Overcoming Crisis in Europe

Peter O’SheaMonash University, January 2013

What Sort of Crisis?

• Is it really a euro crisis? It wasn’t a problem when economic growth was strong in mid 2000s. Yet debt was high then.

• Slovakia, Germany and Estonia among the eurozone states, with GDP in 2011 above 3%.

• Devaluation: export-dependent countries like Germany owe countries like Greece a huge favour

Govt, Household, Financial Sector Debt in Largest Economies

Source: McKinsey, Q2, 2011Note: Asset-backed securities are removed from McKinsey data since underlying mortgages and other loans are already included

Unity: At what price?

• The countries with the biggest deficit problems are Ireland (-13.4%), Greece and Spain (both -9.4%), or the UK (-7.8%). Only Sweden, Hungary and Estonia are in surplus as at October 2011.

• Instead it’s a crisis of unity: what price are the wealthier countries willing to pay to have a long-lasting and sustainable peace in Europe?

Risk of Default

Why the focus on Europe?Because it’s an incomplete union.

Why a euro exit is unlikely• The consequences of exit would be far worse• There are other solutions to avoid default since as

forced debt writedowns in 2011 and the debt restructuring in 2012

• The EU has deep pockets, such as the collective gold reserves, collective cash reserves, enormous unmobilised private savings reserves throughout the EU but particularly the north

• Plus the ECB’s reserves – with long overdue bond buying activity of late

The EU’s Policy Response • Financial Stability and Loan Assistance- The Greek Loan Facility - The EFSM & EFSF – soon to be ESM – in Luxembourg

(which can be seen from Germany!) - Some facts: no member state has given any funds to the

facilities – they are all loans -Money is raised via bonds, guaranteed by states, only in default do states pay up-EFSM funds guaranteed by the EU budget, also IMF funds and some bilateral -You can buy bonds on the Luxembourg stock exchange-No different from lending through EIB or IMF

Fiscal CoordinationA logical step if union is to complete

The Treaty on Stability, Coordination and Governance in the Economic and Monetary Union ….

• Closer coordination of state fiscal policies• Closer Cmn oversight of state budgets• Reinforced deficit and debt levels • A penalty mechanism• Will it work? All based on peer pressure• Growth pact and growth targets - Hollande’s re-election?

Financial Regulation

• Banking supervision overhaul• A big problem earlier identified with the crisis• Regulation of everything from derivatives, directors’

pay, credit ratings agencies, hedge funds, credit default swaps, banking prudential requirements

• Ring-fencing of banks – commercial and retail separation – the UK cannot believe the EU is so slow

• Moves to banking union – ECB as supervisor and maybe deposit guarantee scheme

The Real Problems• Unemployment – no action• A failure to stimulate

innovation – R&D funding down, the EIB and EIF require co-financing and prohibit profit• A chronic and long overdue failure to reform welfare and

other government spending (excruciatingly slow and seemingly impossible

• Anti-business sentiment, particularly in France – manufacturers (and millionaires!) don’t want to go near it for fear of being nationalised

• … let alone venture capital firms

Tax Havens• HNWIs had hidden $21 trillion of unreported

private financial wealth in tax havens in 2010• The size of the United States and Japanese

economies combined !!• Could have generated tax of

US$190-280 bn• More than the EU budget for

2012 of €129.1 billion and could chop Greece’s debt in half (total debt $399.3 billion in 2011)

EU efforts uncoordinated

• The UK versus the EU, with Switzerland in the middle• Liechtenstein, Andorra, San Marino, Monaco … why? • The globalisation of banking and finance, OFCs on-

balance sheet assets at US$4.6 trillion • Some so-called legitimate – better regulation, better

protection, services etc – but a lot of it is not

Tax evasion too

• Cost of tax evasion – including avoidance of tax or social security contributions by individuals or companies — $3.1 trillion every year

• Addressing these would solve many of the EU’s “financial” and “euro” problems … or those of the less needy

A Solution?• Can the EU step back? Does it really want to? Do the

people really want to go back to pre-war nation states?• A “structural” overhaul… a constitution with

separation of federal and state powers (clear), with the ECJ to adjudicate

• Is the popular democratic problem really that insurmountable? … more than half way there

• Greater fiscal union, tax independence, cultural independence

• Even the UK could join later• … but no more principalities