could then come from extreme/nationalistic politics taking centre stage in Europe, with unforeseeable implications for everyone.
Immediate checkpoints that will drive markets in the short term are the Greek election (17/6) and the Fed meeting (20/6).
The Fed seems to stand increasingly ready to act, but (as does the ECB) would like to see what comes out of Greece first.
Below, an interesting interview of Jim Bianco (Bianco Research), who argues that Fed accomodation is actually holding the US economy back.
No comments:
Post a Comment