The EU summit results
Last week’s European Council ended with what seemed to be workable solutions meant to address the eurozone crisis and its ripple effects.
There was agreement on a number of short-term measures that are expected to bring about an element of stability in the financial markets.
However, there is still the niggling suspicion that we still have to address the real fundamentals of the problem.
This suspicion arises from a totally unrelated incident involving the UK bank, Barclays, that has been fined a hefty £290 million for manipulating interbank lending rates – an act that has sent the public’s trust in banks crashing once more.
I had expressed my hope in last week’s contribution that Mario Monti, the Italian Prime Minister, would stand up to German Chancellor Angela Merkel.
He had all the credentials to do it as he is recognised to be a staunch pro-EU person, who
has served as an EU Commissioner and was selected to head Italy’s technocratic government.
In effect, he did stand up to Ms Merkel, threatening to veto any decision on centralised banking supervision, unless there was also agreement on using the EU rescue funds to buy sovereign bonds in the market, with the objective of preventing an increase in the spread (the difference in interest rates) between German bonds and Italian and Spanish bonds.
There was also agreement to direct EU funds to stimulate economic growth and the agreement to allow the European Stability Mechanism to recapitalise banks directly. On the other hand, Germany continued with its strong opposition to eurobonds without a full-blown fiscal union.
The European Central Bank was tasked with devising a new system for European banking supervision.
Without this agreement (that so far has seemed to have had the desired effect), the list of countries seeking bailout funds was bound to grow.
The Financial Times reported last Wednesday that eurozone government bonds saw further gains, albeit, modest ones, and equities had not lost the gains made after the European Council meeting.
Yet the news about Barclays brought up once more two issues.
What is the real cause of the crisis we are facing today?
And has speculation been tackled effectively enough?
The answer to the second question is, most unfortunately, no.
Hopefully, the departure of both the chairman and the chief executive of Barclays will be strong enough signals to stop speculation by those same banks that have been the receivers of public funds.
The first question, namely what is the real cause of the crisis we are facing today, is a more tricky one.
Economist Paul Krugman strongly believes that the EU has not yet understood the real causes of the crisis we are in today.
He claims that many mistakenly insist that the crisis was caused by irresponsible public borrowing.
With regard to Greece, this may have been the case.
However, in the case of other countries, the crisis has been caused by excessive borrowing and lending on the part of the private sector.
Therefore today’s government deficits are a consequence of this crisis and not its cause.
This does not mean that we should not attempt to reduce the deficit in the public sector; however, it cannot be the only objective of current economic policy.
The need to stimulate growth had to remain a key priority of economic policy because of the need to reduce unemployment, especially youth unemployment. This would have meant that fiscal policy needed to play a stabilising role, without serving as an excuse to spend liberally.
The fact that fiscal policy was not allowed to play this role has further dampened business and consumer confidence, plunging several countries into another recession in the space of three years.
It may be correct to claim that we have not yet really tackled the cause of the crisis, such that solutions agreed upon by the European Union appear to be short-termist.
Only time will tell if this fear is founded or not. We certainly could not afford another summit that simply sought to calm down the financial markets without getting to grips with the real problems.
Meanwhile, Malta cannot afford to have its attention diverted from the developments in the EU.
We simply cannot afford to lose all that we have gained in the past 10 years because an individual wanted to experience the exhilaration of settling an old score.