European sovereign-debt crisis
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Long-term interest rates of all eurozone countries except Estonia
(secondary market yields of government bonds with maturities of close to
ten years)
[1] A yield of 6% or more indicates that financial markets have serious doubts about credit-worthiness.
[2]
The
European sovereign debt crisis (referred to by analysts and investment banking professionals as The ESDC) is an ongoing
financial crisis that has made it difficult or impossible for some countries in the
euro area to
re-finance their
government debt without the assistance of third parties.
[3]
From late 2009, fears of a
sovereign debt crisis developed among investors as a result of the rising
government debt levels around the world together with a wave of downgrading of government debt in some
European states. Concerns intensified in
early 2010 and thereafter,
[4][5]
leading Europe's finance ministers on 9 May 2010 to approve a rescue
package worth €750 billion aimed at ensuring financial stability across
Europe by creating the
European Financial Stability Facility (EFSF).
[6]
In October 2011 and February 2012, the
eurozone
leaders agreed on more measures designed to prevent the collapse of
member economies. This included an agreement whereby banks would accept a
53.5% write-off of
Greek debt owed to private
creditors,
[7] increasing the EFSF to about €1 trillion, and requiring European banks to achieve 9%
capitalisation.
[8] To restore confidence in Europe, EU leaders also agreed to create a
European Fiscal Compact including the commitment of each participating country to introduce a
balanced budget amendment.
[9][10]
While sovereign debt has risen substantially in only a few eurozone
countries, it has become a perceived problem for the area as a whole.
[11] Nevertheless, the
European currency has remained stable.
[12]
As of mid-November 2011, the euro was even trading slightly higher
against the bloc's major trading partners than at the beginning of the
crisis.
[13][14] The three countries most affected,
Greece,
Ireland and
Portugal, collectively account for 6% of the eurozone's gross domestic product (GDP).
[15]
Causes
Public debt $ and %GDP (2010) for selected European countries.
Government debt of Eurozone, Germany and crisis countries compared to Eurozone GDP.
The European sovereign debt crisis resulted from a combination of
complex factors, including the globalization of finance; easy credit
conditions during the 2002–2008 period that encouraged high-risk lending
and borrowing practices; the
2007–2012 global financial crisis; international trade imbalances;
real-estate bubbles that have since burst; the
2008–2012 global recession;
fiscal policy choices related to government revenues and expenses; and
approaches used by nations to bailout troubled banking industries and
private bondholders, assuming private debt burdens or socializing
losses.
[16][17]
To find the origin of the financial distress, researchers have to
conduct and analyze financial records dated many years and possibly
decades old. According to Zdenek Kudrna, a political economist, the
financial crisis was destined to happen due to the way the European
Union deals and make their trade policies. He argues that the European
Union only takes action after the facts. They only address a situation
when it has already become a problem.
[18]
One narrative describing the causes of the crisis begins with the
significant increase in savings available for investment during the
2000–2007 period when the global pool of fixed income securities
increased from approximately $36 trillion in 2000 to $70 trillion by
2007. This "Giant Pool of Money" increased as savings from high-growth
developing nations entered global capital markets. Investors searching
for higher yields than those offered by U.S. Treasury bonds sought
alternatives globally.
[19]
The temptation offered by such readily available savings overwhelmed
the policy and regulatory control mechanisms in country after country as
global fixed income investors searched for yield, generating bubble
after bubble across the globe. While these bubbles have burst causing
asset prices (e.g., housing and commercial property) to decline, the
liabilities owed to global investors remain at full price, generating
questions regarding the solvency of governments and their banking
systems.
[17]
How each European country involved in this crisis borrowed and
invested the money varies. For example, Ireland's banks lent the money
to property developers, generating a massive property bubble. When the
bubble burst, Ireland's government and taxpayers assumed private debts.
In Greece, the government increased its commitments to public workers in
the form of extremely generous pay and pension benefits. Iceland's
banking system grew enormously, creating debts to global investors
("external debts") several times
GDP.
[17]
The interconnection in the global financial system means that if one
nation defaults on its sovereign debt or enters into recession putting
some of the external private debt at risk, the banking systems of
creditor nations face losses. For example, in October 2011 Italian
borrowers owed French banks $366 billion (net). Should Italy be unable
to finance itself, the French banking system and economy could come
under significant pressure, which in turn would affect France's
creditors and so on. This is referred to as
financial contagion.
[20][21] Another factor contributing to interconnection is the concept of debt protection. Institutions entered into contracts called
credit default swaps
(CDS) that result in payment should default occur on a particular debt
instrument (including government issued bonds). But, since multiple
CDS's can be purchased on the same security, it is unclear what exposure
each country's banking system now has to CDS.
[22]
Greece hid its growing debt and deceived EU officials with the help of derivatives designed by major banks.
[23][24][25][26][27][28] Although some financial institutions clearly profited from the growing Greek government debt in the short run,
[23] there was a long lead up to the crisis.
Rising government debt levels
In 1992, members of the European Union signed
Maastricht Treaty, under which they pledged to limit their
deficit spending
and debt levels. However, a number of EU member states, including
Greece and Italy, were able to circumvent these rules and mask their
deficit and debt levels through the use of complex currency and
credit derivatives structures.
[29][30] The structures were designed by prominent U.S.
investment banks, who received substantial fees in return for their services.
[23]
Public debt as a percent of GDP (2010).
A number of "appalled economists" have condemned the popular notion
in the media that rising debt levels of European countries were caused
by excess government spending. According to their analysis, increased
debt levels are due to the large bailout packages provided to the
financial sector during the
late-2000s financial crisis,
and the global economic slowdown thereafter. The average fiscal deficit
in the euro area in 2007 was only 0.6% before it grew to 7% during the
financial crisis. In the same period the average government debt rose
from 66% to 84% of GDP. The authors also stressed that fiscal deficits
in the euro area were stable or even shrinking since the early 1990s.
[31] US economist
Paul Krugman named Greece as the only country where fiscal irresponsibility is at the heart of the crisis.
[32]
Either way, high debt levels alone may not explain the crisis. According to
The Economist Intelligence Unit,
the position of the euro area looked "no worse and in some respects,
rather better than that of the US or the UK." The budget deficit for the
euro area as a whole (see graph) is much lower and the euro area's
government debt/GDP ratio of 86% in 2010 was about the same level as
that of the US. Moreover, private-sector indebtedness across the euro
area is markedly lower than in the highly leveraged
Anglo-Saxon economies.
[33]
Trade imbalances
Current account balances relative to GDP (2010).
Commentators such as
Financial Times journalist
Martin Wolf have asserted that the root of the crisis was growing
trade imbalances.
He notes in the run-up to the crisis, from 1999 to 2007, Germany had a
considerably better public debt and fiscal deficit relative to GDP than
the most affected eurozone members. In the same period, these countries
(Portugal, Ireland, Italy and Spain) had far worse balance of payments
positions.
[34][33]
Whereas German trade surpluses increased as a percentage of GDP after
1999, the deficits of Italy, France and Spain all worsened.
More recently, Greece's trading position has improved;
[35]
in the period November 2010 to October 2011 imports dropped 12% while
exports grew 15% (40% to non-EU countries in comparison to October
2010).
[35]
Monetary policy inflexibility
Since membership of the eurozone establishes a single
monetary policy, individual member states can no longer act independently, preventing them from
printing money
in order to pay creditors and ease their risk of default. By "printing
money" a country's currency is devalued relative to its (eurozone)
trading partners, making its exports cheaper, in principle leading to an
improved
balance of trade, increased GDP and higher tax revenues in
nominal terms.
[36]
In the reverse direction moreover, assets held in a currency which
has devalued suffer losses on the part of those holding them. For
example by the end of 2011, following a 25 percent fall in the rate of
exchange and 5 percent rise in inflation, eurozone investors in
Pound Sterling, locked in to euro exchange rates, had suffered an approximate 30 percent cut in the repayment value of this debt.
[37]
Loss of confidence
Sovereign
CDS prices of selected European countries (2010–2011). The left axis is in
basis points; a level of 1,000 means it costs $1 million to protect $10 million of debt for five years.
Prior to development of the crisis it was assumed by both regulators
and banks that sovereign debt from the eurozone was safe. Banks had
substantial holdings of bonds from weaker economies such as Greece which
offered a small premium and seemingly were equally sound.
As the crisis developed it became obvious that Greek, and possibly
other countries', bonds offered substantially more risk. Contributing to
lack of information about the risk of European sovereign debt was
conflict of interest by banks that were earning substantial sums underwriting the bonds.
[38]
The loss of confidence is marked by rising sovereign CDS prices,
indicating market expectations about countries' creditworthiness (see
graph).
Furthermore, investors have doubts about the possibilities of policy
makers to quickly contain the crisis. Since countries that use the euro
as their currency have fewer monetary policy choices (e.g., they cannot
print money in their own currencies to pay debt holders), certain
solutions require multi-national cooperation. Further, the
European Central Bank has an inflation control mandate but not an employment mandate, as opposed to the
U.S. Federal Reserve, which has a dual mandate. According to
the Economist,
the crisis "is as much political as economic" and the result of the
fact that the euro area is not supported by the institutional
paraphernalia (and mutual bonds of solidarity) of a state.
[33]
- Rating agency views
On 5 December 2011
S&P
placed its long-term sovereign ratings on 15 members of the eurozone on
"CreditWatch" with negative implications; S&P wrote this was due to
"systemic stresses from five interrelated factors: 1) Tightening credit
conditions across the eurozone; 2) Markedly higher risk premiums on a
growing number of eurozone sovereigns including some that are currently
rated 'AAA'; 3) Continuing disagreements among European policy makers on
how to tackle the immediate market confidence crisis and, longer term,
how to ensure greater economic, financial, and fiscal convergence among
eurozone members; 4) High levels of government and household
indebtedness across a large area of the eurozone; and 5) The rising risk
of economic recession in the eurozone as a whole in 2012. Currently, we
expect output to decline next year in countries such as Spain, Portugal
and Greece, but we now assign a 40% probability of a fall in output for
the eurozone as a whole."
