Debt crisis: Act now to save dying euro
10 August 2011
They may agree on the malaise afflicting the global financial industry and the Eurozone in particular, but European governments, who appear to be unaware of the gravity of the situation, have failed to take concerted action. French news website Mediapart argues that time is running short for the implementation of existing solutions.
The situation has been discussed! Independently of any other details, this news is supposed to be reassuring. Right in the middle of the summer holidays, the leaders of major governments and western monetary institutions, who participate in the G7, took part in a telephone conference – an apt testament to the critical nature of the problems posed by the crisis.
But since they can hardly agree on anything, yet again the politicians have to decided to wait and see how the financial markets respond before revising their opinions and embarking on yet another last-minute bid to plaster over the cracks.
The recent downgrade of US treasury bonds is also a reflection of inadequate public policy. Today governments are being forced to pay for the fact that they failed to implement appropriate measures in response to the 2008 crisis and the collapse of Lehman Brothers. Blinded by ideology, incompetence, or fear, our political leaders missed a unique opportunity to restore sanity in a financial system that had run amok. After a brief respite in 2009-10 and apparently unaware that denial of reality does not constitute a viable policy, they were convinced that everything could start again as normal.
Having lurched from bubble to bubble and from hidden crisis to latent crisis, the financial system, which was disconnected from any genuine reality, fell apart in 2007. The ensuing confusion came to a climax with the collapse of Lehman Brothers in September 2008.
In response to the emergency, central banks sought to restore and even increase liquidity, while governments rushed to the rescue of banking institutions in a desperate bid to save the economy. Three years later, if the same governments find themselves with hardly any options, it is because they gambled their balance sheets then to save the financial world.
But governments do not appear to have not learned from the collapse of Lehman Brothers, or at least they have not learned the right lesson. The consensus discreetly disseminated by financial institutions, which had every interest in promoting such a view, was that there should be no interference in the banking sector otherwise the entire world would go to the wall. Too big to fail, the banks were given an unlimited right to draw on public funds and to hold governments permanently to ransom. Of course, all of this was done in the name of protecting depositors, in much the same way that small shareholders have served as pretext for a stock market which has excluded them for years.
And what was obtained in exchange? Nothing. There would be no right to supervise, no holding to account or initiative of any kind. The much-vaunted shareholders, who were supposed to accept the burden of risk, were never called on. Only Great Britain, which appeared to demonstrate a better understanding of the financial system, opted to nationalise its main banks. By contrast, in what amounted to a caricature of governance, France responded by entrusting the drafting of a plan to save the French banking sector to Michel Pébereau, the managing director of BNP Paribas.
US banking authorities staged a small scale clean-up. Banks were obliged to recapitalise, and dozens of institutions were forced to close or merge with others. But nothing of this kind happened in the eurozone. It was simply assumed that the banks knew what they were doing, and they just needed time and money to introduce reforms. Thereafter, the banking stress tests turned out to be a farce.
Even the measures announced in the panic that surrounded the G-20 summits in late 2008 and early 2009 have not been applied: remember there were to be “no more tax havens, no more ratings agencies, and no more speculation.”
Ever since their pretense of co-operation with the OECD, the tax havens have been thriving like never before. The ratings agencies, who recently sparked public outrage by downgrading US debt, have not been troubled for a moment, while the pledge that Europe would create its own ratings agency has yet to be honoured.
Speculation continues to run rife. No measures have been introduced, for example, to prohibit the short selling of sovereign debt. Credit default swaps [used to insure bonds], which have been described as financial weapons of mass destruction, continue to be traded without any controls and in a total absence of transparency. Europeans, who are completely dependent on private American organisations for the merest scrap of information, still do not even have any means of knowing what is happening.
There will be no escape from the impact of further shocks in the crisis. The system has reached the point of exhaustion. But what can be done to settle the mountain of debts caused by the deregulation of the monetary and financial system?
First and foremost, there is an urgent need to put a stop to speculation. Sovereign states can no longer allow their economies to be devastated, just because it has been assumed that it is unhealthy to impede the circulation of capital. They have a range of weapons at their disposal if they decide to make use of them: bans on the short selling of sovereign bonds, controls on the movement of capital, and the deployment of central banks.
Secondly, Europe will have to introduce measures to ensure that the market for eurozone sovereign debt no longer resembles a clay pigeon shoot. One after another France’s political leaders have solemnly announced that they found a miracle solution to this problem: more federalism, they say, bouncing up and down on their seats like the young goat so beloved of General De Gaulle. According to them, this will take the form of a strengthened European Financial Stablity Facility until the eurobond can be launched. However, Germany is against this idea, and the government in Berlin is right: because this will amount to another gamble, which this time will bet the balance sheets of all of Europe’s member states. The best solution is to change the status of the European Central Bank, which will have to accept to become the lender of last resort for all of Eurozone states.
Thereafter, the deregulation of the financial system and the debt economy will have to be progressively reined in. Even though it is important to keep public finances on an even keel and establish fair taxation, the reduction of budget deficits, which is the sole policy advocated by governments, is not a sufficient response to the enormous scale of the problem. Inevitably it will only lead to austerity, extreme poverty and hasty political decisions.
In any case, the mountain of debt is such that more than one mechanism will be needed. Some portion of it will have to be written off, which once again raises the question of control of the banking system. There will also have to be some devaluation to reduce excessive liquidity and to cope with the consequences of this measure. Finally, we will have to act to reduce trade imbalances. With so many people jobless, western countries can no longer import everything without creating any wealth, and we will have to reconstruct an employment base that is worthy of the name.
So solutions do exist. But they are a far cry from the dogmas and received ideas relayed by our political leaders, who must now take action. If they succumb to the temptation of continuing to play for time, and postponing critical choices, we will have to endure even more pain in the long run.