• World
    • Africa
    • Asia Pacific
    • Central & South Asia
    • Europe
    • Latin America & Caribbean
    • Middle East & North Africa
    • North America
  • Coronavirus
  • Politics
    • US Election
    • US politics
    • Donald Trump
    • Brexit
    • European Union
    • India
    • Arab world
  • Economics
    • Finance
    • Eurozone
    • International Trade
  • Business
    • Entrepreneurship
    • Startups
    • Technology
  • Culture
    • Entertainment
    • Music
    • Film
    • Books
    • Travel
  • Environment
    • Climate change
    • Smart cities
    • Green Economy
  • Global Change
    • Education
    • Refugee Crisis
    • International Aid
    • Human Rights
  • International Security
    • ISIS
    • War on Terror
    • North Korea
    • Nuclear Weapons
  • Science
    • Health
  • 360 °
  • The Interview
  • In-Depth
  • Insight
  • Quick Read
  • Video
  • Podcasts
  • Interactive
  • My Voice
  • About
  • FO Store
Sections
  • World
  • Coronavirus
  • US Election
  • Politics
  • Economics
  • Business
  • Culture
  • Sign Up
  • Login
  • Publish

Make Sense of the world

Unique insight from 2,000+ contributors in 80+ Countries

Close

Euro Crisis Negotiations at an Impasse

By John Bruton • Jul 19, 2012

Economists and policymakers who devise remedies for the Euro crisis fail to appreciate that it is a process of negotiation, not an academic exercise

The long running crisis in the euro area is caused, at least in part, by the fact that the participants in the bond markets have little understanding of, and for a long time had little interest in, how the Eurozone makes its decisions at political level.

In the past, these bond market participants assumed, without much enquiry as to why, that Greek government bonds were no more risky than German Government bonds, simply because Germany and Greece had the same currency.

At that time, they took no interest in the internal politics, or relative competitiveness, of Greece and Germany. This misunderstanding often also encompassed economic commentators, especially in the English language media, who, then and now, are unduly influential in the mind of bond market participants.

Then, in the wake of the shock of the Lehman collapse, everything changed.

The slightest political ripple now sends amplified shock waves through the bond markets, and the interest rates charged to lend to different  countries  within the euro zone  vary greatly. Long ignored indices are now scrutinized obsessively.

Both bond buyers and economists, having blithely ignored the EU political system for years, now crave complete and definitive answers from it, and they want those answers yesterday!

Of course, the markets worry about the viability of the public finances of individual countries or of their banks, but an even greater concern is to know whether a particular country will stay in the euro in all circumstances.  A country leaving the euro could impose an immediate and shocking loss on lenders to that country, and to its banks.

So the first priority for the markets is convincing them that, no matter what happens, nobody is going to leave the euro. That is a matter of political conviction, not macroeconomic analysis. After that, everything else can be negotiated.

But the political leaders of the euro zone come at things from a very different angle to that of the commentators and bond buyers. While the political leaders understand the bond buyers craving for certainty, they are engaged in a complex multidimensional political negotiation, in which they have to balance the interests of 17 different sets of national taxpayers, some of whom want to shift liabilities to someone else, and others of whom  who want to  take on  as little  liability as possible, for the debts of others.

The political negotiation is further complicated by the fact that the EU does not yet have the legal power to do some of the things it needs to do, and some of its members  want to withhold  agreement to giving it those powers, in pursuit of national concessions. Britain is the most outstanding example of this, but more recently Italy played that game. In Ireland, one political party wanted to veto the ESM, which is beneficial to Ireland, simply to get concessions on something else. This sort of silly thing goes on often in EU negotiations.

While there is a European Union, the people who make the final decisions for the Union are national politicians, elected by national electorates, and the national electorates frequently do not understand one another very well, or choose not to do so.