[39]
Evolution of the crisis
In the first few weeks of 2010, there was renewed anxiety about
excessive national debt. Frightened investors demanded ever higher
interest rates from several governments with higher debt levels,
deficits and
current account deficits.
This in turn made it difficult for some governments to finance further
budget deficits and service existing debt, particularly when economic
growth rates were low, and when a high percentage of debt was in the
hands of foreign creditors, as in the case of Greece and Portugal.
[40]
Elected officials have focused on austerity measures (e.g., higher
taxes and lower expenses) contributing to social unrest and significant
debate among economists, many of whom advocate greater deficits when
economies are struggling. Especially in countries where government
budget deficits and sovereign debts have increased sharply, a crisis of
confidence has emerged with the widening of bond
yield spreads and risk insurance on CDS between these countries and other
EU member states, most importantly Germany.
[41][42] By the end of 2011, Germany was estimated to have made more than
€9 billion out of the crisis as investors flocked to safer but near zero interest rate German federal government bonds (
bunds).
[43]
While Switzerland equally benefited from lower interest rates, the
crisis also harmed its export sector due to a substantial influx of
foreign capital and the resulting rise of the
Swiss franc. In September 2011 the
Swiss National Bank
surprised currency traders by pledging that "it will no longer tolerate
a euro-franc exchange rate below the minimum rate of 1.20 francs",
effectively weakening the
Swiss franc. This is the biggest Swiss intervention since 1978.
[44]
Greece
Greece's debt percentage since 1999 compared to the average of the eurozone.
100,000 people protest against the harsh austerity measures in front of parliament building in Athens, 29 May 2011
In the early mid-2000s, Greece's economy was one of the fastest
growing in the eurozone and the government took advantage of it by
running a large
structural deficit.
[45] As the world economy cooled in the late 2000s, Greece was hit especially hard because its main industries —
shipping and
tourism — were especially sensitive to changes in the business cycle. As a result, the country's debt began to increase rapidly.
On 23 April 2010, the Greek government requested an initial loan of
€45 billion from the EU and
International Monetary Fund (IMF), to cover its financial needs for the remaining part of 2010.
[46][47] A few days later
Standard & Poor's slashed Greece's sovereign debt rating to BB+ or "
junk" status amid fears of
default,
[48] in which case investors were liable to lose 30–50% of their money.
[48] Stock markets worldwide and the Euro currency declined in response to this announcement.
[49]
On 1 May 2010, the Greek government announced a series of
austerity measures
[50] to secure a three year
€110 billion loan.
[51] This was met with great anger by the Greek public, leading to
massive protests, riots and social unrest throughout Greece.
[52]
The Troika (EU, ECB and IMF), offered Greece a second bailout loan
worth €130 billion in October 2011, but with the activation being
conditional on implementation of further austerity measures and a debt
restructure agreement. A bit surprisingly, the Greek prime minister
George Papandreou first answered that call, by announcing a
December 2011 referendum on the new bailout plan,
[53][54]
but had to back down amidst strong pressure from EU partners, who
threatened to withhold an overdue €6 billion loan payment that Greece
needed by mid-December.
[53][55] On 10 November 2011 Papandreou instead opted to resign, following an agreement with the
New Democracy party and the
Popular Orthodox Rally, to appoint non-MP technocrat
Lucas Papademos as new prime minister of an interim
national union government, with responsibility for implementing the needed austerity measures to pave the way for the second bailout loan.
[56][57]
All the implemented austerity measures, have so far helped Greece bring down its
primary deficit before interest payments, from €24.7bn (10.6% of GDP) in 2009 to just €5.2bn (2.4% of GDP) in 2011,
[58][59]
but as a side-effect they also contributed to a worsening of the Greek
recession, which began in October 2008 and only became worse in 2010 and
2011.
[60] Overall the Greek GDP had its worst decline in 2011 with −6.9%,
[61] a year where the seasonal adjusted industrial output ended 28.4% lower than in 2005,
[62][63] and with 111,000 Greek companies going bankrupt (27% higher than in 2010).
[64][65]
As a result, the seasonal adjusted unemployment rate also grew from
7.5% in September 2008 to a record high of 19.9% in November 2011, while
the Youth unemployment rate during the same time rose from 22.0% to as
high as 48.1%.
[66][67]
Overall the share of the population living at
"risk of poverty or social exclusion"
did not increase noteworthy during the first 2 year of the crisis. The
figure was measured to 27.6% in 2009 and 27.7% in 2010 (only being
slightly worse than the EU27-average at 23.4%),
[68] but for 2011 the figure was now estimated to have risen sharply above 33%.
[69]
In February 2012, an IMF official negotiating Greek austerity measures
admitted that excessive spending cuts were harming Greece.
[58]
Some economic experts argue that the best option for Greece and the rest of the EU, would be to engineer an “orderly
default”,
allowing Athens to withdraw simultaneously from the eurozone and
reintroduce its national currency the drachma at a debased rate.
[70][71]
However, if Greece were to leave the euro, the economic and political
impact would be devastating. According to Japanese financial company
Nomura an exit would lead to a 60%
devaluation of the new drachma. Analysts at French bank
BNP Paribas
added that the fallout from a Greek exit would wipe 20% off Greece's
GDP, increase Greece's debt-to-GDP ratio to over 200%, and send
inflation soaring to 40%-50%.
[72] Also
UBS warned of
hyperinflation, a
bank run and even "
military coups and possible civil war that could afflict a departing country".
[73][74]
To prevent this from happening, the troika (EU, IMF and ECB)
eventually agreed in February 2012 to provide a second bailout package
worth €130 billion,
[75]
conditional on the implementation of another harsh austerity package,
reducing the Greek spendings with €3.3bn in 2012 and another €10bn in
2013 and 2014.
[59]
For the first time, the bailout deal also included a debt restructure
agreement with the private holders of Greek government bonds (banks,
insurers and investment funds), to "voluntarily" accept a bond swap with
a 53.5% nominal write-off, partly in short-term EFSF notes, partly in
new Greek bonds with lower interest rates and the maturity prolonged to
11–30 years (independently of the previous maturity).
[7]
It is the world's biggest debt restructuring deal ever done, affecting some
€206 billion of Greek government bonds.
[76] The debt write-off had a size of
€107 billion,
and caused the Greek debt level to fall from roughly €350bn to €240bn
in March 2012, with the predicted debt burden now showing a more
sustainable size equal to 117% of GDP,
[77] somewhat lower than the originally expected 120.5%.
[78][79]
Altogether Greece received aid worth €380bn or €33.600 per capita. This
equals 177% of Greece's GDP, much larger than the funds Western Europe
received through the
Marshall Plan after the Second World War, which amounted to 2.1% of GDP.
[59]
On 9 March 2012 the
International Swaps and Derivatives Association
(ISDA) issued a communique calling the PSI/debt restructuring deal a
"Restructuring Credit Event" which will cause credit default swaps.
According to Forbes magazine Greece’s restructuring represents a
default.
[80][81]
This credit event implies that previous Greek bond holders are being
given, for 1000€ of previous notional, 150€ in “PSI payment notes”
issued by the EFSF and 315€ in “New Greek Bonds” issued by the Hellenic
Republic, including a “GDP-linked security”. The latter represents a
marginal coupon enhancement in case the Greek growth meets certain
conditions. While the market price of the portfolio proposed in the
exchange is of the order of 21% of the original face value (15% for the
two EFSF PSI notes – 1 and 2 years – and 6% for the New Greek Bonds – 11
to 30 years), the duration of the set of New Greek Bonds is slightly
below 10 years.
[82]
Mid May 2012 the crisis and impossibility to form a new government
after elections led to strong speculations Greece would have to leave
the Eurozone shortly due. This phenomenon became known as "
Grexit" and started to govern international market behaviour.
Ireland
Irish government deficit compared to other European countries and the United States (2000–2013)
The Irish sovereign debt crisis was not based on government
over-spending, but from the state guaranteeing the six main Irish-based
banks who had financed a
property bubble. On 29 September 2008, Finance Minister
Brian Lenihan, Jnr
issued a one-year guarantee to the banks' depositors and bond-holders.
He renewed it for another year in September 2009 soon after the launch
of the
National Asset Management Agency (NAMA), a body designed to remove bad loans from the six banks.
Irish banks had lost an estimated 100 billion euros, much of it
related to defaulted loans to property developers and homeowners made in
the midst of the property bubble, which burst around 2007. The economy
collapsed during 2008. Unemployment rose from 4% in 2006 to 14% by 2010,
while the federal budget went from a surplus in 2007 to a deficit of
32% GDP in 2010, the highest in the history of the eurozone, despite
austerity measures.
[17][83]
Ireland could have guaranteed bank deposits and let private
bondholders who had invested in the banks face losses, but instead
borrowed money from the ECB to pay these bondholders, shifting the
losses and debt to its taxpayers, with severe negative impact on
Ireland's creditworthiness. As a result, the government started
negotiations with the EU, the IMF and three nations: the United Kingdom,
Denmark and Sweden, resulting in a
€67.5 billion "bailout" agreement of 29 November 2010
[84][85] Together with additional
€17.5 billion coming from Ireland's own reserves and pensions, the government received
€85 billion,
[86] of which
€34 billion were used to support the country's ailing financial sector.
[87] In return the government agreed to reduce its budget deficit to below three percent by 2015.
[87] In April 2011, despite all the measures taken,
Moody's downgraded the banks' debt to
junk status.
[88]
In July 2011 European leaders agreed to cut the interest rate that
Ireland was paying on its EU/IMF bailout loan from around 6% to between
3.5% and 4% and to double the loan time to 15 years. The move was
expected to save the country between 600–700 million euros per year.
[89]
On 14 September 2011, in a move to further ease Ireland's difficult
financial situation, the European Commission announced it would cut the
interest rate on its
€22.5 billion loan
coming from the European Financial Stability Mechanism, down to 2.59 per
cent – which is the interest rate the EU itself pays to borrow from
financial markets.
