Euro

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by Dr. Kurt Hübner

The German center-right coalition sticks to its tune even when the rest of the orchestra builds toward a shrill crescendo. Jointly with Jens Weidmann, head of the Deutsche Bundesbank and her economic advisor, Chancellor Merkel steadfastly opposes all versions of Eurobonds and any decisive bond purchase program for the ECB. Weidmann may have gone furthest by arguing that both tools are in violation of existing European and German law. Yet saying Merkel would have a more nuanced position would miss the point. Both are not even pretending to be subtle. A look at two scenarios is needed in order to understand this hardliner stance. The first scenario postulates that the crisis mechanisms already in place, or are in the making, and the planned change in policy rules that would come with changes to the Treaty are sufficient to deal with an ever-escalating process. Moreover, the tune goes that those mechanisms are strong enough to handle a Greek default and can stop any contagion. Unfortunately, the probability of this scenario diminishes on a daily base. Internal devaluation kick-starts vicious circles where negative growth drives debt and deficit ratios up and thus generates increases in yield. Higher yields demand, in austerity logic, more cuts and cost reductions that result in an ever-lower growth dynamic and eventually in further increases of yield. Sooner than later this circle runs into economic and political walls. 

As I am writing this text, European economies are falling like dominoes. The yield for Irish bonds is skyrocketing as compared to the returns investors get for the German bonds they hold. Tomorrow may be Portugal´s and Spain´s turn. The day after we could be talking about Italy.

European countries are either frantically cutting public expenses or negotiating multi-billion Euro rescue packages with the main international institutions, including the EU and the IMF. Some of them are doing both things at the same time, though markets will not give them a break, despite such draconian measures. Nearly all countries, even the ones better off, have experienced a regress in their real income. So to speak, we all are poorer now.

The Carnegie Endowment for International Peace has produced a very informative report on the Euro Crisis that outlines the causes, main actors, and effects on the rest of the World along with policy recommendations.

The Endowment has also produced a page to go along with the report that includes an interactive map, which provides immediate access to data about countries in the region and the roles they have played in the current crisis.

A highly recommended and enlightening look at the Eurozone Crisis.

Nothing can stop legal obligations. According to article 140 (1) of the Lisbon Treaty, the Commission and the European Central Bank (ECB) must assess the fulfillment of the conditions for the adoption of the Euro by Member States with a so-called derogation at least every two years, or at the request of a Member State. Despite the rumors of a break-up of the Euro zone, and untouched by the deep economic troubles of the Euro economies and the Euro itself, the Commission practices a business-as-usual policy by issuing its latest assessment. And the winner is ESTONIA!

Last year’s economic record looks impressive. Estonia easily beat the benchmarks regarding HCP inflation, long-term interest rates, budget deficits and public debts. The country did its legal homework by putting all the laws, rules and principles in place that are needed to introduce the Euro. Finally, it successfully participated in ERM II during the last two years. The latter is no small feat, given that the currency board was under economic and political pressure when the 2008 global financial crisis hit the country. Under conditions of a currency board, there is no space for any independent monetary policy, and the whole burden of adjustment is put on the shoulders of fiscal and wage policies. Unemployment skyrocketed in 2009 reaching 15%; nominal wages shrunk by 3 % on average, and the budget deficit was kept at 1.7% of GDP. There is no doubt that Estonia implemented a severe austerity program that may become the model for other troubled Euro zone economies.