The cheap caricaturing of Germany in some other EU countries has been matched by equally juvenile caricatures in parts of the German press of other countries, like Greece.  Sometimes the critics have a point, as when Germans complain about the possibility of extending their credit to countries, like France, which are reducing their retirement age to 60, while Germany feels it has to raise its retirement age to 70 to maintain German creditworthiness.

As well as making decisions, leaders have to bring their parliaments, which reflect these very diverse electorates, along. Sometimes they need a two thirds majority, as in Germany, or a referendum, as in Ireland.

To use a construction analogy, the markets want the EU to produce a fully constructed and furnished building in time for next week’s bond auction.  But the politicians are trying to build the foundations without having finalised the architectural drawings, while simultaneously arguing about the height of the building, investigating whether  they can buy some units prefabricated, and deciding how much bricklayers are paid  per hour by comparison with carpenters.

That’s politics, and this is a political negotiation. It is the way it has to be. No one is going to show their full hand until the moment they are satisfied that everyone else is going to show their hand too.

But commentators criticise the outcome of individual meetings as if it was not a political negotiation, but an academic exercise, and the 17 euro zone leaders were “Platonic guardians” unconstrained by anything except the requirement to produce a theoretically symmetrical outcome.

For example, one notable commentator (Wolfgang Munchau in the Financial Times) announced recently that the crisis was going to last 20 years, just because Angela Merkel had not accepted that there would be joint euro zone insurance of deposits in euro zone banks, before she had seen the details of exactly what level of central scrutiny of their banks, the other countries would accept, so as to ensure that they would not take a free ride on the backs of German depositors.

What did he really expect? Mrs Merkel will not show her hand until she absolutely has to, any more than Enda Kenny or Francois Hollande will.

Likewise, it is unrealistic to demand – as Nouriel Roubini has done – that the size of the ESM fund be oubled  or trebled at this stage, before anyone knows for sure whether the  intended beneficiaries of an enlarged ESM will do all that is required of them in order to deserve the money.  Uncertainty about the size of the fund, and doubt about whether it will be big enough in all circumstances, is essential as an incentive to get debtor Governments to do the things they need to do, to be sure they do qualify for the fund, if they need it. 

The Euro area Summit statement of 29 June said it was “imperative to break the  vicious circle between banks and sovereigns.”

But it also said that, for EU funds to be directly invested in banks, an “effective (European) supervisory mechanism” would have first have to be established, and that any injection of funds would have to be accompanied by conditions that would be “institution specific, sector specific, and economy wide.”  So a deal will have to be negotiated in respect of each individual bank, each national banking sector, and each country.

According to a paper published recently by the highly regarded Brussels based think tank, the Breugel Institute, a European Banking Union would require decisions on at least 8 big questions

1.)    Whether to include countries not yet in the euro

2.)    Whether  to bring all banks under direct EU supervision, or just the big ones

3.)    The scope of an EU wide deposit  guarantee, as to the amount covered and whether there would have to a local contribution, without which the system might be abused

4.)    An EU wide system for closing banks  down and distributing the losses between  shareholders, different classes of creditors, taxpayers and other banks in the  country in question and elsewhere. Associated with this is the question of requiring all banks to draw up “living wills” to say what would happen if they go out of business

5.)    Some form of limited  euro zone wide taxing capacity to act as a back stop if  the deposit guarantee fund proves insufficient

6.)    How to distinguish between past, and potential  future liabilities

7.)    The proper focus of euro zone bank supervision. Should it be on capital ratios, liquidity ratios, business models, diversification or other variables? Should different types of banking be separated from one another, or does a mixed system make it easier to get over short term difficulties?

8.)    What to do about Britain, which wants nothing to do with the euro or a European Banking Union, but still  wants unfettered access to euro zone financial markets  on the same terms as everyone else.

These are difficult political issues and they will need to be resolved in a way that is BOTH theoretically sound, AND politically balanced, between all the 27 countries in the EU. Patience will be required.