[90]
The Euro Plus Monitor report from November 2011 attests to Ireland's
vast progress in dealing with its financial crisis, expecting the
country to stand on its own feet again and finance itself without any
external support from the second half of 2012 onwards.
[91]
According to the Centre for Economics and Business Research Ireland's
export-led recovery "will gradually pull its economy out of its trough".
As a result of the improved economic outlook, the cost of 10-year
government bonds, which has already fallen substantially since mid July
2011 (see the graph "Long-term Interest Rates"), is expected to fall
further to 4 per cent by 2015.
[92]
Portugal
In the first half of 2011, Portugal requested a €78 billion IMF-EU bailout package in a bid to stabilise its
public finances. These measures were put in place as a direct result of decades-long governmental overspending and an over bureaucratised
civil service. After the bailout was announced, the Portuguese government headed by
Pedro Passos Coelho
managed to implement measures to improve the State's financial
situation and the country started to be seen as moving on the right
track. However, the unemployment level rose to over 14.8 percent, taxes
were increased, and civil service-related wages were frozen, on top of
the government's spending cuts.
A report released in January 2011 by the
Diário de Notícias[93] and published in Portugal by
Gradiva, had demonstrated that in the period between the
Carnation Revolution in 1974 and 2010, the democratic
Portuguese Republic governments
encouraged over-expenditure and investment bubbles through unclear
public-private partnerships and funding of numerous ineffective and
unnecessary external consultancy and advisory of committees and firms.
This allowed considerable
slippage in state-managed
public works
and inflated top management and head officer bonuses and wages.
Persistent and lasting recruitment policies boosted the number of
redundant public servants. Risky
credit,
public debt creation, and European
structural and cohesion funds were mismanaged across almost four decades. Prime Minister
Sócrates's
cabinet was not able to forecast or prevent this in 2005, and later it
was incapable of doing anything to improve the situation when the
country was on the verge of bankruptcy by 2011.
[94]
Robert Fishman, in the New York Times article "Portugal's Unnecessary
Bailout", points out that Portugal fell victim to successive waves of
speculation by pressure from bond traders, rating agencies and
speculators.
[95]
In the first quarter of 2010, before pressure from the markets,
Portugal had one of the best rates of economic recovery in the EU. From
the perspective of Portugal's industrial orders, exports,
entrepreneurial innovation and high-school achievement, the country
matched or even surpassed its neighbors in Western Europe.
[95]
On 16 May 2011, the eurozone leaders officially approved a
€78 billion
bailout package for Portugal, which became the third eurozone country,
after Ireland and Greece, to receive emergency funds. The bailout loan
was equally split between the
European Financial Stabilisation Mechanism, the
European Financial Stability Facility, and the
International Monetary Fund.
[96] According to the Portuguese finance minister, the average interest rate on the bailout loan is expected to be 5.1 percent.
[97]
As part of the deal, the country agreed to cut its budget deficit from
9.8 percent of GDP in 2010 to 5.9 percent in 2011, 4.5 percent in 2012
and 3 percent in 2013.
[98]
The Portuguese government also agreed to eliminate its
golden share in
Portugal Telecom to pave the way for privatization.
[99][100]
In 2012, all public servants had already seen an average wage cut of
20% relative to their 2010 baseline, with cuts reaching 25% for those
earning more than 1,500 euro per month. This led to a flood of
specialized technicians and top officials leaving the public service,
many looking for better positions in the private sector or in other
European countries.
[101]
On 6 July 2011, the ratings agency Moody's had cut Portugal's credit
rating to junk status, Moody's also launched speculation that Portugal
could follow Greece in requesting a second bailout.
[102]
In December 2011, it was reported that Portugal's estimated budget
deficit of 4.5 percent in 2011 would be substantially lower than
expected, due to a one-off transfer of pension funds. The country would
therefore meet its 2012 target a year earlier than expected.
[98]
Despite the fact that the economy is expected to contract by 3 percent
in 2011 the IMF expects the country to be able to return to medium and
long-term debt sovereign markets by late 2013.
[103]
Any deficit means increasing the nation's debt. To bring down the debt
to sustainable levels will require a 10% budget surplus for several
years according to some estimates.
[104]
Cyprus
In September 2011, yields on
Cyprus
long-term bonds have risen above 12%, since the small island of 840,000
people was downgraded by all major credit ratings agencies following a
devastating explosion at a power plant in July and slow progress with
fiscal and structural reforms. Since January 2012, Cyprus is relying on a
€ 2.5bn emergency loan from Russia to cover its budget deficit and
re-finance maturing debt. The loan has an interest rate of 4.5% and it
is valid for 4.5 years
[105] though it is expected that Cyprus will be able to fund itself again by the first quarter of 2013.
[106]
On 13 March 2012 Moody's has slashed Cyprus's credit rating into Junk
status, warning that the Cyprus government will have to inject fresh
capital into its banks to cover losses incurred through Greece's debt
swap. Cyprus's banks were highly exposed to Greek debt and so are
disproportionately hit by the haircut taken by creditors.
[107]
Possible spread to other countries
Total financing needs of selected countries in % of GDP (2011–2013).
Economic data from Portugal, Italy, Ireland, Greece, United Kingdom, Spain, Germany, the EU and the eurozone for 2009.
The 2010 annual budget deficit and public debt, both relative to GDP for selected European countries.
Long-term interest rates of selected European countries.
[1]
Note that weak non-eurozone countries (Hungary, Romania) lack the sharp
rise in interest rates characteristic of weak eurozone countries.
One of the central concerns prior to the bailout was that the crisis
could spread to several other countries after reducing confidence in
other European economies. According to the UK
Financial Policy Committee
"Market concerns remain over fiscal positions in a number of euro area
countries and the potential for contagion to banking systems."
[108]
Besides Ireland, with a government deficit in 2010 of 32.4% of GDP, and
Portugal at 9.1%, other countries such as Spain with 9.2% are also at
risk.
[109]
For 2010, the OECD forecast
$16 trillion
would be raised in government bonds among its 30 member countries.
Financing needs for the eurozone come to a total of €1.6 trillion, while
the U.S. is expected to issue US$1.7 trillion more
Treasury securities in this period,
[110] and Japan has
¥213 trillion of government bonds to
roll over.
[111]
Greece has been the notable example of an industrialised country that
has faced difficulties in the markets because of rising debt levels but
even countries such as the U.S., Germany and the UK, have had fraught
moments as investors shunned bond auctions due to concerns about public
finances and the economy.
[112]
Italy
Italy's deficit of 4.6 percent of GDP in 2010 was similar to
Germany’s at 4.3 percent and less than that of the U.K. and France.
Italy even has a surplus in its primary budget, which excludes debt
interest payments. However, its debt has increased to almost 120 percent
of GDP (U.S. $2.4 trillion in 2010) and economic growth was lower than
the EU average for over a decade.
[113] This has led investors to view Italian bonds more and more as a risky asset.
[114]
On the other hand, the public debt of Italy has a longer maturity and
a substantial share of it is held domestically. Overall this makes the
country more resilient to financial shocks, ranking better than France
and Belgium.
[115]
About 300 billion euros of Italy's 1.9 trillion euro debt matures in
2012. It will therefore have to go to the capital markets for
significant refinancing in the near-term.
[116]
On 15 July and 14 September 2011, Italy's government passed austerity measures meant to save
€124 billion.
[117][118]
Nonetheless, by 8 November 2011 the Italian bond yield was 6.74 percent
for 10-year bonds, climbing above the 7 percent level where the country
is thought to lose access to financial markets.
[119]
On 11 November 2011, Italian 10-year borrowing costs fell sharply from
7.5 to 6.7 percent after Italian legislature approved further austerity
measures and the formation of an emergency government to replace that of
Prime Minister
Silvio Berlusconi.
[120]
The measures include a pledge to raise
€15 billion
from real-estate sales over the next three years, a two-year increase
in the retirement age to 67 by 2026, opening up closed professions
within 12 months and a gradual reduction in government ownership of
local services.
[114] The interim government expected to put the new laws into practice is led by former European Union Competition Commissioner
Mario Monti.
[114]
As in other countries, the social effects have been severe, with child labour even re-emerging in poorer areas.
[121]
Spain
Spain has a comparatively low debt among advanced economies.
[122]
The country's public debt relative to GDP in 2010 was only 60%, more
than 20 points less than Germany, France or the US, and more than 60
points less than Italy, Ireland or Greece.
[123][124]
Like Italy, Spain has most of its debt controlled internally, and both
countries are in a better fiscal situation than Greece and Portugal,
making a default unlikely unless the situation gets far more severe.
[125]
As one of the largest eurozone economies, the condition of Spain's
economy is of particular concern to international observers, and has
faced pressure from the United States, the IMF, other European countries
and the European Commission to cut its deficit more aggressively.
[126][127] Spain's public debt was approximately U.S. $820 billion in 2010, roughly the level of Greece, Portugal, and Ireland combined.
[128]
Rumors raised by speculators about a Spanish bail-out were dismissed
by then Spanish Prime Minister José Luis Rodríguez Zapatero as "complete
insanity" and "intolerable".
[129]
Nevertheless, shortly after the announcement of the EU's new "emergency
fund" for eurozone countries in early May 2010, Spain had to announce
new austerity measures designed to further reduce the country's budget
deficit, in order to signal financial markets that it was safe to invest
in the country.
[130]
The Spanish government had hoped to avoid such deep cuts, but weak
economic growth as well as domestic and international pressure forced
the government to expand on cuts already announced in January.
Spain succeeded in trimming its deficit from 11.2% of GDP in 2009 to 9.2% in 2010
[131] and 8.5% in 2011.
[132]
Due to the European crisis and over spending by regional governments
the latest figure is higher than the original target of 6%.
[133][134] To build up additional trust in the financial markets, the government amended the
Spanish Constitution in 2011 to require a
balanced budget
at both the national and regional level by 2020. The amendment states
that public debt can not exceed 60% of GDP, though exceptions would be
made in case of a natural catastrophe, economic recession or other
emergencies.
[135][136] Under pressure from the EU the new conservative Spanish government led by
Mariano Rajoy aims to cut the deficit further to 5.3 percent in 2012 and 3 percent in 2013.
