The new order in the systemic Euro crisis
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|If things stay as they are then we will reach a dead end that will signal the start of the collapse of the euro and of everything that took decades to build. Image Source: The Telegraph|
The newly-shaped situation in the euro area is quite bleak. On the one hand the second bailout to Greece might fall into jeopardy, due to the rise in the demands for collaterals from the countries who will contribute to the second bailout to Greece. On the other hand the bond-buying programme of the European Central Bank (ECB) of the European South’s debt has been openly challenged as illegitimate by German President Christian Wulff, who argues that the ECB has violated its treaty mandate with its bond-buying actions. The Bundesbank too is in line with Mr. Wulff’s statements.
To put everything into context, the first thing we need to keep in mind is that all this discussion exists because taxpayers in surplus countries are protesting against the failing policies of their leaders who throw their taxes into the black holes of the Euro system. European taxpayers are right to protest against the failing policies of the EFSF and against the expensive, ill advised, self-defeating bailouts to practically insolvent countries that end up as indirect financing to an ill regulated, quasi-bankrupt banking system. European taxpayers are not fooled by the myths of the new “Marshall Plan” for Greece and the “voluntary participation” of the private sector in the second Greek bailout that has ostensibly forced international creditors to take a 21% “haircut” (the latter is one of the biggest lies in the euro crisis).
The second thing we need to bear in mind, is that politicians across Europe are not acting out of their own initiative, vision and will but out of their party interests. They therefore prefer to cling to populist beliefs than to make the necessary audacious choices (with the political cost) that can save the euro and the EU from falling apart. What happens is that in their attempts to deal with the crisis and at the same time satisfy their voters, politicians end up with really bad solutions that fuel more resistance in their national electorates as they make things worse, instead of offering solutions to the problems.
A sign of this vicious cycle is the Greek case. Europeans agreed on a first bailout to Greece, which was from every aspect a really bad choice. It was economically illiterate and mostly it was politically dangerous as it took taxpayers money and threw it into a black hole. The need for a second bailout was known to everyone who studied the structure of the first, as they knew the first would fail. Indeed this was the case as European leaders agreed about a month ago in the July 21 Euro summit on a second bailout to Greece which however follows the same failing policies of the first and is therefore condemned to fail as well.
Greece will not be saved that way, default will not be prevented, the re-adoption of the Drachma will be a reality, the necessary reforms in the Greek economy cannot be done under this way due to social unrest, and European taxpayers will forever be called to give their money to sustain this completely irrational cycle of destruction. They will simply demand to stop paying and they will be right to do so. I agree with them.
To offer a solution to the above new order of things, European leaders must finally accept that the crisis is systemic and requires system-wide solutions. Towards that end the European Investment Bank must be mobilized within a fundamental redesign of the Stability and Growth Pact to produce real growth in the periphery and act as a wealth redistribution mechanism in order to achieve much-needed balanced growth and convergence. Parallel to that, the European Central Bank must issue eurobonds, within its own capacity, avoiding however the mutualization of the system’s debt as some argue, since this will produce adverse effects. Additionally the temporary EFSF that will soon be replaced by the ESM must undergo fundamental changes so as to draw out its currently toxic foundations that are the source of contagion and to offer to it a more practical role (such as a bank overseer and recapitalizer). Finally the European banking sector must be unified, oversight must be carried out by supranational authorities, and stable rules must be put in place to finally regulate this sector of the economy (to view a concrete proposal for saving the euro, within the current institutional framework, one that will not imply any fiscal transfers or any pooling of the debt that everyone rightfully objects at this point, see the Modest Proposal for Overcoming the Euro Crisis by Varoufakis and Holland).
If things stay as they are then we will reach a dead end that will signal the start of the collapse of the euro and of everything that took decades to build.