The initial enthusiasm of the financial markets over the last European summit was short lived as the new ”kick down the can, grand plan” to solve the crisis was agreed upon.
To bolster the market, the remnants of the famous EFSF 440 billions Euros – which, never forget, was also provided by the periphery countries it was supposed ”to save” – should be used to leverage new instruments aimed at forming a potential of, say, 1 trillion euros.
The idea is to insure 20% of the newly issued sovereign debt of risk countries and to create special purpose vehicles (SPVs) – a term that conjures up flashbacks of the infamous toxic assets. These SPVs would be composed mainly of risky sovereign debt with a dash of EFSF money and a touch of IMF funds (so to get an AAA rating). They would then be sold off to emerging countries.
This is all wishful thinking. The most cynical commentators (here, here and here) have already pointed this out. Greek debt will be somewhat reduced, but its competitiveness will not be restored. Markets will not be assured by the insurance plan and emerging countries will not buy Europe’s toxic assets.
Many authorities (e.g. here and here), along with the U.S. administration, have stated that only a firm ECB unlimited offer to guarantee European sovereign debt can stabilise and solve the present situation. This is without having to buy a single bond. It would not solve the long-run European imbalances generated by the irresponsible structural elements of the creation of the European Monetary Union (EMU), but it would help.
For room to manoeuvre on carrying fiscal deficits, for the benefit of kick-starting growth, a two-pronged initiative is needed from the ECB. First, to force interest rates on all European sovereign debt, aiming to return roughly to the German level. Second, for core European nations such as Spain and Italy to focus on stabilising their sovereign debt to GDP (no reduction) ratio.
This would be the start of a more comprehensive solution that would require, inter alia, a stronger wage and price dynamics in core countries and pro-active public industrial policies in the periphery.
We may wonder why Germany is against the ECB intervention. The ECB inherited the Bundesbank’s role of watchdog on wage moderation at the inception of the German ”economic miracle”. Pursuing wage and price moderation has been a consistent element of German post-WW2 policy, taking advantage of the various fixed exchange systems prevailing in this period – Bretton Woods, the EMS and currently the EMU (Cesaratto & Stirati 2011). Letting the ECB act as a genuine European central bank, that is as the lender of last resort for all European governments – as the FED, the BoE or the BoJ do – would undermine Germany’s mercantilistic, i.e. extremely export oriented, growth model.
However, either Germany acknowledges a reshaping of this growth model, beginning to act as the European locomotive and not as a separate entity or it will have to accept a transfer-union. Otherwise the Euro will rancorously collapse.
As many authorities have pointed out, too many German policy makers still do not to understand the meaning of a currency union. They are perpetuating a point of view characterised by a certain degree of ignorance (here). As in a classical gold standard, the countries with current account deficits cannot make the adjustments alone. On the contrary, it must mostly be achieved through the contribution of surplus countries if avoiding disastrous debt-deflation troubles in deficit countries is a shared aim (e.g. Unctad 2011, VI/D).
Mario Draghi (as well as Bini-Smaghi) knows all this very well, and this is the reason why the world is looking at him with hope of having a genuine central banker in place. But there is a political limit to what super-Mario can do.
Last Sunday the Merkel-Sarkozy tag-team humiliated Italy in order to find a culprit to conceal their inability to find a definitive solution to the crisis. Instead of accepting the blame, the burlesque Italian prime minister should have pointed out that in no sense is Italy responsible for the current crisis (the Italian debt has been there for decades without much trouble). The point is rather that German and French banks are liable for the present situation; mostly resulting from the Germany’s lack of what Charles Kindleberger would have called economic leadership (here).
Italy and the rest of the periphery, as well as France, should refuse the imposed deflationary measures as useless. A new consensus is emerging, supported even by the IMF and, it seems, by the troika supervising Greece (here and here), that an ”expansionary fiscal retrenchment” only exists in the mind of neoliberal columnists like Alberto Alesina. It is just a tragedy that the surrounding European nations don’t unite to bring Germany back to reason and reality, once again.