Guest post. Translated from the French by Tim Gupwell
As people return from their holidays, the convergence of internal political tensions in Germany, the attempt by the Greek Government to obtain a two year period of grace for its bail-out plan, and the ever-approaching Spanish derailment, have rendered the options for a European rescue even more problematic. An intervention from the ECB in order to make good its declarations and play the role of saviour is anticipated even more keenly; the risk being that it doesn’t go far enough.
Attempts to win over a German government that has dug its heels in have misfired. It is caught in a dilemma and refuses to take the plunge, unable to extricate itself on its own but unwilling to run any further risks. Successive half-hearted European agreements, passed as a matter of urgency as we lurch from one crisis to another, have not solved anything. This is less due to their very limited financial means and more due to the fact that they continue to deny the very nature of the ongoing crisis, which they are unable to check.
One simple statement sums all this up: the states and the financial system are both equally insolvent and are no longer able to manage their debts. With public debt established and scrutinized from every angle, a study from PriceWaterhouse has just shed new light on that of the European banks. According to them, European banks were sitting on one trillion Euros of non-performing loans at the end of 2011, double the figure for the end of 2008. This increase chiefly originates from Greece, Spain and Italy.
Is not the call for a massive and magical ECB intervention – which alone is capable of any kind of meaningful action – just an implicit avowal of a problem which cannot be acknowledged, since the solution is a sweeping restructuring of the debt?
The entire succession of disjointed financial schemes have stemmed from a different type of logic, which aims to refinance the debt with new debt and reduce its risk with shared guarantees, based on a hard core which remains disciplined. The order and the timetable of the reforms which might allow the reinforcement of this process – something which is much needed – is under debate. But, by imposing preconditions which delay the process, the unrealistic nature of the German position has been revealed in the face of the dynamic of the crisis.
By striving to impose a model of budgetary virtue and export-based economic growth, the German Government is defending a strategy which cannot work for everyone. With the first element, it is precipitating the Eurozone into recession, creating a stumbling-block to debt-reduction; with the second, it condemns itself to suffer from the shrinking of its own markets and economic activity.
The two versions of the debt-reduction strategy which are under discussion only differ by virtue of the greater or lesser role accorded to the ECB and both share the same lack of realism.
It is symptomatic that the ECB is envisaging a new intervention only by providing guarantees to the market; in the form of a surrender of its priority status for reimbursement (seniority) as a creditor. This is exactly the opposite of the restructuring of the public debt and the depreciations which are needed at the heart of the banking system
In another expression of this same self-defeating logic, the Rajoy Government is currently attempting to find a way to compensate all the small investors, ruined after having been incited to buy financial products destined to shore up the Spanish banks; but experienced investors are threatening to take advantage of the same opening in the name of equal treatment…
It needs knocking off its pedestal.