Share Story
Categories360° Analysis, Economics, Europe
Join our network of more than 2,000 contributors to publish your perspective, share your story and shape the global conversation. Become a Fair Observer and help us make sense of the world.

READ MORE IN THIS 360° SERIES

Cyprus: Another Chapter in the Disintegration of the Euro Zone?
By John Sydney Hopkins • May 02, 2013
The Euro Crisis - Where will it Visit Next?
By John Bruton • Jun 13, 2012
Is Europe Ready for Banking Union?
By Nicolas Veron • May 22, 2012
Europe’s Banking Supervision
By Nicolas Veron • May 06, 2012
US Firms in Europe: Waiting for the Good News
By KnowledgeWharton • Apr 29, 2012
Europe Needs to Drop its Resistance to Non-Bank Credit
By Nicolas Veron • Apr 19, 2012
The Euro Crisis: Collateral and Centralization
By Mithun Selvaratnam • Apr 17, 2012
Europe’s Fiscal Union Still Lacks a Blueprint
By Nicolas Veron • Feb 10, 2012
New EU Initiative to Combat Youth Unemployment
By Inger Dyrnes • Jan 30, 2012
Is the Euro Still a Model for an Asian Monetary Union?
By Norbert Walter • Jan 23, 2012
Wirtschaftskrise ohne Ende ?
By Aymo Brunetti • Jan 20, 2012

Leave a Reply Cancel reply

You must be logged in to post a comment.

Post navigation

Previous PostPrevious Waste of Medicines
Next PostNext Economic Reform in Morocco: The Road Not Taken
Subscribe
Register for $9.99 per month and become a member today.
Publish
Join our community of more than 2,500 contributors to publish your perspective, share your narrative and shape the global discourse.
Donate
We bring you perspectives from around the world. Help us to inform and educate. Your donation is tax-deductible.

Explore

  • About
  • Authors
  • FO Store
  • FAQs
  • Republish
  • Privacy Policy
  • Terms of Use
  • Contact

Regions

  • Africa
  • Asia Pacific
  • Central & South Asia
  • Europe
  • Latin America & Caribbean
  • Middle East & North Africa
  • North America

Topics

  • Politics
  • Economics
  • Business
  • Culture
  • Environment
  • Global Change
  • International Security
  • Science

Sections

  • 360°
  • The Interview
  • In-Depth
  • Insight
  • Quick Read
  • Video
  • Podcasts
  • Interactive
  • My Voice

Daily Dispatch


© Fair Observer All rights reserved
We Need Your Consent
We use cookies to give you the best possible experience. Learn more about how we use cookies or edit your cookie preferences. Privacy Policy. My Options I Accept
Privacy & Cookies Policy

Edit Cookie Preferences

The Fair Observer website uses digital cookies so it can collect statistics on how many visitors come to the site, what content is viewed and for how long, and the general location of the computer network of the visitor. These statistics are collected and processed using the Google Analytics service. Fair Observer uses these aggregate statistics from website visits to help improve the content of the website and to provide regular reports to our current and future donors and funding organizations. The type of digital cookie information collected during your visit and any derived data cannot be used or combined with other information to personally identify you. Fair Observer does not use personal data collected from its website for advertising purposes or to market to you.

As a convenience to you, Fair Observer provides buttons that link to popular social media sites, called social sharing buttons, to help you share Fair Observer content and your comments and opinions about it on these social media sites. These social sharing buttons are provided by and are part of these social media sites. They may collect and use personal data as described in their respective policies. Fair Observer does not receive personal data from your use of these social sharing buttons. It is not necessary that you use these buttons to read Fair Observer content or to share on social media.

 
Necessary
Always Enabled

These cookies essential for the website to function.

Analytics

These cookies track our website’s performance and also help us to continuously improve the experience we provide to you.

Performance
Uncategorized

This cookie consists of the word “yes” to enable us to remember your acceptance of the site cookie notification, and prevents it from displaying to you in future.

Preferences
Save & Accept