Retroaction and ad hoc semi-measures will never solve the Euro crisis
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|Image Source: Der Spiegel|
A week ago when the EU summit ended and when the final document was publicized I wrote a full analysis of the outcomes of the summit, in which I analyzed the document paragraph by paragraph to explain how the EU had massively failed (again) to address the crisis. From the very first day I warned that the plan will be a failure. The markets would soon realize that the fundamentals were not addressed and would strike back with vengeance.
The EU leaders massively fail to understand (or to accept) the very structure of the crisis, which is a systemic crisis of the euro that is comprised of three crises: the debt crisis, banking sector crisis (quasi-bankrupt banks comprise the eurosystem), under-investment crisis in many parts of the euro area, especially in certain peripheral countries.
The crisis is not Greek, nor is it caused by the “laziness” of the “PIIGS” (now also include Cyprus – “PIIGCS”). The crisis is deeply seated in the structural flaws of the euro, in the lack of a fiscal union, in the absence of a Eurobond issued by the European Central Bank, in the inability of the European Investment Bank to be a tool for regional growth and structural investments, in the reluctance of the countries with deep pockets to share the burdens of the crisis and to accept their political responsibilities (if they really want to keep the euro in tact).
When I first said these things some might have thought that I was biased against the EU. That I could not see the wind of change the new package brought. Today events show that I was correct. The new package, contains only new rhetoric but the same old failing practices. The fragility of the summit’s decision is now exposed in a number of ways.
Firstly European leaders are still unable to speak the same language. They seem to be confused over what was agreed just a week ago. Here’s what EurActiv reports on the issue:
Contradictory statements made by eurozone politicians to domestic audiences have underlined the fragility of last week’s deal to rescue Greece and unsettled financial markets already on edge due to the US debt impasse.</p>
Additionally the interest rate spread between Italian and German bonds is now higher than it was before the latest European deal was announced (this means that Italy borrows at very high rates that will soon become forbidding).
European leaders took their latest ad hoc decision with the hope of calming down the markets. They believed that the new deal for Greece would in fact be the cheapest way to prevent the spread of the crisis to Italy and Spain. They have massively failed and they will continue to fail if they cling to their narrow, retroactive policies and their ad hoc semi-measures.
On July 28 Paul Krugman wrote an article titled “Eurofail” in which he concludes as follows:
In short, what the markets seem to be seeing is disaster on the periphery and the Japanification of the core. And I can’t say they’re wrong.</p>
[Note: The term “Japanification” refers to deflation] The situation is indeed as dire as Nobel Laureate, Prof. Krugman has painted, but let us not forget that the eurozone has deep pockets and it still has some time left to turn things around. But its leaders need to embrace reality and adopt radical measures that are necessary to overcome the crisis, before the euro collapses.
Above all European leaders need to do is to accept that the crisis is systemic, it is a crisis of the Euro and it needs a Euro-wide audacious response to it. Once they agree on that we can then proceed to the technical issues.
The racist, unfair and populist rhetoric against the lazy “PIIGS” who “drain” money from the other hard-working peoples must be brought to an end and everyone in Europe must understand that Europeans are like climbers tied together. If one falls, all fall down together.
The sooner decision-makers realize that the better. Time is running out and no one in the markets will allow Europeans to kick the can down the road for any longer. Here’s what I wrote a few days ago, when euphoria was still pushing stock markets up.
The real systemic causes of the crisis persist. EU leaders did nothing to address them in the last summit. Even though the markets reacted with enthusiasm to the outcomes of the summit, they will soon realize that the structural problems were not addressed and will start speculating again.</p>
I am sure that by the end of August or mid-September European officials will come to the need of arranging yet another summit. The question now is how many more summits will be required for EU leaders to accept reality and to take measures that address the problem as it really is?
When will the point of no return be reached?
The clock is ticking. With every second that passes the crisis worsens.</div>