Eurozone - exit stage left
In the latest eurozone summit (I have lost count of how many we have had, although not of how many of them were actually progressive) we had the apparent ‘breakthrough’ of Germany allowing eurozone aid to flow directly to sinking banks. This represented a break with the norm of funding the state in the first instance (which would in turn fund its banks in the second), and European imperialists hailed it as a watershed event.
One can understand that viewpoint. Let us look at it from Malta’s perspective. When Greece needed our help, it was Greece itself which received it (through our contributions to the EFSF). When Ireland’s banks needed help, it was Ireland itself which received the funds. So the debt in both cases is owed by governments. (My own view is that at least a portion of these loans will be converted to ‘gifts’ for some, no doubt, justifiable reason. I do no hold much hope for full repayment. Note that the ESM, which will replace the EFSF, will not enjoy seniority over other debt holders).
In contrast, we have now lent money to private entities in Spain, which are chock full of Spanish sovereign debt – the very same debt that our (well-managed) main local banks are shunning. That is merely one example of the anomalies playing out the in the eurozone crisis.
The issue is this: if we are now prepared to bypass the sovereign (and the safeguards which would otherwise be imposed on it) and fund ailing banks directly does that represent a climb-down by Germany? The risk is clear enough – this could be the start of a never-ending liability, if the root cause of the problem is not addressed.
That is the way a normal person would look at it. If you have a wild-eyed European aggrandisement agenda, then you might view this outcome as the main prize you have been trying to win all along – viewing Europe as a whole, and tying the German ‘region’ in to perennial transfers to fill the gaps in the deficit ‘regions’. However, I very much doubt whether the latest concession represents a long-term policy shift. It was more likely a one-off type concession granted under extreme duress.
Whichever way we look at it, the eurozone is in an unstable equilibrium. It will inevitably repose upon a stable equilibrium in due course, either after break-up or after welding the constituents into a fiscal union – one in which Germany can be confident it can control excesses. The time it has taken to effect the latter reflects the difficulty of execution.
At this juncture I would argue that the merits of both solutions should be considered in an even-handed, dispassionate manner. And they should be considered by reference to what is best for the common man, who will be the subject of the outcome. Instead, we are starting with the premise that the eurozone must be preserved at all costs – even if that cost is borne by the unemployed youth, for example. And that assumption happens to suit those unenlightened self-serving politicians who got us into this mess in the first place – none of whom have accepted responsibility, resigned or adopted austerity measures themselves.
Keeping the status quo is very often the path of least resistance, but that does not necessarily make it the correct course. It may be, and it may not be – but only a positive and honest compare and contrast exercise can determine it. As an example, citing the catastrophic consequences of eurozone exit (similar to the fear instilled in the UK when it was solemnly declared that it must stay in the ERM at all costs – and cost it did, for no benefit) does not in isolation prove that a country should remain in the eurozone.
For example, it could be that the catastrophic consequences are short term and more than made up by the eventual credits. Or that the consequences are indeed catastrophic, and possibly long term – yet still ultimately shorter and better, in that at least there would be some room for hope of self-sustainability working in a less hostile environment.
Curmi & Partners Ltd are members of the Malta Stock Exchange and licensed by the MFSA to conduct investment services business. This article is the author’s objective and independent opinion. It is based on public information and should not be viewed as investment advice in any manner. The value of investments may fall as well as rise and past performance is no guarantee of future performance.
Mr Webster is head of equity research at Curmi and Partners Ltd.