[107]
Belgium
In 2010, Belgium's public debt was 100% of its GDP—the third highest in the eurozone after Greece and Italy
[137] and there were doubts about the financial stability of the banks,
[138] following the country's major
financial crisis in 2008–2009. After inconclusive elections in June 2010, by November 2011
[139] the country still had only a caretaker government as parties from the two main language groups in the country (
Flemish and
Walloon) were unable to reach agreement on how to
form a majority government.
[137]
In November 2010 financial analysts forecast that Belgium would be the
next country to be hit by the financial crisis as Belgium's borrowing
costs rose.
[138]
However the government deficit of 5% was relatively modest and
Belgian government 10-year bond yields in November 2010 of 3.7% were
still below those of Ireland (9.2%), Portugal (7%) and Spain (5.2%).
[138]
Furthermore, thanks to Belgium's high personal savings rate, the
Belgian Government financed the deficit from mainly domestic savings,
making it less prone to fluctuations of international credit markets.
[140]
Nevertheless on 25 November 2011, Belgium's long-term sovereign credit
rating was downgraded from AA+ to AA by Standard and Poor
[141] and 10-year bond yields reached 5.66%.
[139]
Shortly after, Belgian negotiating parties reached an agreement to
form a new government. The deal includes spending cuts and tax rises
worth about
€11 billion, which should bring the budget deficit down to 2.8% of GDP by 2012, and to balance the books in 2015.
[142] Following the announcement Belgium 10-year bond yields fell sharply to 4.6%.
[143]
France
France's public debt in 2010 was approximately U.S. $2.1 trillion and 83% GDP, with a 2010 budget deficit of 7% GDP.
[144] By 16 November 2011, France's bond yield spreads vs. Germany had widened 450% since July, 2011.
[145] France's C.D.S. contract value rose 300% in the same period.
[146]
On 1 December 2011, France's bond yield had retreated and the country
successfully auctioned €4.3 billion worth of 10 year bonds at an
average yield of 3.18%, well below the perceived critical level of 7%.
[147] By early February 2012, yields on French 10 year bonds had fallen to 2.84%.
[148]
United Kingdom
According to the Financial Policy Committee "Any associated disruption to bank funding markets could spill over to UK banks."
[108] The UK has the
highest gross foreign debt of any European country (€7.3 trillion; €117,580 per person) due in large part to its highly
leveraged financial industry, which is closely connected with both the United States and the eurozone.
[149]
Bank of England governor
Mervyn King
stated in May 2012 that the Euro zone is "tearing itself apart" and
advised British banks to pay bonuses and dividends in stock to hoard
cash. He acknowledged that the Bank of England, the
Financial Services Authority,
and the British government were preparing contingency plans for a Greek
exit from the Euro or a collapse of the currency, but refused to
discuss them to avoid adding to the panic.
[150]
Known contingency plans include emergency immigration controls to
prevent millions of Greek and other EU residents from entering the
country to seek work, and the evacuation of Britons from Greece during
civil unrest.
[151]
A Euro collapse would damage London's role as a major
financial centre because of the increased risk to UK banks. The pound and
gilts would likely benefit, however, as investors seek safer investments.
[152]
The London real estate market has similarly benefited from the crisis,
with French, Greeks, and other Europeans buying property with capital
moved out of their home countries,
[153] and a Greek exit from the Euro would likely increase such transfer of capital.
[152]
Policy reactions
EU emergency measures
European Financial Stability Facility (EFSF)
On 9 May 2010, the 27 EU member states agreed to create the European Financial Stability Facility, a legal instrument
[154]
aiming at preserving financial stability in Europe by providing
financial assistance to eurozone states in difficulty. The EFSF can
issue bonds or other debt instruments on the market with the support of
the German Debt Management Office to raise the funds needed to provide
loans to eurozone countries in financial troubles, recapitalize banks or
buy sovereign debt.
[155]
Emissions of bonds are backed by guarantees given by the euro area
member states in proportion to their share in the paid-up capital of the
European Central Bank.
The €440 billion lending capacity of the facility is jointly and
severally guaranteed by the eurozone countries' governments and may be
combined with loans up to €60 billion from the
European Financial Stabilisation Mechanism (reliant on funds raised by the
European Commission using the EU budget as collateral) and up to €250 billion from the
International Monetary Fund (IMF) to obtain a financial safety net up to €750 billion.
[156]
The EFSF issued €5 billion of five-year bonds in its inaugural
benchmark issue 25 January 2011, attracting an order book of €44.5
billion. This amount is a record for any sovereign bond in Europe, and
€24.5 billion more than the
European Financial Stabilisation Mechanism(EFSM), a separate European Union funding vehicle, with a €5 billion issue in the first week of January 2011.
[157]
On 29 November 2011, the member state finance ministers agreed to
expand the EFSF by creating certificates that could guarantee up to 30%
of new issues from troubled euro-area governments, and to create
investment vehicles that would boost the EFSF’s firepower to intervene
in primary and secondary bond markets.
[158]
- Reception by financial markets
Stocks surged worldwide after the EU announced the EFSF's creation.
The facility eased fears that the Greek debt crisis would spread,
[159] and this led to some stocks rising to the highest level in a year or more.
[160] The euro made its biggest gain in 18 months,
[161] before falling to a new four-year low a week later.
[162] Shortly after the euro rose again as hedge funds and other short-term traders unwound
short positions and
carry trades in the currency.
[163] Commodity prices also rose following the announcement.
[164]
The dollar
Libor held at a nine-month high.
[165] Default
swaps also fell.
[166] The
VIX closed down a record almost 30%, after a record weekly rise the preceding week that prompted the bailout.
[167] The agreement is interpreted as allowing the ECB to start buying
government debt from the
secondary market which is expected to reduce bond yields.
[168] As a result Greek bond yields fell sharply from over 10% to just over 5%.
[169] Asian bonds yields also fell with the EU bailout.
[170])
- Usage of EFSF funds
Debt profile of Eurozone countries
The EFSF only raises funds after an aid request is made by a country.
[171] As of the end of December 2011, it has been activated two times. In November 2010, it financed
€17.7 billion of the total
€67.5 billion
rescue package for Ireland (the rest was loaned from individual
European countries, the European Commission and the IMF). In May 2011 it
contributed one third of the €78 billion package for Portugal. As part
of the second bailout for Greece, the loan was shifted to the EFSF,
amounting to
€164 billion (130bn new package plus 34.4bn remaining from Greek Loan Facility) throughout 2014.
[172] This leaves the EFSF with
€250 billion or an equivalent of
€750 billion in leveraged firepower.
[173] According to German newspaper
Sueddeutsche,
this is more than enough to finance the debt rollovers of all flagging
European countries until end of 2012, in case necessary.
[173]
The EFSF is set to expire in 2013, running one year parallel to the permanent
€500 billion rescue funding program called the
European Stability Mechanism
(ESM), which will start operating as soon as member states representing
90% of the capital commitments have ratified it. This is expected to be
in July 2012.
[174][175]
On 13 January 2012,
Standard & Poor’s downgraded France and Austria from AAA rating, lowered Spain, Italy (and five other
[176])
euro members further, and maintained the top credit rating for Finland,
Germany, Luxembourg, and the Netherlands; shortly after, S&P also
downgraded the EFSF from AAA to AA+.
[176][177]
European Financial Stabilisation Mechanism (EFSM)
On 5 January 2011, the European Union created the European Financial
Stabilisation Mechanism (EFSM), an emergency funding programme reliant
upon funds raised on the financial markets and guaranteed by the
European Commission using the
budget of the European Union as collateral.
[178] It runs under the supervision of the Commission
[179]
and aims at preserving financial stability in Europe by providing
financial assistance to EU member states in economic difficulty.
[180] The Commission fund, backed by all 27
European Union members, has the authority to raise up to
€60 billion[181] and is rated
AAA by
Fitch,
Moody's and
Standard & Poor's.
[182][183]
Under the EFSM, the EU successfully placed in the capital markets a
€5 billion issue of bonds as part of the financial support package agreed for Ireland, at a borrowing cost for the EFSM of 2.59%.
[184]
Like the EFSF, the EFSM will also be replaced by the permanent rescue
funding programme ESM, which is due to be launched in July 2012.
[174]
Brussels agreement and aftermath
On 26 October 2011, leaders of the 17 eurozone countries met in
Brussels and agreed on a 50% write-off of Greek sovereign debt held by
banks, a fourfold increase (to about €1 trillion) in bail-out funds held
under the
European Financial Stability Facility,
an increased mandatory level of 9% for bank capitalisation within the
EU and a set of commitments from Italy to take measures to reduce its
national debt. Also pledged was
€35 billion
in "credit enhancement" to mitigate losses likely to be suffered by
European banks. José Manuel Barroso characterised the package as a set
of "exceptional measures for exceptional times".
[8][185]
The package's acceptance was put into doubt on 31 October when Greek Prime Minister George Papandreou announced that a
referendum would be held so that the Greek people would have the final say on the bailout, upsetting financial markets.
[186] On 3 November 2011 the promised Greek referendum on the bailout package was withdrawn by Prime Minister Papandreou.
In late 2011, Landon Thomas in the
New York Times noted that
some, at least, European banks were maintaining high dividend payout
rates and none were getting capital injections from their governments
even while being required to improve capital ratios. Thomas quoted
Richard Koo, an economist based in Japan, an expert on that country's banking crisis, and specialist in
balance sheet recessions, as saying:
I do not think Europeans understand the implications of a systemic
banking crisis.... When all banks are forced to raise capital at the
same time, the result is going to be even weaker banks and an even
longer recession – if not depression.... Government intervention should
be the first resort, not the last resort.
Beyond
equity issuance and
debt-to-equity
conversion, then, one analyst "said that as banks find it more
difficult to raise funds, they will move faster to cut down on loans and
unload lagging assets" as they work to improve capital ratios. This
latter contraction of balance sheets "could lead to a depression”, the
analyst said.
