Crise de la Dette européenne: Il est temps de restructurer la dette et de nationaliser les banques
European Debt Crisis: It is time to restructure the debt and to nationalize the banks
The European crisis is getting worse and it is casting a huge cloud of uncertainty on the future of every major economy. What the market is seeing is a thick and blurry shadow on the far horizon. Indeed, the question that the markets have been asking for a long time now, and the EU leaders have not answered it yet is: can the EU countries pay their debts or do they have the ability, structurally, to pay their public debt? And clearly, the markets are saying “No.” The markets have not shown any confidence in the EU institutions and in the leadership to solve this crisis. Instead, what we have seen is that the debt crisis is worsening–it went from the periphery, Greece and Ireland, to the center, Spain and Italy. Right now, there are speculations about the financial health of the French government. This is how spread and serious this crisis has become. Last week, the French ministers of budget and finance, Valarie Pécresse and François Baroin respectively, were forced to publicly defend the solvency of the French government. Both ministers were compelled to call major hedge funds and lobby large banks to calm down the speculations. It is obvious to me (and to everyone who has followed this debt crisis for the last couple of years) that the EU does not have the structural and institutional capability to deal with the crisis. Last week’s Franco-German summit is a perfect example. The French and the Germans agreed not to agree on almost anything. The only possible solution that would have seriously calmed the markets would have been the establishment of the euro-bonds. Instead, the French and the German leaders agreed on some very weak measures that did not have any calming effect on the markets; they actually raised more fear and speculation.
So, what’s the solution to this protracted European debt crisis? Well, the N-word might be it–i.e., nationalizing the banks and restructuring the debt.
Let me back up and explain why this might be a necessary solution. First, EU politicians have not understood what the markets have been telling them all this time. The message got lost or misunderstood. If they continue to misunderstand this clear message that world markets have been sending, well the future would not be pretty at all.
Second, the downward spiral in all markets has not been caused by the speculators or shorting. This has been the biggest misdiagnosis of the century, promoted, of course, by the know-nothing media. There are not that many hedge funds that are shorting the market heavily. The decline in stocks and the rising in value of sovereign CDS and treasury notes have been the results of normal market actors and activity. It is mostly the financial institutions that manage the savings, the pensions, the trusts, the insurance, and so forth, of everyday citizen that have been trying to protect their investments and themselves from risks. In a period of great uncertainty about the future economic growth in the core eurozone countries, and more importantly the ability of EU countries to pay their debts, these financial institutions sought to secure and protect themselves by going to quality investments and safe havens.
Third, it is evident that there is uncertainty out there, and this in turn is making the market extremely jittery, and some days, totally irrational. Last week was a good example. The triple-A status of the French debt was threatened (and it is still threatened), but is this really surprising? For decades France has run a chronic budget deficit, has had a chronically high unemployment rate, and chronically low economic growth. Structurally, France does not have much room to get out of this crisis and get back in the black. It would need to raise taxes and slash entitlement programs. Well, taxes are already high, and entitlement programs are sacrosanct politically. If we compare France to the US (the debt to GDP ratio is 58% for the US and 83% for France), the picture is totally different (capacity to increase taxes, high to moderately high economic growth, job creations, large investments etc). So, the real issue for France is not how to keep the triple-A rating, but how to restore the balance of public finances without stumping growth. The trick for France and other core eurozone countries is to strike a careful balance between generating economic growth and cutting spending. Instead of Baroin and Pécresse lobbying large banks and financial institutions, and issuing politically empty statements every other hour to keep France’s triple-A, they should have announced that they have a serious plan to get out of this mess, and to clean up their finances in order to maintain a certain level of consumption and business investments–because without consumption and without investments, there would not be a serious economic growth and/or job creation. As for the triple-A rating, Baroin and Pécresse should have said “on s’en fiche!” Moreover, the market is already behaving as if France does not have a triple-A rating. The market has digested the poor macro-economic indicators of France, and has factored in those variables in all future transactions.
So how does a country take a break from short term market pressures to reinvigorate its long term financial health? That’s where the nationalization of the banks comes in. Well, we need to understand something very simple: the EU politicians have completely misunderstood what markets want. Cameron, Merkel, Berlusconi, Sarkozy and so forth thought that markets demanded drastic cuts in spending–that markets demanded the so-called austerity packages: slash budgetary spending, slash public investments, increase taxes, and slash entitlement programs. So the political leaders in Greece, Portugal, Spain, Ireland, France, Italy and even Great Britain went on to craft the most drastic austerity packages out there. The risk, however, is to completely kill all economic growth, and they indeed killed it (just look at numbers from the last quarter: almost 0% economic growth in France and Great Britain, abysmal growth in Germany, Spain, Italy, Greece, and so forth). This was a stupid policy wrapped in total absurdity. The reaction of the markets around the world was swift, rational and expected. The message was that with this very weak economic growth and with this already over-taxed population, the EU countries cannot possibly pay back all their public debts. This is what markets are really saying. The more austerity policies they introduced (the Golden rule, la regle d’or, proposed by Sarkozy is the latest biggest and most stupidest idea ever proposed), the less confidence markets have in the eurozone politicians. Therefore, to get a break from slashing spending to the core and not having enough capital to reinvest in the economy, a country needs to restructure its debt. This is the only way to create enough breathing room to be able to generate the right macroeconomic conditions to reconnect with and reignite long-term growth. However, restructuring the debt has to be done without the market going totally nuts. This has and must be a highly coordinated political decision taken by all major world economies. It would even be a great plan if the G7 or G20 (including all eurozone countries and all heavily indebted African countries) could coordinate their actions in such a way to provide a political cover for certain countries to restructure their public debt safely, and also provide guarantees that this restructuring would bring everyone to a balanced budget in certain amount of time (a 2 or 5 year period would be appropriate). Moreover, in order to engage in a serious public debt restructuring, the largest banks in each country must be nationalized for a certain period of time. Why nationalizing the banks? Simply to decouple banks from market-driven activities. This allows banks to go back to their original charter and mission, which is lending money to businesses and individuals to foster economic growth and employment. Moreover, this would separate investment banks from deposit banks (a glass-steagall kind of plan).
Oh, i can hear the supply-siders screaming moral hazard. Well, when the welfare of a whole continent is at risk with all the social turmoils that more austerity policies may cause, and when worldwide negative spillover effects of a debt crisis that is choking the life out of the eurozone are considered, moral hazard becomes just an empty expression. We are truly facing a serious economic situation these days with serious political and social consequences. The time of the half-baked half-ass measures is over. It is time to put back the economic health of the G20 countries on an even keel with a serious economic growth agenda.