Saturday, June 30, 2012

How much credibility should we give the EU summit decisions?

The PBS Newshour on Friday gave a decent report on the outcome of the EU summit, although I don't buy the spin that the summit participants were happy to project that German Chancellor Angela Merkel was forced into concession by Prime Ministers Mario Monti of Italy and Mariano Rajoy of Spain, both conservatives who have been faithfully subservient to Angie in the past. Eurozone Leaders Agree to Bail Out and Supervise Banks 06/29/2012:

One notable thing in that report is that it quotes Angie as having said during the summit that thepropoosals they actually wound up adopting would be just "eyewash and fake solutions". She may not have been wrong in that, although what she surely meant was that austerity, austerity, austerity (for countries other than Germany) is the only real solution. But it's precisely austerity economics during this depression that is destroying the euro and the national economies of Greece, Ireland, Italy, Portugal and Spain.

The snippet of British Prime Minister showing off his sneering, preppy nationalism is also notable:

JAMES MATES: ... David Cameron's role has been to dodge between the warring parties, hoping none of this damages British interests. For once, he has been able to stand back from the fray.

DAVID CAMERON, British prime minister: Italy, Spain, France, Germany, they may be playing each other at football, but when it comes to the eurozone, they should all be on the same side. And the side they need to be on is doing what is necessary to make their single currency succeed.
And the "British interests" with which Cameron was primarily concerned, as always, were those of The City, London's equivalent of Wall Street. He wanted to make sure that the proposed central EU supervision of banks would not include The City. In all the discussion over the euro crisis, I have seen little comment on Britain's arrogant abdication of all responsibility for the European Union. Even assuming the EU survives Angie's austerity economics, I don't see how it can function as a real political union as long as Britain is a member.

In the second part of the segment, Jeffrey Brown interviews Joao Vale de Almeida, the EU Ambassador to the US. Brown asks some decent questions of the Ambassador who was his only guest and who obviously had to defend the EU summit decisions as something at least mildly wonderful, EU Ambassador on Debt Crisis Deal: 'Major Step Forward' 06/29/3012.

But this was the most notable passage to me:

JOAO VALE DE ALMEIDA: This week, the leaders agreed on a $150 billion injection not economy that would unlock further $225 billion of private investment.

This is -- this is a response to those who say austerity is not enough. We believe both are necessary.

JEFFREY BROWN: Well, you have said that before, that both are necessary. But are you suggesting there is a real shift away from the -- from too much emphasis on austerity? Has that happened?

JOAO VALE DE ALMEIDA: There is a chief evolution in the sense of, say, recognizing that we need to do more to support growth.

And the leaders agreed a package -- they call it the growth and jobs compact, which will coexist with the fiscal compact, again, the austerity, rigor on the financial budgetary side, coupled with proactive growth financing measures. [my emphasis]
That's a "tell", talking about simultaneous policies of both stimulus and austerity. Because if you have a policy of stimulus and growth, you don't have an austerity program. Time will tell if the so-called stimulus to which the summit agreed is meaningful or not. But if it's big enough to be meaningful, then the eurozone will not have an austerity program for the present. And that would be a very good thing.

My initial skepticism is based on what the basics are that the euro needs to function without suicidal austerity economics for the "periphery" countries, which include Italy and Spain, respectively the third and fourth largest EU economies. Very similarly to the gold standard in the Great Depression, membership in the common currency forces Greece, Ireland, Italy, Portugal and Spain to take austerity measures to stay on the euro that are the opposite of what their economies need to get out of the current depression.

To get beyond that, there would have to be a real, substantive political union with shared taxing, budget and labor policies. The European Central Bank (ECB) would have to act as a genuine central bank with responsibility for both economic growth as well as price stability and the ability to act as the buyer of last resort for sovereign debt. And the eurozone countries would need access to eurobonds, allowing individual countries to borrow money based on the credit of the entire eurozone.

For the eurozone to survive long enough to get there, they have to reverse the austerity policies killing the economies of Greece, Ireland, Italy, Portugal and Spain. They have to subsidize and resolve problem banks in individual eurozone countries without adding to the national debt burdens of the countries in which they are located. They need to tighten financial regulation to prevent another "2008" from bringing down the house. And Germany will have to accept a significant period of higher inflation than the countries like Greece most hard hit by depression and Angie's austerity policies.

