Europe's heads of state have done a lot of summiting and deal making of late. Greece has voted more austerity. But on balance the results have disappointed again. The only genuine help for Europe's sovereign debt troubles has come from the European Central Bank (ECB), which at last has begun to provide markets much needed liquidity. Otherwise, Europe's leaders, though they have managed some action, seem incapable of thinking broadly enough even to begin grappling with the continent's underlying problems.
For all the deep problems facing Europe—questions of default, of membership, of its basic political-economic model, even of the biases built into the euro—the continent's summiteers have kept a remarkably narrow focus. They have considered just two things, in fact: (1) how to enforce haircuts on the holders of Greek debt and (2) how to enforce fiscal austerity. Though such matters are important and help for Greece hinges on their resolution, they are nonetheless a relatively small part of Europe's problems. Until Angela Merkel, Nicholas Sarkozy and other European leaders expand their focus to deal with the fundamentals, markets and investors will show no confidence beyond that evoked by the ECB. Yet, rather than broadening the scope of their concerns, Europe's leaders have failed even to reach agreement on the narrow goals with which they seem so wonderfully preoccupied.
On the matter of Greek bond values, they have talked private bondholders into swapping their existing holdings for only half their value in new, longer-term bonds. Since private entities hold just under 60% of outstanding Greek public debt, this haircut would cut the overall burden of outstanding Greek government bonds by almost 30%, bringing it down to about 115% of the country's gross domestic product. But they have accomplished a little more. Though the ECB has agreed to suffer a haircut, the exact extent and nature of the deal remain ambiguous. Substantial dispute remains over whether the International Monetary Fund (IMF) should take a loss. There is also disagreement on the size of the coupon attached to the new debt. The Germans and the IMF want a low figure below 3.5% to ease Greece's financing burden. Private holders want a coupon closer to 4%.
On the other, admittedly larger issue of enforced austerity, confusion reigns. The outlined agreement would force each country to keep its budget deficits below 0.5% of GDP over the course of an economic cycle. It would also limit each country's outstanding debt to 60% of GDP. The rule would impose fines of up to 0.1% of GDP on violators, though it would allow for exceptions under extraordinary circumstances, for instance, when real GDP falls more than 2%. German Chancellor Merkel in particular has emphasized the need for enforcement and penalties. She is especially keen to supervise the Greeks, who, she claims with some justice, have violated austerity promises in the past. Though France showed a distinct lack of enthusiasm for the announced austerity regime, French President Sarkozy still claimed, against all appearances, that Europe's leadership agreed. Meanwhile, the United Kingdom and the Czech Republic refused to endorse the new rules.
If it is disappointing that Europe failed to agree on narrow issues, it is worse that its leadership has entirely ignored more fundamental concerns, such as growth. That's a major oversight with the continent on the verge of recession and the deficit control rules set to enforce considerable fiscal restraint. Though Italian Prime Minister Mario Monti talked about growth, a one-sided emphasis on austerity remains and could produce a vicious cycle in which spending cuts and tax increases so depress growth that deficits expand, demanding still more austerity that, in its turn, would depress growth and widen budget shortfalls still further. Europe could avoid such evils, even while exercising budget restraint, if it simultaneously pursued tax or labor market reform, for instance, or a reassessment of spending and regulatory priorities, or even plans for privatization. But the summiting has failed even to mention these or other possible growth initiatives.
Nor does Europe's leadership seem ready to consider the biases built into the euro. Many have decried the common currency for preventing the kind of devaluation that might otherwise have eased the strains on countries like Greece, Ireland and Portugal. EU leaders, of course, cannot consider such a route without utterly destroying the euro. It is unfortunate, nonetheless, that they have proceeded as if the euro had no clear biases. Primary is the distortion caused by the highly divergent rates at which each country joined. Because Germany exchanged its national currency for euros at a cheap rate relative to its economic fundamentals, the common currency enshrined for Germany substantial export advantages within the eurozone, especially compared to Europe's periphery, whose nations joined the euro when their national currencies were dear compared with their competitive fundamentals. Without implying that this relative positioning was deliberate, the biases nonetheless exist, deserve attention and, unless corrected, will make the periphery's adjustments that much more arduous.
Until Europe's leaders address these and other fundamental matters, investors, bankers and others involved in this sovereign debt fiasco will remain skeptical. Few can have any confidence in a lasting solution when those presumably managing it offer only partial responses to narrow issues and effectively ignore everything else. Europe's strains demand more initiative and imagination than dubious efforts to centralize still more power in Brussels—or is it Berlin?
Complete your profile to continue reading and get FREE access to Treasury & Risk, part of your ALM digital membership.
Your access to unlimited Treasury & Risk content isn’t changing.
Once you are an ALM digital member, you’ll receive:
- Thought leadership on regulatory changes, economic trends, corporate success stories, and tactical solutions for treasurers, CFOs, risk managers, controllers, and other finance professionals
- Informative weekly newsletter featuring news, analysis, real-world case studies, and other critical content
- Educational webcasts, white papers, and ebooks from industry thought leaders
- Critical coverage of the employee benefits and financial advisory markets on our other ALM sites, PropertyCasualty360 and ThinkAdvisor
Already have an account? Sign In Now
*May exclude premium content© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.
