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|Time for euro creditors to reward their allies|
Financial Times - July 6, 2015
What will happen now after Greece’s resounding ‘No’ lies in the hands of fresh negotiations, Greek banking solvency and the nerve of the triumphant Alexis Tsipras. No doubt he will demand rapid debt relief in return for new Greek promises of fiscal restraint and economic reform that represent apparent concessions from his previous negotiating position; most probably the euro-zone creditors will refuse, for the same reasons they have refused before, namely that they won’t, or politically can’t, grant special privileges to just one euro member, and that they don’t trust any promises coming from Mr Tsipras.
Right now, Doris Day has the right slogan for Greece: “Che sera, sera”, whatever will be will be. Among the countless metaphors-turned-cliches used during the long Greek crisis, the most apposite has always been the theatrical one, namely tragedy. For Greece, there is no good outcome.
For the euro as a whole, however, that is not true. Tragedy is all too possible, but far from inevitable. To avoid it, euro-zone leaders would do best to think and act now. And in doing so, the creditors among them, led of course by Germany, could reflect upon what for them has been one of the few positive aspects of the Greek saga.
This is the quite surprising—particularly to Mr Tsipras—solidarity that has been shown by the other 18 members of the euro, whether rich or poor, creditor or debtor. Early glimmers of support and sympathy for Greece from France and Italy soon disappeared; if he expected any support from those euro members that are poorer than Greece, such as Slovakia, Slovenia or the Baltics, then he was swiftly disabused.
These euro members have shown a respect for the rules over fiscal policy and sovereign debt that in many ways the economic performance of the euro-zone has not deserved. It takes just one statistic to demonstrate this: seven years after the global financial crisis began in 2008 there remain more than 17.7 million people unemployed in the euro countries, while in the United States, where after all the financial crisis was born, unemployment is down to 8.3 million. The population of all 19 euro countries is 335 million; that of the USA is 320 million.
It is time to reward those euro allies for their support and perseverance. The danger posed to them, and the single European currency itself, from the Greek vote and probable Grexit is not economic or financial contagion. It is political contagion.
Cheering on Mr Tsipras’s referendum triumph are all the anti-euro and anti-establishment political parties that have been gathering strength in recent years from the currency area’s dismal economic record and from tensions over immigration and especially the migrant crisis in the Mediterranean: Marine Le Pen’s Front National in France; in Italy Beppe Grillo’s Five Star Movement and Matteo Salvini’s Northern League; in Spain, Podemos; and so on around the continent.
If these political parties are not to prosper in elections due in 2016 and 2017 in Spain, France and Italy, to name but three, then the euro area is going to need to up its economic and political game. It is going to have to replace the current atmosphere of economic failure and fragility with one of hope and real initiative.
Fortunately, the way in which this could be done is quite clear, at least on paper. It can be done by taking two existing proposals-cum-initiatives by the European Commission, doubling or trebling their ambition, and making them real; and by adding a third, to bind the euro’s monetary union closer together.
The existing proposals to be picked up and run with are the pledge to complete the European Union’s single market, by extending it into services and the digital economy, and the programme of public investment currently associated with the Commission’s president, Jean-Claude Juncker and for having attached to it a pathetic amount of money (€300 billion, most of it purely theoretical).
Single-market based liberalization is the core of what policy-makers mean when they talk of “structural reforms”; the main missing part is the labour market, which belongs in domestic politics thanks to its sensitivity. Public investment involves public debt, which has hitherto been anathema to the creditors. But with Greece out of the way, it is surely time to redefine the euro area’s fiscal rules to distinguish between current and capital expenditure, or else to devise common financing methods for new public infrastructure spending, policed by the European Commission. A natural target for such infrastructure is energy, subject of another Commission proposal that has so far got nowhere, namely to build a common European electricity grid and gas pipeline network – which would be a further way to distance Europe from Vladimir Putin.
The third element which would bind the euro zone closer together would be to introduce collectively-backed Eurobonds for government borrowing in the zone. This is toxic in German politics, since it would put German taxpayers at risk for other people’s borrowing. The euro-zone could not move there immediately or quickly. Instead, what could be done would be to set out a path towards Eurobonds, either as new issues or to replace some existing debt, laying out the intention to deploy them but also laying out conditions that have to be satisfied before they can be introduced.
Without collective responsibility for debt, under fiscal rules and with a banking union, the euro area will never be a full monetary union, and without it, the euro will always live under the shadow of doubt about its permanence.
Permanence, combined with hope, would be the best reward the euro area’s creditors could now offer their allies.