Bruno Colmant - Economic Insights

Day after day, with a catastrophe such as the one that we are witnessing in slow motion, the Eurozone is inevitably heading towards a chaotic situation, i.e. its dislocation. This monetary choc is not determined by the results of the Greek elections or German budget orientations. Even recent inaction of the European Central Bank (ECB) becomes an accessory element in this moving landscape.

The situation is much worse.

Indeed, the understanding between European populations is no longer sufficient to share the ultimate expression of sovereign power, visually that of coining a common currency.

Moreover, what more is money than a state convention destined to support transactions and savings? Yet, the value of savings is the measure of time. This time has already been borrowed from future generations by the public debt accumulation that they will inherit. Today, after having squandered future generations’ growth, Eurozone countries do no longer share the same future visions.

Thirteen years after the consecration of a political project thought out by visionary men that were the last war’s conscience guards, European States risk having to wave farewell, abstaining from monetary reconfiguration and economic drifts. The latter will occur quickly yet untidily, for it is impossible to assure social order without monetary discipline. In the hope of regaining the bases of a stable economy, some countries will face political and national spasms.

Does that imply that some countries only wished to have a single currency to satisfy circumstantial interests or to take advantage of godsend effects? This cannot be excluded. The political movement that should have accompanied monetary hooping has never been established. Some countries were the clandestine passengers of the Euro. Others saw immediate interest in expanding their internal markets, avoiding the revaluation of their money.

For a long time we thought, like numerous economists, that the political vision of a single currency would be sufficiently profound to take long-term stake measures. However, after three years of monetary procrastination and community pusillanimity, we have to admit that intelligence optimism has to be moved aside, in favour of willpower absence pessimism. It’s a disaster.

What else can be observed? Without accepting the consequences of this adhesion, the weak and little industrialised European countries were imposed a strong currency, typical of countries disciplined by manufacturing exportations. Through monetary adhesion, these very countries were able to let their public debt increase under abnormally favourable conditions. Everything happened as if change risk disappearance, instead of reinforcing the socio-political structures of certain countries, had permitted borrowing German solvency.

Apart from this godsend phenomenon, few understood that the Euro was a voluntary choice of belonging to a liberal and more flexible market economy. Indeed, a monetary zone can only exist when production factors, visually labour and capital, are fluid and mobile throughout the zone. However, contrary to anticipations, various European countries have increased State weight in the market economy, by calcifying labour regulations and by making production factor adaptation viscous. Instead of relaxing the economy, Euro public loan conditions have reinforced the welfare state.

European authorities should likely to have confronted these member states with these increased public debt drifts, and this well before the 2007 crisis, which retrospectively speaking was no other than a glimpse of more profound dysfunctions. Yet, not any serious message was given. At the same time, everyone knew that the cost of an ageing population would begin overflowing public finances, were nothing was anticipated either, a slightly as if the single currency euphoria effect would have been able to erase objective reality.

Political community indolence, regulatory complacency and social rigidity were added to the lacking  prospective of leading our European economies towards an untenable and incompatible debt level with a currency that we want to be single, but without sacrificing fiscal and national budget independence. 

We wrote that everything is being put into place for monetary disaster. To observe those elements that the financial markets have already anticipated, both from intolerable interest rates in Southern Europe and financial enterprises’ loss in value of 50% in a year’s time, we only need to notice the erratic character of political orientations.

Indeed, while disastrous unemployment rates (11% of the European active population) is added to unseen conjectural contraction, European political authorities impose the fragile countries austerity programmes that lead to a lethal spiral, i.e. recession fed by rigidity. These budget programmes strongly weaken the local banks, which are already confronted with abyssal losses.

At the same time, recent ECB interventions are destined to allow the banks of weak countries to buy the debts of their own States back. These countries (Portugal, Italy, Spain etc.) thus progressively drift away from the European capital market and have to rely on their own local savings, that are yet having a rough time, for their auto financing. The risk of financial contamination is reduced but at the cost of each country’s individual fragility. This leads to a tacit nationalisation of the banking sector, the liquidity alimentation of which will inevitable dry up. These very financial establishments could even disappear, except with European support that they only be granted under socially unacceptable conditions.

We are thus far from the idea of hypothetical Eurobonds, which Germany will refute. Why would this country that that has allowed other member states to run into debts under the conditions of its social discipline, henceforward accept having to be subjected to the conditions of lax countries? The same reasoning goes for the illusory “banking union” and the European deposit protections tthat are ectoplasms in times of financial crisis.

Moreover, as we already observe in the weak countries, this even comes with a massive escape of savings towards other countries, from het fear that the Greek monetary expulsion will, on a short or middle-long term, be transposed to other State Members. It’s the proof that the citizens of peripheral countries have lost confidence in their own States, while this monetary confidence concretely stands for social appeasement guarantees.

What is thus bound to happen if Greece abandons the Euro?

The other peripheral countries, paralysed by the Greek case, will have to nationalise their financial sectors and impose restrictions to capital trying to escape the country. This will result in state interventionism. These very countries of the South of Europe will no longer form a homogenous monetary zone but will adopt different currencies, except maybe from Spain and Portugal that will co-exist with the same monetary standard. It will thus not be a Europe with two gears, but a gear box with detached pieces.

The other countries of Northern Europe will stay grouped in a Deutsche Mark zone, spreading from the Benelux to Austria, including some countries from Northern or Eastern Europe, even Poland. France will join this monetary aggregate, while the fate of Italy or Ireland is more uncertain. The financial markets have already chosen, dividing the European countries in two categories based on their interest rates. The German epicentre will be directed by rates close to zero or negative.

However, aren’t we delighted with this situation, in which Belgium appears to be part of the good side of Europe, even though regional difference between Flanders and Wallonia they constitute an economic caesura themselves? The end of the Eurozone would come with the germs of commercial flux dislocation and would lead, apart from immediate losses, to a contraction of the GNP, to which the constraints of a strong currency, i.e. the Deutsche Mark, would be added. Stock markets would suffer a very severe and strong correction.

This is the distressed landscape towards which a lacking European harmonisation or a monetary expulsion of Greece could lead. And let the badly informed public opinion stop reprimanding the banks and financial markets, the scapegoats of a systematic financial crisis! It’s not the banks that have excessed, but the States, i.e. us who have sinned against discipline, believing that debt would be absorbed by capital.

It remains an exit ramp, but the orifice is getting smaller every day, i.e. a brutal integration of political structures accompanied by massive monetary injection and subsequent inflation that would lighten debt weight and would allow generational wealth rebalancing. The banks from the South should be recapitalised so as to prevent a domino effect. On the 9th of July, the Monetary Stability Mechanism will be activated with a an working capacity of 500 billion. This will be the last German effort.

However, we fear that, except from an expression of decisive will, State Members, like the artisans of the Tower of Babel, have committed a political sin, coupled with monetary vanity. They no longer speak the same language. Political messages disappear into cacophony. Their time – and ours – has run out. We already wrote it in these column at the beginning of this year: the summer of 2012 will be the moment of truth. Without any major political push forward, it will at best be a colossal injection to temporarily save the Euro or its disintegration.

This text only reflects the opinion of the author. It does not concern any private, public or academic institution with whom he collaborates.