As we stare at the euro crisis, it is useful to mark the similarities and differences with America’s response to the global economic crisis that hit home in October 2008. The “Yes-we-can” civic solidarity built by Barack Obama for America was crucial in the mobilisation to address the banking crisis. Trust personified by him was built by the combined impact of the moral overtones of fundraising for his campaign, the strategic “audacity of hope” of the American people to resurrect the economy and then by the emotions that brimmed over when the meek and humble turned up to vote on a cold day for an African-American President.
Obviously, the euro crisis is vastly different from the rude shock America woke up to. The specifics of a mutually reinforcing sovereign debt crisis and indebtedness of the banks in Europe are different from the situation where the Fed Chairman Alan Greenspan had grievously looked away as the bubble of dubious derivatives had bloated up. Nevertheless, there are similarities. Though the European problem has been dubbed a sovereign debt crisis because it has escalated to that, governments did not start it. Increase in debts in Spain and Italy before the recession in 2008 had little to do with governments.
Interest rates had fallen in southern European countries when they joined the euro and it was the private companies and mortgage borrowers that basked in the sunshine of loans. Their economies grew rapidly. A huge infusion of liquidity by means of unregulated derivatives in capital market banking — practically six times the value of primary collaterals — increased the risks banks were taking. The differences in competitiveness between European Union members played its part as Germany and Poland gained immensely from the excessive imports of southern countries, lubricated by derivatives-inflated loans from French banks. A debt-driven boom encountered global recession. Unable to adjust exchange rates in the face of external trade pressures, the less competitive countries suffered greater unemployment than the others. Their governments then tried to mitigate hardship by spending massively from their national budgets instead of reining in the huge risks banks were taking. Ultimately, any significant price shift in securitised debt created a major ripple effect ending in a demand for liquidity much faster than the banks could recapitalise by their earnings to pay up on demand.
Three points
To address the issues in the U.S., the “defaulters-pay” argument of the capitalist creed was tempered by the stakes of U.S. citizens in global assets dependent on the value of the dollar. Bailouts for banks were approved on the understanding that the free market would eventually have to redeem itself by proving it could drive success at the frontiers of new technologies to stimulate growth; till then, the banks were to be helped by taxpayers who were persuaded to do so, by extension of health care to them. It seemed a fair manoeuvre and there are glimmering signs of the economy turning. For Europe, it might be tempting to think in terms of shaking it out of a socialistic creed of overly benevolent welfare states by demanding more toil, tears and sweat from workers; for several reasons, this would be a charge in the wrong direction.
For one, it is difficult to say whether the problem in Europe is due to its soft states or its welfare orientation; the state has been far softer on companies and banks than common citizens. Second, we can’t overlook the fact that the overall volume of trade within Europe has risen substantially ever since the union; someone must have worked to produce all that. Third, more national governments of northern Europe reneged on the convergence criteria of a public debt cap even before the recession hit them than from the south who piled up sovereign debt after the recession.
For resurgence of trust in a union and the euro, of the kind that happened in the U.S., people in Europe will also need not only strategic, but moral and emotional reasons to repose that trust. Their strategic reason cannot be simply the benefits from a common market. In the long march to the European Union, the rise to power of Solidarity in Poland and the fall of the Berlin Wall in 1990 was the defining moment. The Maastricht Treaty in 1992, with its several pillars and convergence criteria, sealed the union on the basis of the idea of tempering extreme forms of nationalism and securing an enduring peace after suffering a thousand years of frequent wars.
Distinct culture its strength
The motivation to take each other’s interests into account while legislating and the will to a secular, not chauvinistic, foundation along with a belief in social justice, are not grounded in political alignments but in the idea of civic solidarity. Europe’s strength is that the distinctiveness of its culture is to be found no longer in a Christian political formation but in civic consciousness at the level of its towns, cities and islands. The yen for peace and the moral moorings of voters in Greece prompted them on June 17, 2012, to vote for repaying loans to stay with the euro. But the emotions aroused by human suffering due to worsening unemployment cannot be overlooked and the pound of flesh has to be cut without spilling a drop of blood.
Unfortunately, this does not seem likely. The pledges at G-20 by many countries to shore up the capital with the International Monetary Fund (IMF) to help in the euro crisis were disappointing. Neither was the problem of the volatility in currencies addressed nor can the tinkering by IMF, in tandem with the European Stability Mechanism (ESM), to try and impose the strict conditionality of gradual reduction in debt-GDP ratio, help matters much. The funds available with ESM are a meagre €500 billion. Bending the rule that only governments can borrow from it to allow banks to borrow directly is not a healthy development; long-term refinancing operations with banks, like has been done twice before, ought to be undertaken by the European Central Bank, not ESM.
If the European Central Bank does not stand behind the euro, who does? Another option, of further lowering of interest rates by the European Central Bank, sounds promising, but since confidence has been eroded in the south, the greater gainers would be in the competitive north where loans would be more freely given by banks. The idea of floating eurobonds, or pooling of European debt, appears to be the only way out. Yes, Germany would have to accept higher interest rates than otherwise while the southern countries enjoy lower rates than they face now, but Germany is also the greatest beneficiary of trade within the EU and should bear the burden.
Instead of refusing to consider it because Germany thinks it is dangerously close to monetary financing of the member states which is prohibited by the treaty governing the euro, German Chancellor Angela Merkel needs to say “Yes, we can.” That would generate a trust among the Europeans, not just their governments, that their lives, not paper treaties, count for far more in the Union.
(Amitabh Mukhopadhyay is a commentator on social issues.)