[187] Reduced lending was a circumstance already at the time being seen in a "deepen[ing] crisis" in
commodities trade finance in western Europe.
[188]
- Final agreement on the second bailout package
In a marathon meeting on 20/21 February 2012 the Eurogroup agreed with the IMF and the
Institute of International Finance
on the final conditions of the second bailout package worth €130
billion. The lenders agreed to increase the nominal haircut from 50% to
53.5%. EU Member States agreed to an additional retroactive lowering of
the interest rates of the Greek Loan Facility to a level of just 150
basis points above the
Euribor.
Furthermore, governments of Member States where central banks currently
hold Greek government bonds in their investment portfolio commit to
pass on to Greece an amount equal to any future income until 2020.
Altogether this should bring down Greece's debt to between 117%
[77] and 120.5% of GDP by 2020.
[78]
ECB interventions
ECB Securities Markets Program (SMP) covering bond purchases from May 2010 till May 2012.
The
European Central Bank (ECB) has taken a series of measures aimed at reducing volatility in the financial markets and at improving
liquidity.
[189]
In May 2010 it took the following actions:
- It began open market operations buying government and private debt securities,[190] reaching €219.5 billion by February 2012,[191] though it simultaneously absorbed the same amount of liquidity to prevent a rise in inflation.[192] According to Rabobank economist Elwin de Groot, there is a “natural limit” of €300 billion the ECB can sterilize.[193]
- It reactivated the dollar swap lines[194] with Federal Reserve support.[195]
- It changed its policy regarding the necessary credit rating for loan
deposits, accepting as collateral all outstanding and new debt
instruments issued or guaranteed by the Greek government, regardless of
the nation's credit rating.
The move took some pressure off Greek government bonds, which had
just been downgraded to junk status, making it difficult for the
government to raise money on capital markets.
[196]
On 30 November 2011, the ECB, the U.S.
Federal Reserve, the central banks of Canada, Japan, Britain and the
Swiss National Bank provided global financial markets with additional liquidity to ward off the debt crisis and to support the
real economy. The central banks agreed to lower the cost of dollar
currency swaps
by 50 basis points to come into effect on 5 December 2011. They also
agreed to provide each other with abundant liquidity to make sure that
commercial banks stay liquid in other currencies.
[197]
- Long Term Refinancing Operation (LTRO)
On 22 December 2011, the ECB
[198] started the biggest infusion of credit into the European banking system in the euro's 13 year history. Under its
Long Term Refinancing Operations (LTROs) it loaned
€489 billion to 523 banks for an exceptionally long period of three years at a rate of just one percent.
[199] Previous refinancing operations matured after three, six and twelve months.
[200] The by far biggest amount of
€325 billion was tapped by banks in Greece, Ireland, Italy and Spain.
[201]
This way the ECB tried to make sure that banks have enough cash to pay off
€200 billion
of their own maturing debts in the first three months of 2012, and at
the same time keep operating and loaning to businesses so that a credit
crunch does not choke off economic growth. It also hoped that banks
would use some of the money to buy government bonds, effectively easing
the debt crisis.
[202] On 29 February 2012, the ECB held a second auction, LTRO2, providing 800 Eurozone banks with further
€529.5 billion in cheap loans.
[203]
Net new borrowing under the €529.5 billion February auction was around
€313 billion; out of a total of €256 billion existing ECB lending (MRO +
3m&6m LTROs), €215 billion was rolled into LTRO2.
[204]
- Resignations
In September 2011,
Jürgen Stark became the second German after
Axel A. Weber to resign from the ECB Governing Council in 2011. Weber, the former
Deutsche Bundesbank president, was once thought to be a likely successor to
Jean-Claude Trichet as bank president. He and Stark were both thought to have resigned due to "unhappiness with the
ECB’s bond purchases,
which critics say erode the bank’s independence". Stark was "probably
the most hawkish" member of the council when he resigned. Weber was
replaced by his Bundesbank successor
Jens Weidmann, while Belgium's
Peter Praet took Stark's original position, heading the ECB's economics department.
[205]
- Money supply growth
In April, 2012, statistics showed a growth trend in the
M1 "core" money supply.
Having fallen from an over 9% growth rate in mid-2008 to negative 1%
+/- for several months in 2011, M1 core has built to a 2-3% range in
early 2012. "'It is still early days but a further recovery in
peripheral real M1 would suggest an end to recessions by late 2012,'
said Simon Ward from
Henderson Global Investors who collects the data." While attributing the money supply growth to ECB's LTRO policies, an analysis in
The Telegraph
said lending "continued to fall across the eurozone in March [and] ...
[t]he jury is out on the ... three-year lending adventure (LTRO)".
[206]
European Stability Mechanism (ESM)
The European Stability Mechanism (ESM) is a permanent rescue funding programme to succeed the temporary
European Financial Stability Facility and
European Financial Stabilisation Mechanism in July 2012.
[174]
On 16 December 2010 the European Council agreed a two line amendment to the EU
Lisbon Treaty to allow for a permanent bail-out mechanism to be established
[207]
including stronger sanctions. In March 2011, the European Parliament
approved the treaty amendment after receiving assurances that the
European Commission, rather than EU states, would play 'a central role' in running the ESM.
[208][209] According to this treaty, the ESM will be an
intergovernmental organisation under public international law and will be located in
Luxembourg.
[210][211]
Such a mechanism serves as a "financial firewall." Instead of a
default by one country rippling through the entire interconnected
financial system, the firewall mechanism can ensure that downstream
nations and banking systems are protected by guaranteeing some or all of
their obligations. Then the single default can be managed while
limiting
financial contagion.
European Fiscal Compact
In March 2011 a new reform of the
Stability and Growth Pact
was initiated, aiming at straightening the rules by adopting an
automatic procedure for imposing of penalties in case of breaches of
either the deficit or the debt rules.
[212][213] By the end of the year, Germany, France and some other smaller EU countries went a step further and vowed to create a
fiscal union across the eurozone with strict and enforceable fiscal rules and automatic penalties embedded in the EU treaties.
[9][10] On 9 December 2011 at the
European Council
meeting, all 17 members of the eurozone and six countries that aspire
to join agreed on a new intergovernmental treaty to put strict caps on
government spending and borrowing, with penalties for those countries
who violate the limits.
[214] All other non-eurozone countries apart from the UK are also prepared to join in, subject to parliamentary vote.
[174] The treaty will enter into force on 1 January 2013, if by that time 12 members of the
euro area have ratified it.
[215]
Originally EU leaders planned to change existing EU treaties but this was blocked by British prime minister
David Cameron, who demanded that the
City of London be excluded from future financial regulations, including the proposed
EU financial transaction tax.
[216][217] By the end of the day, 26 countries had agreed to the plan, leaving the United Kingdom as the only country not willing to join.
[218] Cameron subsequently conceded that his action had failed to secure any safeguards for the UK.
[219] Britain's refusal to be part of the Franco-German fiscal compact to safeguard the eurozone constituted a
de facto refusal (PM
David Cameron vetoed the project) to engage in any radical revision of the
Lisbon Treaty at the expense of British
sovereignty: centrist analysts such as John Rentoul of The Independent concluded that
"Any Prime Minister would have done as Cameron did".[220]
Economic reforms and recovery
Increase investment
There has been substantial criticism over the austerity measures
implemented by most European nations to counter this debt crisis. Some
argue that an abrupt return to "non-Keynesian" financial policies is not
a viable solution
[221] and predict that
deflationary policies now being imposed on countries such as Greece and Spain might prolong and deepen their recessions.
[222]
In a 2003 study that analyzed 133 IMF austerity programmes, the IMF's
independent evaluation office found that policy makers consistently
underestimated the disastrous effects of rigid spending cuts on economic
growth.
[223][224]
Current austerity "cuts have been relatively small compared to the size
of the problem and meaningful structural reforms were seldom
implemented."
[225] Most austerity cuts came with even larger tax increases.
[226][227]
In early 2012 an IMF official, who negotiated Greek austerity measures, admitted that spending cuts were harming Greece.
[58][58] Nouriel Roubini
adds that the new credit available to the heavily indebted countries
did not equate to an immediate revival of economic fortunes: "While
money is available now on the table, all this money is conditional on
all these countries doing fiscal adjustment and structural reform."
[228]
According to Keynesian economists "growth-friendly austerity" relies
on the false argument that public cuts would be compensated for by more
spending from consumers and businesses, a theoretical claim that has not
materialized. The case of Greece shows that excessive levels of private
indebtedness and a collapse of public confidence (over 90% of Greeks
fear unemployment, poverty and the closure of businesses)
[229] led the private sector to decrease spending in an attempt to
save up
for rainy days ahead. This led to even lower demand for both products
and labor, which further deepened the recession and made it ever more
difficult to generate tax revenues and fight public indebtedness.
[230] According to New York Times chief economics commentator
Martin Wolf,
"structural tightening does deliver actual tightening. But its impact
is much less than one to one. A 1 percentage point reduction in the
structural deficit delivers a 0.67 percentage point improvement in the
actual
fiscal deficit."
This means that Ireland e.g. would require structural fiscal tightening
of more than 12% to eliminate its 2012 actual fiscal deficit. A task
that is difficult to achieve without an
exogenous eurozone-wide economic boom.
[231]
Instead of austerity, Keynes suggested increasing investment and
cutting income tax for low earners to kick-start the economy and boost
growth and employment.
[232] Since struggling European countries lack the funds to engage in
deficit spending, German economist and member of the
German Council of Economic Experts Peter Bofinger and Sony Kapoor of the global
think tank
Re-Define suggest financing additional public investments by
growth-friendly taxes on "property, land, wealth, carbon emissions and
the under-taxed financial sector". They also called on EU countries to
renegotiate the
EU savings tax directive
and to sign an agreement to help each other crack down on tax evasion
and avoidance. Currently authorities capture less than 1% in annual tax
revenue on untaxed wealth transferred to other EU members. Furthermore
the two suggest providing
€40 billion in additional funds to the
European Investment Bank (EIB), which could then lend ten times that amount to the employment-intensive smaller business sector.
