By Sergio Cesaratto
December 15, 2010
In December 16-17 meeting in Belgium, the Council of EU leaders. What are the scenarios that are facing Europe?
The unresolved crisis of solvency of Greece was in Ireland this fall and added that turning the infection, as evidenced by an increase in interest rates on government bonds, also came to Italy and Spain and Portugal and now to Germany. What are the prospects? We are faced with three scenarios: 1) Give a little bit of liquidity to the peripheral countries to ask them "Reckoning" to "sacrifice" internally. 2) failure to anticipate and manage to avoid the most painful, as you can, 3) attack the root problems in the direction of building a union with political and economic performance.
The crisis in Europe is similar to many of the debt crisis in developing countries, whose most recent dramatic example was the default of Argentina in 2002. In short, the establishment European Monetary Union (EMU) in 1999 has encouraged the flow of cheap capital from Central European countries (Germany and France in particular) to the peripherals, the famous PIGS. The ECB's monetary policy has been at the same time, marked by low nominal interest rates in Germany, to compensate for moderate fiscal policy and wage moderation that little sustain demand and production. Capital flows have led to a boom in housing and household debt in Spain and Ireland, and the public sector in Greece. Construction is a stimulus to the economy and these countries have in fact grown, so also the nominal wage prices. This has meant that real interest rates [1] were, in those countries, very low, further stimulating demand.
The productivity of these countries has increased more than in Germany, but in the latter money wages rose less than productivity in the periphery increased more than productivity, so that the latter lost competitiveness.
Germany and its environment (Germany, Austria, Netherlands, etc) won so in terms of net exports to the European periphery is because demand in those countries grew much, that their loss of competitiveness. In fact, exports of capital from countries Central ended up financing the purchase of products from the same countries. But if this happens for a number of years, the peripheral countries end up accumulating heavy debt. Initially it was in Spain and Ireland, only private, but now was added after the outbreak of the crisis, the public sector borrows in turn to help domestic banks in debt to the Central Europe. If the creditor countries reached a moment believe that debtors can not pay its debt, may no longer refinance, and debtors filing for bankruptcy (default).
One solution to this situation is to: a) in the short term to ensure sufficient liquidity cheaper for these countries and not to fall, b) in the medium-term solvency to solve their problem by stimulating production and exports. Consider the three scenarios.
1. In the first stage, already in place, the "help" and a very timid ECB curb the liquidity crisis by supporting evidence of the debtor countries where markets will not do or would do so only at exorbitant prices, but insufficient extent do truly and without prejudice to the usurious rates that these countries pay (and that aggravate the debt). At the same time, fiscal and wage deflation causes a fall in GDP, with the consequent loss of tax revenue, so the adjustment accounts is a Sisyphean task (not to mention the social sacrifices involved). Traditionally, internal accounting adjustments are accompanied by a devaluation, boosting exports has offset the damage of GDP. But now the national currencies are no more! Moreover Germany itself becomes the champion of deflation, which aggravates the crisis of aggregate demand in Europe and worldwide. The markets know this, and this is the failure of the peripheral countries and the currency is on the current agenda. If debtors go bankrupt, also break the creditor countries (including U.S.), what would be the mother of all crisis.
2. A breakdown of the EMU ordered the release of the peripheral countries is a complicated issue (Blejer and Levy-Yeyati 2010, Eichengreen 2010). The central fact to keep in mind is that the external debt of these countries are still denominated in euros. Measures in the new local currencies, which would fall in value, and much against the euro, the value of that debt would increase, so surely must be what is called a "haircut" (a haircut), which would be to renegotiate (it is agreed that part is not returned, and the rest is returned in a longer time.) But if markets consider this possibility, speculation trigger giving to an immediate and "messy" default. So the decision of a break must be taken in secret before the market suspected something - so a bit before the system falls apart by itself, in a forum that can not exclude, however, U.S., China and Japan, at least, as well as major European countries. Wikileaks times secrecy is not easy! The advantage of regaining its own currency would be in the revival of exports, but measures to prevent the onset of a strong domestic inflation, would be necessary.
would not need to print new tickets in advance, at present and are marked by country (an "S" after the serial number identifies eg "Italian"). Drastic measures of capital controls, obviously, would be necessary. If this were Germany (and perhaps a recalcitrant France) the case to leave the euro, this would constitute in itself a cut debts denominated in foreign currency, the euro, would be devalued against the German mark again. And if what remains of EMU collapses, everyone will return to national currencies and the foreign debt is denominated in those, which in fact would sanction a haircut done.
3. The failure of the first hypothesis, and the drama of the second, could eventually to arrive at reasonable solutions. With respect to issues of sustainability in the short term, more effective action by the ECB in supporting the bonds and the Europeanization of the debts (as proposed, among others, Tremonti) ensure that markets allow refinancing costs be contained. Structural problems then should be treated by the reversal of fiscal restraint and wage moderation German that the German economy loses a bit of competitiveness and at the same time, boost domestic demand [2]. Moreover, only by working with measures contrary to what so far have characterized the EMU, they can invest trends.
This is unacceptable at the time in Germany, which bases its model of growth of internal discipline and exports with the expansion in non-European countries in mind.
If God truly blind to those who really want to lose in the December 16-17 meeting of the European countries decide draconian plans to return the debt to which our country will, without a government that has authority to oppose such folly.
[1] The real interest rate is the difference between the nominal interest rate and inflation rate. If we take € 100 in loans to 5% nominal rate and inflation rate is 4% (so that we will return in a year is 4% less in terms of purchasing power), the real rate actually paid is 1%.
[2] One of the goals for the Germans would aceptadísimos accepting that nominal wages in the country grew at a rate of productivity growth of 2% which is the rate of the ECB's inflation target.
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