Globalization has caused a fundamental imbalance between the model of
international governance established at the end of World War II and the
markets, freed by globalization, and having acquired a completely
disproportionate economic nuisance compared to that of States. It is, in
this crisis, the fate of Europe which is at stake.
The Eurozone has many fragile states. Two of them, Greece and Ireland have
already suffered attacks from the markets, which led to the intervention of
the European Union and the IMF. Today, risk premiums required by investors
to hold Portuguese debt are very high. The position of Spain is, for now,
less negative, but there is no guarantee that it will not also, in the near
future, be “tested” by the markets. All the Eurozone countries could be in
trouble as long as a true budgetary federalism will not come to restore
markets’ trust and put a halt to speculation.
The crisis is far from over. Public debt continues to rise, and recession is
installed, in the developed nations already living on credit. Emerging
countries less affected by the crisis, will not be able to lead to global
recovery, alone: it will not be enough. The crisis will end only after the
underlying problems will be solved, including the adoption of global
measures of regulation.
The creation of a permanent mechanism for financial assistance to member
States of the Eurozone where the holders of public debt are forced to share
the costs of a possible bailout of a country of the Eurozone was necessary:
it was an essential response to reassure financial markets about the
capacity for Member States of the Eurozone to withstand a debt crisis. The
perpetuation of what was initially an emergency solution has proven
inevitable: everyone knows that now, on a more or less short term, many
European states will be unable to fund their debt service, whose share of
their budget is increasing daily. The aid package to Greece has been
extended through the creation of a European Fund of stabilization.
If it was necessary, this mechanism remains nevertheless insufficient for an
obvious reason: the Fund does not have the money required for the most
exposed countries. Worse still, it is faulty on two aspects. First, the loan
guarantee given to it is common, but not joint: if a member state of the
Eurozone cannot do its share, the others will not substitute themselves in
its place. More importantly, having announced a limited amount could make
the Fund the next prey of speculators: by betting on the collapse of the
Euro, they could sign its death certificate.
The crisis of the monetary union has shown that the EU cannot be simply
expedient: structural reforms are needed. In particular, the Eurozone will
no longer live with the dilemma of a monetary union already widely
implemented and a budget integration constantly postponed. The Pact of
Stability and Growth had allowed a first step towards a solution to this
dilemma, but the limits it sets (a deficit of 3% of GDP, debt of 60%) were
obsolete from the start in many Member States.
We must therefore today tackle the heart of the problem. The European Union
remains the only sovereign entity that does not have a borrowing capacity. A
further deepening of the European construction is necessary, which would see
the creation of real European Treasury Bonds, but also of institutions in
charge of their management. It is also necessary to endow the Union of a new
budget, financed by the capacity to borrow and taxes. The Union could then
see transferred to itself a part of the public debt of its member states, up
to the equivalent of 60% of its GDP. It has indeed no debt to date, which
offers considerable flexibility: the service of the loans will be lower than
if the debts remained at the national level, Member States will be able to
transfer to the Union the fiscal resources necessary to finance it. As long
as a real budgetary federalism will not be implemented, the single currency
may be in a fragile position.
States have placed themselves in the hands of financial markets: the growing
needs of modern states have in fact led them to borrow more and more, using
in order to do so instruments whose sophistication grew unceasingly.
Investors benefited greatly: if government bonds offer only low interest
rates, on the other hand, they are particularly safe investment because
states, unlike businesses, have a horizon of life tending infinity. The
State thus created markets which allow it to finance itself. But they can
also undermine it, when the extent of its borrowings cast doubt, in the eyes
of the markets, on its ability to honor its commitments. What follows is a
deadly duel between these two actors, each anxiously watching every movement
of the other. It is this situation that we live today. To get out of it, it
is essential to restore the confidence of investors, which requires the
definition of a credible path back to the sustainability of European public
finances.
The Euro is not at risk in the short term: it is a solid currency, sitting
on an economy that is, when viewed in its entirety, the first in the world,
and used as a reserve currency in the whole world.
However, the monetary union will not survive in the long term if nothing is
done in the coming months to avoid bankruptcy in chain of countries of the
Eurozone. The worst scenario is simple to write: the threatened countries
will try to avoid the disaster, using austerity programs. Insufficient to
restore the confidence of lenders, and ineffective against attacks from
speculators, these programs will not prevent the countries from defaulting,
one after the other. Banks and other financial institutions, which had been
called upon to finance this devalued debt, will fall next, causing the ruin
of depositors, pensioners and employees. The ECB, meanwhile, will not be
able to prevent this disaster, and if it tries to do so, by monetary
creation, then it will be the Euro that will collapse. This worst-case
scenario may still be avoided; but for that, a start is essential. European
political action is urgent.
Must be implemented alongside the ECB, a true European economic government,
with several essential instruments: European Treasury Bonds, federal
taxation, and a real power of constraint against states of the Eurozone.
The situation Europe is facing today is far from being completely new, as
history teaches us that sovereign debt crises generally come to ratify the
decline of a nation, that would try to maintain its standard of living by
borrowing. The threat of the current crisis on Europe cannot be taken
lightly.
However, history also teaches us that from the beginning, whenever a crisis
occurred, the European Union has found a solution to come out on top. It is
through the common will to overcome difficult situations that were born the
single market and the single currency. Today, a new breakthrough is needed:
Europe must unite in the face of threats, so that States finally act before
the markets, instead of simply being subject to their pressures. Moral
hazard – the risk that some European countries ceasing their efforts for
fiscal consolidation – may be limited by the definition of thresholds
representing the conditions of implementation of the mechanism of stability.
Europe still has the means to take a major role. It has all the assets, the
main one being its school and university level education. However it will
need to find answers to many challenges. Economic governance is not the
least, but it is not the only one: even before the crisis, the continent
suffered from a structural low growth, due to a lack of innovation, and a
population that did not ensure the renewal of generations. Moreover, the
fragility of the financial system and concerns about employment persist. It
is the ability of the European Union to find innovative answers to these
questions and identify new growth engines, which will determine its future.
The decline of Europe that this crisis could cause is not inevitable: the
future of the continent remains to be written. For this, Europe must move
forward with urgency and unity.