[230]
Apart from arguments over whether or not austerity, rather than increased or frozen spending, is a macroeconomic solution,
[233]
union leaders have also argued that the working population is being
unjustly held responsible for the economic mismanagement errors of
economists, investors, and bankers. Over 23 million EU workers have
become unemployed as a consequence of the global economic crisis of
2007–2010, and this has led many to call for additional regulation of
the banking sector across not only Europe, but the entire world.
[234]
In April, 2012,
Olli Rehn,
the European commissioner for economic and monetary affairs in
Brussels, "enthusiastically announced to EU parliamentarians in
mid-April that 'there was a breakthrough before Easter'. He said the
European heads of state had given the green light to pilot projects
worth billions, such as building highways in Greece." Other growth
initiatives include "project bonds" wherein the EIB would "provide
guarantees that safeguard private investors. In the pilot phase until
2013, EU funds amounting to €230 million are expected to mobilize
investments of up to €4.6 billion."
Der Spiegel
also said: "According to sources inside the German government, instead
of funding new highways, Berlin is interested in supporting innovation
and programs to promote small and medium-sized businesses. To ensure
that this is done as professionally as possible, the Germans would like
to see the southern European countries receive their own state-owned
development banks, modeled after Germany's [Marshall Plan-era-origin]
Kreditanstalt für Wiederaufbau (
KfW) banking group. It's hoped that this will get the economy moving in Greece and Portugal."
[235]
Increase competitiveness
Change in unit labour costs, 2000–2010
Slow GDP growth rates correspond to slower growth in tax revenues and
higher safety net spending, increasing deficits and debt levels.
Indian-American journalist
Fareed Zakaria
described the factors slowing growth in the eurozone, writing in
November 2011: "Europe's core problem [is] a lack of growth... Italy's
economy has not grown for an entire decade. No debt restructuring will
work if it stays stagnant for another decade... The fact is that Western
economies – with high wages, generous middle-class subsidies and
complex regulations and taxes – have become sclerotic. Now they face
pressures from three fronts: demography (an aging population),
technology (which has allowed companies to do much more with fewer
people) and globalization (which has allowed manufacturing and services
to locate across the world)." He advocated lower wages and steps to
bring in more foreign capital investment.
[236]
British economic historian
Robert Skidelsky
disagreed saying it was excessive lending by banks, not deficit
spending that created this crisis. Government's mounting debts are a
response to the economic downturn as spending rises and tax revenues
fall, not its cause.
[237]
To improve the situation, crisis countries must significantly
increase their international competitiveness. Typically this is done by
depreciating the currency, as in the case of Iceland, which suffered the largest
financial crisis in 2008–2011
in economic history but has since vastly improved its position. Since
eurozone countries cannot devalue their currency, policy makers try to
restore competitiveness through
internal devaluation, a painful economic adjustment process, where a country aims to reduce its
unit labour costs.
[238]
German economist
Hans-Werner Sinn
noted in 2012 that Ireland was the only country that had implemented
relative wage moderation in the last five years, which helped decrease
its relative price/wage levels by 16%. Greece would need to bring this
figure down by 31%, effectively reaching the level of Turkey.
[239][240]
Other economists argue that no matter how much Greece and Portugal
drive down their wages, they could never compete with low-cost
developing countries such as China or India. Instead weak European
countries must shift their economies to higher quality products and
services, though this is a long-term process and may not bring immediate
relief.
[241]
Jeremy J. Siegel
argues that the need to make labor competitive requires devaluation.
This could be achieved by Greece leaving the Euro but that would lead to
runs on the banks of Greece and other EU nations. This could be
achieved by
internal devaluation
but this is difficult politically. Siegel argues that the only option
left is for the devaluation of the Euro as a whole (parity with the
dollar)--if it is to survive.
[242]
- Progress
On 15 November 2011, the Lisbon Council published the Euro Plus
Monitor 2011. According to the report most critical eurozone member
countries are in the process of rapid reforms. The authors note that
"Many of those countries most in need to adjust [...] are now making the
greatest progress towards restoring their fiscal balance and external
competitiveness". Greece, Ireland and Spain are among the top five
reformers and Portugal is ranked seventh among 17 countries included in
the report (see graph).
[243]
Address current account imbalances
Current account imbalances (1997–2013)
Regardless of the corrective measures chosen to solve the current
predicament, as long as cross border capital flows remain unregulated in
the euro area,
[244] current account
imbalances are likely to continue. A country that runs a large current
account or trade deficit (i.e., importing more than it exports) must
ultimately be a net importer of capital; this is a mathematical
identity called the
balance of payments.
In other words, a country that imports more than it exports must either
decrease its savings reserves or borrow to pay for those imports.
Conversely, Germany's large trade surplus (net export position) means
that it must either increase its savings reserves or be a net exporter
of capital, lending money to other countries to allow them to buy German
goods.
[245]
The 2009 trade deficits for Italy, Spain, Greece, and Portugal were estimated to be
$42.96 billion, $75.31bn and $35.97bn, and $25.6bn respectively, while Germany's trade surplus was $188.6bn.
[246]
A similar imbalance exists in the U.S., which runs a large trade
deficit (net import position) and therefore is a net borrower of capital
from abroad.
Ben Bernanke
warned of the risks of such imbalances in 2005, arguing that a "savings
glut" in one country with a trade surplus can drive capital into other
countries with trade deficits, artificially lowering interest rates and
creating asset bubbles.
[247][248][249]
A country with a large trade surplus would generally see the value of
its currency appreciate relative to other currencies, which would
reduce the imbalance as the relative price of its exports increases.
This currency appreciation occurs as the importing country sells its
currency to buy the exporting country's currency used to purchase the
goods. Alternatively, trade imbalances can be reduced if a country
encouraged domestic saving by restricting or penalizing the flow of
capital across borders, or by raising interest rates, although this
benefit is likely offset by slowing down the economy and increasing
government interest payments.
[250]
Either way, many of the countries involved in the crisis are on the
euro, so devaluation, individual interest rates and capital controls are
not available. The only solution left to raise a country's level of
saving is to reduce budget deficits and to change consumption and
savings habits. For example, if a country's citizens saved more instead
of consuming imports, this would reduce its trade deficit.
[250]
It has therefore been suggested that countries with large trade
deficits (e.g. Greece) consume less and improve their exporting
industries. On the other hand, export driven countries with a large
trade surplus, such as Germany, Austria and the Netherlands would need
to shift their economies more towards domestic services and increase
wages to support domestic consumption.
[34][251] In May 2012 German finance minister
Wolfgang Schäuble
has signaled support for a significant increase in German wages to help
decrease current account imbalances within the eurozone.
[252]
Proposed long-term solutions
Eurobonds
A growing number of investors and economists say Eurobonds would be the best way of solving a debt crisis,
[253] though their introduction matched by tight financial and budgetary coordination may well require changes in EU treaties.
[253] On 21 November 2011, the European Commission suggested that
eurobonds
issued jointly by the 17 euro nations would be an effective way to
tackle the financial crisis. Using the term "stability bonds", Jose
Manuel Barroso insisted that any such plan would have to be matched by
tight fiscal surveillance and economic policy coordination as an
essential counterpart so as to avoid
moral hazard and ensure sustainable public finances.
[254][255]
Germany remains largely opposed at least in the short term to a
collective takeover of the debt of states that have run excessive budget
deficits and borrowed excessively over the past years, saying this
could substantially raise the country's liabilities.
[256]
European Monetary Fund
On 20 October 2011, the
Austrian Institute of Economic Research published an article that suggests transforming the EFSF into a
European Monetary Fund
(EMF), which could provide governments with fixed interest rate
Eurobonds at a rate slightly below medium-term economic growth (in
nominal terms). These bonds would not be tradable but could be held by
investors with the EMF and liquidated at any time. Given the backing of
all eurozone countries and the ECB "the
EMU
would achieve a similarly strong position vis-a-vis financial investors
as the US where the Fed backs government bonds to an unlimited extent."
To ensure fiscal discipline despite lack of market pressure, the EMF
would operate according to strict rules, providing funds only to
countries that meet fiscal and macroeconomic criteria. Governments
lacking sound financial policies would be forced to rely on traditional
(national) governmental bonds with less favorable market rates.
[257]
The econometric analysis suggests that "If the short-term and long-
term interest rates in the euro area were stabilized at 1.5 % and 3 %,
respectively, aggregate output (GDP) in the euro area would be 5
percentage points above baseline in 2015". At the same time sovereign
debt levels would be significantly lower with e.g. Greece's debt level
falling below 110% of GDP, more than 40
percentage points
below the baseline scenario with market based interest levels.
Furthermore, banks would no longer be able to unduly benefit from
intermediary profits by borrowing from the ECB at low rates and
investing in government bonds at high rates.
[257]
Drastic debt write-off financed by wealth tax
Overall debt levels in 2009 and write-offs necessary in the Eurozone, UK and U.S. to reach sustainable grounds.
According to the
Bank for International Settlements, the combined private and public debt of 18
OECD
countries nearly quadrupled between 1980 and 2010, and will likely
continue to grow, reaching between 250% (for Italy) and about 600% (for
Japan) by 2040.
[258]
The same authors also found in a previous study that increased
financial burden imposed by aging populations and lower growth makes it
unlikely that indebted economies can grow out of their debt problem if
only one of the following three conditions is met:
[259]
- government debt is more than 80 to 100 percent of GDP;
- non-financial corporate debt is more than 90 percent;
- private household debt is more than 85 percent of GDP.
The
Boston Consulting Group
(BCG) adds that if the overall debt load continues to grow faster than
the economy, then large-scale debt restructuring becomes inevitable. To
prevent a vicious upward debt spiral from gaining momentum the authors
urge policy makers to "act quickly and decisively" and aim for an
overall debt level well below 180 percent for the private and government
sector. This number is based on the assumption that governments,
nonfinancial corporations, and private households can each sustain a
debt load of 60 percent of GDP, at an interest rate of 5 percent and a
nominal economic growth rate of 3 percent per year. Lower interest rates
and/or higher growth would help reduce the debt burden further.
