The politics of small steps don’t work
European leaders are holding a summit in Brussels in December to solve the euro crisis. “Another desperate attempt to save the euro,” says the French economist Elie Cohen, Research Director at the CNRS (National Centre for Scientific Research). At the annual PWC Banking Day in Luxembourg he criticised European politicians harshly for their chaotic decision-making process. He underlined that moment of truth is approaching, but it is not too late yet to rescue the ship.
Elie Cohen did not approve of European leaders and their various attempts to pull the eurozone out of the swamp: “In May 2010, the decision was taken to implement a 110 billion euro plan to help Greece, while three months earlier the same politicians had been convinced that Greece would get out its financial problems by itself.
By the time the next European Summit was held fifteen months later in July 2011, the recapitalisation of banks was on the agenda.” This still wasn’t enough. A third summit of the kind was held in October 2011 to save the euro and a fourth round will take place in Brussels this December. Elie Cohen underlined that the time between the European summits is getting shorter every time decision makers meet.
This represents a worryingly familiar choreography to this French economist, who insists that European leaders have to give up their politics of small steps. At the PwC Banking Day Mr Cohen cited reasons for his criticism. First of all, politicians have been wrong about the nature of the crisis, “Greece faces a solvency and not a liquidity crisis.
If you refuse to acknowledge the reality of the problems, you will never solve them. The only way out is debt restructuring.” Another misjudgement he pointed out is the lack of focus to help Greece out of its severe financial crisis. “What are European leaders aiming for: avoiding contagion or punishing wrongdoers?” he wonders.
“When the first rescue plan was in place, it was decided that it would apply to Greece at punitive rates. Can you imagine that the first priority is to punish a country that is collapsing, has negative growth and is losing in competitiveness? That is highly unreasonable.”
He continued in the same vein when he reminded the audience of the fact that the United Kingdom finances itself under better conditions than Germany, although the latter is in better economic shape. The reason for this is simple: the Bank of England intervenes when it must, while the European Central Bank has no such mandate.
Reshaping the Treaty
Maastricht is perhaps the best known and most controversial of the European treaties. It was the blueprint for what was to be Europe's biggest project for the next decade - economic and monetary union. It defined the three stages of European Monetary Union (EMU), which eventually led to a single currency. According to Mr Cohen, the treaty didn’t work, because over the past decade, a huge gap has opened between the North and the South of Europe.
“The currency has been undermined by Northern European investors’ distrust of the countries of the South. Economists had warned at the time that this convergence of different economic models would not work, but politics wanted to push it through no matter what,” he points out. Another mistake is the fact that some large banks are still supervised by their domestic authority although their balance sheet is so important that they represent a systemic risk to the entire eurozone and beyond.
Elie Cohen’s conclusion to this mess is tough but logical: “the momentum of the current situation will lead us to failure or breakdown. It’s time to join forces and get things together.” He nevertheless closed on a positive note.
The French economist had three suggestions to turn things around: A European Central Bank that is lender of last resort, a European Ministry of Finance that manages the euro bonds, and a more thorough budget and fiscal policy agreed by the eurozone member states. “But do Germans want a deeper European integration?” and “Do European leaders have the courage to state things as they are?” these are questions to which Mr Cohen admitted he has no answer. CW