To the extent the summit decisions offer real hope for addressing those problems, there are three positive elements. Former senior EU official and Spanish Social Democrat Javier Solana‏ on Twitter recommends this El País International article by Xavier Vidal-Folch as a good explanation of the EU summit, Tres en uno 29.06.2012, who describes the three hopeful elements as follows (my translations of quotes):

  • "urgent measures to resolve the turbulences of Spain and Italy": these include better terms on bank bailouts to be established in six months or later and new authorization for a central European fund to purchase sovereign debt to ease speculative pressure on the interest rates on Spanish and Italian bonds.
  • "the basics of the growth agenda formulated by Socialist France": The proposed measures theoretically equal 1% of the eurozone GDP
  • "a perspective for a bank, economic and even political union"

There are several obvious concerns. Vidal-Folch reminds his readers that past supposedly successful solutions to the ongoing euro crisis - which in reality is a banking crisis manifesting itself as a sovereign debt crisis - have in practice left the wounded only partially treated. And he alludes somewhat obliguely to the vulnerability of eurozone members to financial speculative attacks, the "bond vigilantes" who the world has come to know too well over the last two decades.

The austerity concern hasn't gone away. In the Great Depression, countries like Germany in serious economic trouble concentrated on being what establishment opinion of the time considered financially responsible and relied on austerity economics instead of stimulus, making the Depression and its political consequences far worse than they had to be. And much of Europe is now making the same mistake. Vidal-Folch joins Ambassador Joao Vale de Almeida in the bizarre formula which Vidal-Folch turns into a metaphor, "ahora caminaremos sobre dos piernas, austeridad y crecimiento" ("now we are walking on two legs, austerity and growth"). No, dude, you aren't practicing austerity and growth at the same time! This formula only makes any sense at all if you assume that austerity produces growth, which is the basis of Frau Fritz Merkel's austerity policies which shouldn't have to fail any more spectacularly to demonstrate to anyone but One Percenter greedheads who hope to profit at the majority's expense that they are disastrous in a depression like this.

On the alleged stimulus measures, the proof is in the pudding. Or, in this case, the spending. If the EUers are using the austerity-and-stimulus formula to politically mis-characterize a turn away from austerity and toward stimulus, that would be healthy for the European economy. Otherwise, they are likely to be mostly "eyewash and fake solutions" (Angie) or "little more than airy accounting and hopeful values" (Christian Rickens, Die Klügere gab nach Spiegel Online 29.06.2012)

The decision to allow the eurozone emergency funds to be used to buy sovereign debt is something that can take place quickly and would provide substantive relief to Spain and Italy. This is a substitute for giving the ECB the authority to do this, though the ECB has done some of it in recent months though its explicit legal authority to do so is questionable. This also critically depends on how it's implemented. If purchase of national debt come with additional austerity requirements, it won't provide the necessary relief. This seems to be the most substantive of the summit's agreements.

If a new financial crisis doesn't overwhelm the eurozone before the new centralized bank regulations come into effect, Rebecca Christie and Jim Brunsden in EU Banking Debate Shifts to Euro Area After Accord on Spain 06/29/2012 explain the broad outlines of what that means:

Once Europe establishes a single banking supervisor, leaders said they may allow cash-strapped lenders to be recapitalized directly instead of through their home governments. This could break the link between banks and sovereigns that has plagued the euro area throughout the crisis and become a particular flash point for Spain’s bank rescue.

“The Spanish sovereign is effectively being held hostage to what is likely to be a tortuous political process in putting the ECB in charge of euro-zone banks,” said Nicholas Spiro, managing director of Spiro Sovereign Strategy in London. He said direct recapitalization of Spanish banks is the summit’s most important achievement and hinges on creation of an independent supervisory authority.
It's surely a bad sign that 86-year-old Ayn Rand disciple Alan Greenspan, former Federal Reserve Chairman and financial Maestro who was so spectacularly wrong about the housing bubble and financial regulation in the lead-up to the 2007-8 crisis, thinks the EU summit was dandy. (Caroline Fairchild, Greenspan Says Europe Like a ‘Leaking Boat’ With Holes Bloomberg News 06/29/2012)

Despite the happy talk, the crisis goes on.

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