[260]
To reach sustainable levels the Eurozone must reduce its overall debt
level by €6.1 trillion. According to BCG this could be financed by a
one-time wealth tax of between 11 and 30 percent for most countries,
apart from the crisis countries (particularly Ireland) where a write-off
would have to be substantially higher. The authors admit that such
programs would be "drastic", "unpopular" and "require broad political
coordination and leadership" but they maintain that the longer
politicians and central bankers wait, the more necessary such a step
will be.
[260]
Instead of a one-time write-off, German economist
Harald Spehl
has called for a 30 year debt-reduction plan, similar to the one
Germany used after World War II to share the burden of reconstruction
and development.
[261] Similar calls have been made by political parties in Germany including the
Greens and
The Left.
[262][263]
Debt defaults and national exits from the Eurozone
In mid May 2012
the financial crisis in Greece
and the impossibility of forming a new government after elections led
to strong speculation that Greece would have to leave the Eurozone
shortly.
[264][265][266][267] This phenomenon had already become known as "
Grexit"
and started to govern international market behaviour. Economists have
expressed concern that the phenomenon may well become a typical example
of what is called a
self-fulfilling prophecy.
[268]
Reuters stated that the implementation of Grexit would have to occur "within days or even hours of the decision being made"
[269] due to the high volatility that would result.
"The euro should now be recognized as an experiment that failed", wrote
Martin Feldstein in 2012.
[270] Economists, mostly from outside Europe, and associated with
Modern Monetary Theory and other
post-Keynesian schools condemned the design of the Euro currency system from the beginning
[271][272]
and have since been advocating that Greece (and the other debtor
nations) unilaterally leave the eurozone, which would allow Greece to
withdraw simultaneously from the eurozone and reintroduce its national
currency the drachma at a debased rate.
[273][274][275]
Economists who favor this radical approach to solve the Greek debt
crisis typically argue that a default is unavoidable for Greece in the
long term, and that a delay in organising an orderly default (by lending
Greece more money throughout a few more years), would just wind up
hurting EU lenders and neighboring European countries even more.
[276]
Fiscal austerity or a euro exit is the alternative to accepting
differentiated government bond yields within the Euro Area. If Greece
remains in the euro while accepting higher bond yields, reflecting its
high government deficit, then high interest rates would dampen demand,
raise savings and slow the economy. An improved trade performance and
less reliance on foreign capital would be the result.
[citation needed]
However, German Chancellor
Angela Merkel and former French President
Nicolas Sarkozy
have said on numerous occasions that they would not allow the eurozone
to disintegrate and have linked the survival of the Euro with that of
the entire
European Union.
[277][278] In September 2011, EU commissioner
Joaquín Almunia
shared this view, saying that expelling weaker countries from the euro
was not an option: "Those who think that this hypothesis is possible
just do not understand our process of integration".
[279]
Controversies
The European bailouts are largely about shifting exposure from banks
and others, who otherwise are lined up for losses on the sovereign debt
they recklessly bought, onto European taxpayers.
[280][281][282][283][284][285]
EU treaty violations
- No bail-out clause
The EU's
Maastricht Treaty contains juridical language which appears to rule out intra-EU bailouts. First, the “no bail-out” clause (
Article 125 TFEU)
ensures that the responsibility for repaying public debt remains
national and prevents risk premiums caused by unsound fiscal policies
from spilling over to partner countries. The clause thus encourages
prudent fiscal policies at the national level.
The
European Central Bank's purchase of distressed country bonds can be viewed as violating the prohibition of monetary financing of budget deficits (
Article 123 TFEU). The creation of further leverage in
EFSF with access to ECB lending would also appear to violate the terms of this article.
Articles 125 and 123 were meant to create disincentives for EU member
states to run excessive deficits and state debt, and prevent the
moral hazard
of over-spending and lending in good times. They were also meant to
protect the taxpayers of the other more prudent member states. By
issuing bail-out aid guaranteed by prudent eurozone taxpayers to
rule-breaking eurozone countries such as Greece, the EU and eurozone
countries also encourage moral hazard in the future.
[286] While the no bail-out clause remains in place, the "no bail-out doctrine" seems to be a thing of the past.
[287]
- Convergence criteria
The EU treaties contain so called
convergence criteria. Concerning government finance the states have agreed that the annual
government budget deficit should not exceed 3% of the gross domestic product (GDP) and that the gross
government debt to GDP should not exceed 60% of the GDP. For
eurozone members there is the
Stability and Growth Pact
which contains the same requirements for budget deficit and debt
limitation but with a much stricter regime. Nevertheless the main crisis
states Greece and Italy (status November 2011) have substantially
exceeded these criteria over a long period of time.
Actors fueling the crisis
Credit rating agencies
Standard & Poor's Headquarters in Lower Manhattan, New York City
The international U.S.-based
credit rating agencies—
Moody's,
Standard & Poor's and
Fitch—which have already been under fire during the
housing bubble[288][289] and the
Icelandic crisis[290][291]—have also played a central and controversial role
[292] in the current European bond market crisis.
[293] On one hand, the agencies have been accused of giving overly generous ratings due to conflicts of interest.
[294]
On the other hand, ratings agencies have a tendency to act
conservatively, and to take some time to adjust when a firm or country
is in trouble.
[295]
In the case of Greece, the market responded to the crisis before the
downgrades, with Greek bonds trading at junk levels several weeks before
the ratings agencies began to describe them as such.
[45]
European policy makers have criticized ratings agencies for acting politically, accusing the
Big Three of bias towards European assets and fueling speculation.
[296] Particularly
Moody's
decision to downgrade Portugal's foreign debt to the category Ba2
"junk" has infuriated officials from the EU and Portugal alike.
[296] State owned utility and infrastructure companies like
ANA – Aeroportos de Portugal,
Energias de Portugal,
Redes Energéticas Nacionais, and
Brisa – Auto-estradas de Portugal were also downgraded despite claims to having solid financial profiles and significant foreign revenue.
[297][298][299][300]
France too has shown its anger at its downgrade. French central bank chief
Christian Noyer
criticized the decision of Standard & Poor's to lower the rating of
France but not that of the United Kingdom, which "has more deficits, as
much debt, more inflation, less growth than us". Similar comments were
made by high ranking politicians in Germany.
Michael Fuchs, deputy leader of the leading
Christian Democrats,
said: "Standard and Poor's must stop playing politics. Why doesn't it
act on the highly indebted United States or highly indebted Britain?",
adding that the latter's collective private and public sector debts are
the largest in Europe. He further added: "If the agency downgrades
France, it should also downgrade Britain in order to be consistent."
[301]
Credit rating agencies were also accused of bullying politicians by
systematically downgrading eurozone countries just before important
European Council meetings. As one EU source put it: "It is interesting
to look at the downgradings and the timings of the downgradings ... It
is strange that we have so many downgrades in the weeks of summits."
[302]
- Regulatory reliance on credit ratings
Think-tanks such as the World Pensions Council have criticized
European powers such as France and Germany for pushing for the adoption
of the
Basel II recommendations, adopted in 2005 and transposed in European Union law through the
Capital Requirements Directive (CRD), effective since 2008. In essence, this forced European banks and more importantly the
European Central Bank, e.g. when gauging the
solvency of EU-based financial institutions, to rely heavily on the standardized assessments of
credit risk marketed by only two private company US agencies- Moody’s and S&P.
[303]
- Counter measures
Due to the failures of the ratings agencies, European regulators obtained new powers to supervise ratings agencies.
[292] With the creation of the
European Supervisory Authority in January 2011 the EU set up a whole range of new financial regulatory institutions,
[304] including the
European Securities and Markets Authority (ESMA),
[305] which became the EU’s single credit-ratings firm regulator.
[306]
Credit-ratings companies have to comply with the new standards or will
be denied operation on EU territory, says ESMA Chief Steven Maijoor.
[307]
Germany's foreign minister Guido Westerwelle has called for an
"independent" European ratings agency, which could avoid the conflicts
of interest that he claimed US-based agencies faced.
[308]
European leaders are reportedly studying the possibility of setting up a
European ratings agency in order that the private U.S.-based ratings
agencies have less influence on developments in European financial
markets in the future.
[309][310] According to German consultant company
Roland Berger,
setting up a new ratings agency would cost €300 million. On 30 January
2012, the company said it was already collecting funds from financial
institutions and business intelligence agencies to set up an independent
non-profit ratings agency by mid 2012, which could provide its first
country ratings by the end of the year.
[311] In April 2012, in a similar attempt, the
Bertelsmann Stiftung
presented a blueprint for establishing an international non-profit
credit rating agency (INCRA) for sovereign debt, structured in way that
management and rating decisions are independent from its financiers.
[312]
But attempts to regulate more strictly credit rating agencies in the
wake of the European sovereign debt crisis have been rather
unsuccessful. Some European financial law and regulation experts have
argued that the hastily drafted, unevenly transposed in national law,
and poorly enforced EU rule on ratings agencies (Regulation EC N°
1060/2009) has had little effect on the way financial analysts and
economists interpret data or on the potential for conflicts of interests
created by the complex contractual arrangements between credit rating
agencies and their clients"
[313]
Media
There has been considerable controversy about the role of the English-language press in regard to the bond market crisis.
[314][315]
Greek Prime Minister Papandreou is quoted as saying that there was no
question of Greece leaving the euro and suggested that the crisis was
politically as well as financially motivated. "This is an attack on the
eurozone by certain other interests, political or financial".
[316] The Spanish Prime Minister
José Luis Rodríguez Zapatero has also suggested that the recent financial market crisis in Europe is an attempt to undermine the euro.
[317][318] He ordered the
Centro Nacional de Inteligencia intelligence service (National Intelligence Center, CNI in Spanish) to investigate the role of the "
Anglo-Saxon media" in fomenting the crisis.
[319][320][321][322][323][324][325] So far no results have been reported from this investigation.
Other commentators believe that the euro is under attack so that
countries, such as the U.K. and the U.S., can continue to fund their
large
external deficits and
government deficits,
[326] and to avoid the collapse of the US$.
