La crise financière de la zone euro: Est-ce que l’Euro est une monnaie viable?
The Euro-zone financial crisis: Is the euro a viable currency anymore?
By: La Septieme Wilaya
The markets are taking an extremely gloomy view of what is going on inside the euro-zone. It has been a very bad week for the euro-zone with Italy and Spain, the 3th and 4th largest economies in the euro area, being hit with sharply rising borrowing cost as they try to raise money on the international markets to service their already huge debt. The financial panic inside the euro-zone is spreading worldwide right now and it is affecting the confidence in the Asian and North American markets.
This means that the terrible fear of contagion from the problems that engulfed Greece continue to spread throughout Europe. And this contagion is now threatening these two very large economies, Italy and Spain. However, Italy and Spain are not Greece or Portugal. If the scenario of a financial package to save these two countries is put together—in other words, if a bailout is the only way out, well then, we have to keep in mind one very simple fact: each economy—that is, either Italy’s or Spain’s economy—is bigger than the economies of Ireland, Greece and Portugal put together. This is a nightmare from the perspective of raising capital to put together a bailout package strong enough to calm the markets and stop traders from shorting the Italian and Spanish bonds to death. Taking into consideration of how the EU members, specially Germany, dragged their feet for months to respond to the pressing crisis affecting Greece, well one cannot be hopeful for a quick reaction this time. Moreover, right now in all the markets of the world, I do not think there is enough capital or enough trust and confidence into the EU financial institutions (including the economic health of Italy and Spain) to save either Spain or Italy. It has to be done, once again, through the IMF (combination of IMF and several other countries), which is a slap in the face to all European leaders highlighting the deep structural problems of the euro-zone and inability of the EU leaders to deal with a crisis.
There is also another major worry right now among all financial analysts. The worry is that the euro-zone could not withstand the pressure from all these simultaneous crisis (Greece, Portugal, Ireland, Spain and Italy), and that could lead to the collapse of the euro altogether. This is why we have seen over the last week or so major euro-zone leaders scrambling around and desperately trying to find a solution to this huge problem in order to shore up some confidence in the euro as a currency. With all of this happening this week (and to be honest, the last 4 weeks or so), the governor of the European Central Bank (ECB), Jean Claude Trichet announced that the ECB would start putting money into the banks in those countries heavily exposed to sovereign debt as a result of severe shortage in liquidity. In other words, the ECB will have to pump liquidity in the Italian, Spanish, Portuguese, Irish, and Greek banks. I am afraid this is a little bit too late. This should have been the first urgent measure taken by the ECB. Pumping liquidity in those banks would have stabilized them and allowed them to raise capital using their values and holdings as collateral. Right now, I am not sure that this is enough to sway and convince investors.
Nevertheless all these last minutes mad-dash-to-the suggestion-box tricks, the problems of the euro-zone were and still are deeply structural. A financial band-aid like the one announced by the governor of the ECB might postpone doomsday and stave off the catastrophe, but on the long run the euro-zone will face the same problem again because of its deep structural problems. In a letter to all the heads of the euro-zone, Jose Manuel Barroso, European Commission president, said publicly what everyone was saying privately and quietly. Jose Manuel Barroso said that “it is time to rethink the euro financial defenses….it is clear we are no longer managing a crisis in the euro periphery area alone.” This is a very clear warning to the major players of the euro-zone. What Jose Manual Barose is saying is that the cats are out of the bag, and the crisis is no longer contained to Greece, but it is affecting the heart of the euro-zone. The development in the bonds markets of Italy and Spain are a serious cause of concern, and they reflect a deep skepticism among investors about the systemic capacity of the euro-zone to respond to a financial crisis. If the euro is to continue as a common currency for a certain number of countries, serious decisions must be taken, and serious reforms must be implemented. It is my opinion that kicking Greece out of the euro-zone would be a step in the right direction. With all the money poured in Greece these last 2 years, the country is still on the brink of total financial collapse. Allowing Greece to leave the euro-zone, restructure its debt, get its fiscal house in order, and then reapply to the euro-zone is the best possible solution for everyone, Greece included. Yes, the markets would go crazy for a couple of weeks and yes some banks would take a serious haircut, but that is a better alternative than a low to an anemic economic growth for years to come affecting everyone from Asia to the US. It would at least bring all the focus on the major players like Italy and Spain. Moreover, a common currency zone cannot operate over several countries without having a common bond market. It is time for all the different bonds of the euro-zone to be combined in one giant bond held by the ECB or for the ECB to start issuing euro-zone bonds backed by all the full faith and credit of the central bank and every member of the euro-zone. That euro-zone bond would protect individual bond markets from being singled out by speculators and shorted to death (like Greece and Italy these days). Finally, several countries will have to bite the bullet and pass severe austerity packages. These packages must strike a careful balance between cutting spending, raising revenues, and generating growth. Austerity for the sake of austerity and cutting spending just to calm market would most likely backfire and plunge all the euro-zone into a slow and long period of recovery (that means, high unemployment, low economic growth, social unrest, rise of the extreme right parties and so forth). These countries cannot just simple cut their way out of this crisis; they must also growth their way out of this crisis. It is only through growth that a stable solution can be found to this crisis. Countries like France, Italy, Spain, Ireland, Netherlands and so forth must restructure their entitlement programs, diminish the size of their welfare state, raise taxes, and invest in pro-growth areas. Politically, this is a very tough thing to do, but sooner or later, every western democracy will have to swallow a very bitter pill, otherwise the long-term outlook is not that rosy, and the day of reckoning will be too dreadful to imagine.