The Ticking Euro Bomb What Options Are Left for the Common Currency?
Part 4: Are European Rescue Efforts Doomed to Fail?
Act IV: The Future of the Euro (2011 to ?)
Why Jacques Delors, one of the founding fathers of the Europe , still believes in the common currency. Why economist Kenneth Rogoff feels that his nightmare scenario is realistic. And why Mohammed El-Erian, CEO of the world's largest bond trader, says that he isn't making any bets on the demise of the euro.
What will happen to Europe in the coming weeks and months has much to do with Greece, but it has also long been detached from the drama in Athens. In fact, it is the continuation of the financial tragedy that began in New York in 2007. According to American economist Kenneth Rogoff, what began in New York was not a normal recession, albeit somewhat more severe than usual, but a "great contraction" of the sort that happens only once every 75 years in global economic history. This circumstance, says Rogoff, has not been recognized to this day. In his view, this is why Europe's crisis, which began as a crisis of confidence, turned into a debt and liquidity crisis and finally led to multiple solvency crises, is not ending.
"The current policy is to act as if a liquidity crisis could be overcome," says Rogoff, "and as if all it took were to hand out enough loans to jump-start growth once. But it's the wrong diagnosis. We have a solvency crisis, and we have European countries and regions that are fundamentally bankrupt. No loan in the world, no matter how big, will save Greece, nor will it save Portugal and probably not Ireland, either, and Italy is also very worrisome."
Band-Aids Where Surgery Is Needed?
If this conclusion is correct, it means that the new European Financial Stability Fund (EFSF), established for ailing euro countries, is pointless. It means that the ECB's new policy of financing the national debts of countries will fail. It also means that Europe's leaders, as they rush from one crisis meeting to the next, are merely handing out Band-Aids where surgery of the inner organs of the Union would be necessary. "The goal now should be to trim debt," says Rogoff, "declare bankruptcy and start over again." According to Rogoff, Greece is so insolvent that it will only have a future if 50 to 75 percent of its government debt is written off, and the situation in Ireland and Portugal isn't all that different.
If strong medication isn't administered to Europe now, says El-Erian, notwithstanding its adverse side effects, the infection will soon reach the heart and the brain: France and Germany.
Either way, says Rogoff, the euro project is at a crossroads. The European partners must either enter into a forced marriage, a shotgun marriage, or the union will break apart sooner or later. "And, of course, it's questionable whether the people of Europe are willing to enter into such an unromantic marriage."
The Germans, says Rogoff, play a critical role. And if they want to save Greece, they should take a sober look at the situation.
They should look to Italy, says Rogoff, where the northern part of the country has been paying the bills for southern Italy for 90 years. And they should ask themselves whether they are prepared to pay Greece's bills for the next 90 years.
'A Risk Bordering on Madness'?
"That's what is involved when we talk about a transfer union. It's certainly possible. Germany is probably strong enough to pay all the bills, presumably to the tune of 150 percent of its own economic output, and the markets would somehow play along. Germany would then be the super-European, and everyone would love Germany. But, to be honest, for the Germans it would be a risk bordering on madness."
When politicians ask him for advice these days, Rogoff suggests starting with a debt haircut as quickly as possible, but even this solution would be very costly. To avoid simply pushing the affected countries over the brink, Europe -- and Germany in particular -- would have to find a way to deal with the bankrupt states.
Rogoff could imagine the Europeans guaranteeing the debts of a country's central government, but nothing more than that. In the case of Ireland, this would mean that no guarantees would be assumed for the banks. And in the case of Spain, it would mean that the immense debts of its cities and towns, such as Barcelona's, would remain Spain's problem. And finally, in that of Greece, it would mean that only the government's most critical expenses would be assumed, but nothing more.
It would mean that Europe would enter a very difficult period. "That's the problem with big crises," says Rogoff. "In the end, they create many more losers than winners."
While this is the scenario Rogoff, an American expert on financial crises, paints, European politicians like Jacques Delors stand by their vision of a great Europe. Delors, the founding father of modern Europe, cannot imagine that the euro zone, by and large, will break apart. "It would be too expensive, and I think that no one wants to take this risk." Europe, says Delors, is a moral obligation, something that today's politicians have apparently forgotten. "They run around like disorganized firefighters, and they still believe that they can put out all the fires." But what is really necessary, says Delors, is a strong central government in Brussels that coordinates the efforts, as well as new, robust institutions.
Do Only Two Possibilities Remain for Saving Euro?
The proposals to solve the euro crisis are manifold -- reducing debt with or without withdrawal from the euro zone, a European finance minister or even a European economic government -- but they have become little more than an expression of the cluelessness of economists and politicians. There is no precedent for this crisis, nor is there a recipe that could be applied to resolve it. Europe's politicians have maneuvered themselves and their people into an unparalleled situation. It scares some of them more than it scares their voters, because politicians already know what voters don't even suspect yet.
In the end, only two possibilities will remain: a transfer union, in which the strong countries pay for the weak; or a smaller monetary union, a core Europe of sorts, that would consist of only relatively comparable economies.
A transfer and liability union requires new political institutions, and individual countries would have to confer a significant portion of their powers on Brussels. Some politicians are warming up to this idea as they consider an economic government or even a United States of Europe, but without explaining exactly what this means.
The second path is the more likely one. It will not be easier, and it might not be any less costly, either. First a firewall would have to be erected between the countries that are in fact insolvent and do not stand a chance of ever repaying their debts, like Greece, and others that have only a short-term liquidity problem. Then the banks would have to be provided with government funds, so that the financial system does not collapse when banks are forced to write off some of the government bonds on their balance sheets. Finally, the countries exiting the euro zone would require continued support, because Europe cannot simply look on as countries like Greece descend into chaos.
'That Doesn't Look Not Dangerous'
Horst Reichenbach will still be needed in either case. In his first tour through the offices of Athens cabinet ministers, the director of the EU Task Force is embarking on a battle against 10 years of mismanagement, 100 years of slowness and the pride of 3,000 years of history. Reichenbach is a mathematician, an economist and a technocrat with decades of experience in the Brussels bureaucracy, and generally a well-tempered man with an aura of extremely professional and esthetic austerity. He is an envoy from another time zone, an envoy from the future.
While waiting for the elevator, Reichenbach says that he feels "extremely welcome" wherever he goes. He attributes this to the fact that he is, after all, the "good guy" in this game, whereas the representatives of the so-called troika, consisting of the European Commission, the IMF and the ECB, who are there to monitor compliance with requirements, are "regarded less favorably" in Greece.
When he drives through Athens, what he sees looks like a dynamic European city through the tinted windows of his dark-blue Renault Espace, the Task Force's official vehicle. Traffic is light now that 15,000 striking taxi drivers have disappeared from the streets of Athens.
He has to slow down at one point, where the other side of the road is blocked. Reichenbach slowly maneuvers his Renault past a burning car in front of the US Embassy. He says, "oops!" and looks out the window, but then he concludes: "That doesn't look not dangerous."
REPORTED BY FERRY BATZOGLOU, MANFRED ERTEL, ULLRICH FICHTNER, HAUKE GOOS, RALF HOPPE, THOMAS HÜETLIN, GUIDO MINGELS, CHRISTIAN REIERMANN, CORDT SCHNIBBEN, CHRISTOPH SCHULT, THOMAS SCHULZ AND ALEXANDER SMOLTCZYK
Translated from the German by Christopher Sultan
- Part 1: What Options Are Left for the Common Currency?
- Part 2: Greece Adrift
- Part 3: Design Defects, Political Weakness, Public Disinterest
- Part 4: Are European Rescue Efforts Doomed to Fail?