[327][328][329]
The U.S. and U.K. do not have large domestic savings pools to draw on
and therefore are dependent on external savings e.g. from China.
[330][331] This is not the case in the eurozone which is self funding.
[332][333]
Speculators
Both the Spanish and Greek Prime Ministers have accused
financial speculators and
hedge funds of worsening the crisis by
short selling euros.
[334][335]
German chancellor Merkel has stated that "institutions bailed out with
public funds are exploiting the budget crisis in Greece and elsewhere."
[336]
According to
The Wall Street Journal several hedge-fund managers launched "large
bearish bets" against the euro in early 2010.
[337] On 8 February, the boutique research and brokerage firm
Monness, Crespi, Hardt & Co. hosted an exclusive "idea dinner" at a private townhouse in Manhattan, where a small group of hedge-fund managers from
SAC Capital Advisors LP,
Soros Fund Management LLC,
Green Light Capital Inc., Brigade Capital Management LLC and others
argued that the euro was likely to fall to parity with the US dollar and
were of the opinion that Greek government bonds represented the weakest
link of the euro and that Greek contagion could soon spread to infect
all sovereign debt in the world. Three days later the euro was hit with a
wave of selling, triggering a decline that brought the currency below
$1.36.
[337] There was no suggestion by regulators that there was any collusion or other improper action.
[337] On 8 June, exactly four months after the dinner, the Euro hit a four year low at $1.19 before it started to rise again.
[338]
Traders estimate that bets for and against the euro account for a huge
part of the daily three trillion dollar global currency market.
[337]
The role of
Goldman Sachs[339] in Greek bond yield increases is also under scrutiny.
[340]
It is not yet clear to what extent this bank has been involved in the
unfolding of the crisis or if they have made a profit as a result of the
sell-off on the Greek government debt market.
In response to accusations that speculators were worsening the problem, some markets banned
naked short selling for a few months.
[341]
Speculation about the breakup of the eurozone
Economists, mostly from outside Europe and associated with
Modern Monetary Theory and other
post-Keynesian
schools, condemned the design of the euro currency system from the
beginning because it ceded national monetary and economic sovereignty
but lacked a central fiscal authority. When faced with economic
problems, they maintained, "Without such an institution,
EMU would prevent effective action by individual countries and put nothing in its place."
[271][272]
Some non-Keynesian economists, such as Luca A. Ricci of the IMF,
contend the eurozone does not fulfill the necessary criteria for an
optimum currency area, though it is moving in that direction.
[243][342]
As the debt crisis expanded beyond Greece, these economists continued
to advocate, albeit more forcefully, the disbandment of the eurozone.
If this was not immediately feasible, they recommended that Greece and
the other debtor nations unilaterally leave the eurozone, default on
their debts, regain their fiscal sovereignty, and re-adopt national
currencies.
[343][344] Bloomberg
suggested in June 2011 that, if the Greek and Irish bailouts should
fail, an alternative would be for Germany to leave the eurozone in order
to save the currency through
depreciation[345] instead of austerity. The likely substantial fall in the euro against a newly reconstituted
Deutsche Mark would give a "huge boost" to its members' competitiveness.
[346]
The Wall Street Journal conjectured that Germany could return to the Deutsche Mark,
[347] or create another
currency union[348]
with the Netherlands, Austria, Finland, Luxembourg and other European
countries such as Denmark, Norway, Sweden, Switzerland and the Baltics.
[349]
A monetary union of these countries with current account surpluses
would create the world's largest creditor bloc, bigger than China
[350] or Japan. The
Wall Street Journal added that without the German-led bloc, a residual euro would have the flexibility to keep
interest rates low
[351] and engage in
quantitative easing or
fiscal stimulus in support of a job-targeting economic policy
[352] instead of
inflation targeting in the current configuration.
George Soros warns in “Does the Euro have a Future?” that there is no
escape from the “gloomy scenario” of a prolonged European recession and
the consequent threat to the Eurozone’s political cohesion so long as
“the authorities persist in their current course.” He argues that to
save the Euro long-term structural changes are essential in addition to
the immediate steps needed to arrest the crisis. The changes he
recommends include even greater economic integration of the European
Union.
[353]
At a minimum, Soros writes, a European Monetary Fund following the
template of the International Monetary Fund is needed to better assist
debt-ridden states like Greece and Portugal in their periods of economic
crises. But what would be most effective, Soros argues, is a
full-fledged European Treasury. A European Treasury would have the
capability to tax and borrow money. And it would be under collective
European supervision instead of individual member states’ supervision.
Thus a common European Treasury could mean that individual members of
the Eurozone will be less able to pursue costly fiscal policies such as
excessive spending, which can prove costly both for their own citizens
and those of other Eurozone states that are forced to bail out the
profligate states.
[353]
Soros writes that a treaty is needed to transform the European
Financial Stability Fund into a full-fledged European Treasury.
Following the formation of the Treasury, European Council could then ask
the European Commission Bank to step into the breach and indemnify the
European Commission Bank in advance against potential risks to the
Treasury’s solvency. Soros acknowledges that converting the EFSF into a
European Treasury will necessitate “a radical change of heart.” In
particular, he cautions, Germans will be wary of any such move, not
least because many continue to believe that they have a choice between
saving the Euro and abandoning it. Soros writes however that a collapse
of European Union would precipitate an uncontrollable financial meltdown
and thus “the only way” to avert “another Great Depression” is the
formation of a European Treasury.
[353]
German Chancellor
Angela Merkel and French President
Nicolas Sarkozy[354]
have, on numerous occasions, publicly said that they would not allow
the eurozone to disintegrate, linking the survival of the euro with that
of the entire
European Union.
[355][356] In September 2011, EU commissioner
Joaquín Almunia shared this view, saying that expelling weaker countries from the euro was not an option.
[357] Furthermore, former ECB president
Jean-Claude Trichet also denounced the possibility of a return of the Deutsche Mark.
[358]
Iceland, not part of the EU, is regarded as one of Europe's recovery
success stories. It defaulted on its debt and drastically devalued it
currency, which has effectively reduced wages by 50% making exports more
competitive.
[359]
Lee Harris argues that floating exchange rates allows wage reductions
by currency devaluations, a politically easier option than the
economically equivalent but politically impossible method of lowering
wages by political enactment.
[360]
Sweden's floating rate currency gives it a short term advantage,
structural reforms and constraints account for longer-term prosperity.
Labor concessions, a minimal reliance on public debt, and tax reform
helped to further a pro-growth policy.
[361]
The British betting company
Ladbrokes
stopped taking bets on Greece exiting the Eurozone in May 2012 after
odds fell to 1/3, and reported "plenty of support" for 33/1 odds for a
complete disbanding of the Eurozone during 2012.
[152]
Odious debt
Main article:
Odious debt
Some protesters, commentators such as
Libération correspondent
Jean Quatremer and the
Liège based NGO
Committee for the Abolition of the Third World Debt (CADTM) allege that the debt should be characterized as odious debt.
[362] The Greek documentary
Debtocracy examines whether the recent
Siemens scandal
and uncommercial ECB loans which were conditional on the purchase of
military aircraft and submarines are evidence that the loans amount to
odious debt and that an audit would result in invalidation of a large
amount of the debt.
National statistics
In 1992, members of the European Union signed an agreement known as the
Maastricht Treaty,
under which they pledged to limit their deficit spending and debt
levels. However, a number of EU member states, including Greece and
Italy, were able to circumvent these rules and mask their deficit and
debt levels through the use of complex currency and credit derivatives
structures.
[29][30]
The structures were designed by prominent U.S. investment banks, who
received substantial fees in return for their services and who took on
little credit risk themselves thanks to special legal protections for
derivatives counterparties.
[29]
Financial reforms within the U.S. since the financial crisis have only
served to reinforce special protections for derivatives—including
greater access to government guarantees—while minimizing disclosure to
broader financial markets.
[363]
The revision of Greece’s 2009 budget deficit from a forecast of "6–8%
of GDP" to 12.7% by the new Pasok Government in late 2009 (a number
which, after reclassification of expenses under IMF/EU supervision was
further raised to 15.4% in 2010) has been cited as one of the issues
that ignited the Greek debt crisis.
This added a new dimension in the world financial turmoil, as the issues of "
creative accounting" and manipulation of statistics by several nations came into focus, potentially undermining investor confidence.
The focus has naturally remained on Greece due to its debt crisis.
There has however been a growing number of reports about manipulated
statistics by EU and other nations aiming, as was the case for Greece,
to mask the sizes of public debts and deficits. These have included
analyses of examples in several countries
[364][365][366][367] or have focused on Italy,
[368] the United Kingdom,
[369][370][371][372][373][374][375][376] Spain,
[377] the United States,
[378][379][380] and even Germany.
[381][382]
Collateral for Finland
On 18 August 2011, as requested by the Finnish parliament as a
condition for any further bailouts, it became apparent that Finland
would receive
collateral from Greece, enabling it to participate in the potential new
€109 billion support package for the Greek economy.
[383]
Austria, the Netherlands, Slovenia, and Slovakia responded with
irritation over this special guarantee for Finland and demanded equal
treatment across the eurozone, or a similar deal with Greece, so as not
to increase the risk level over their participation in the bailout.
[384]
The main point of contention was that the collateral is aimed to be a
cash deposit, a collateral the Greeks can only give by recycling part of
the funds loaned by Finland for the bailout, which means Finland and
the other eurozone countries guarantee the Finnish loans in the event of
a Greek default.
[385]
After extensive negotiations to implement a collateral structure open
to all eurozone countries, on 4 October 2011, a modified escrow
collateral agreement was reached. The expectation is that only Finland
will utilise it, due to i.a. requirement to contribute initial capital
to
European Stability Mechanism
in one installment instead of five installments over time. Finland, as
one of the strongest AAA countries, can raise the required capital with
relative ease.
[386]
At the beginning of October, Slovakia and Netherlands were the last countries to vote on the
EFSF expansion, which was the immediate issue behind the collateral discussion, with a mid-October vote.
[387] On 13 October 2011 Slovakia approved euro bailout expansion, but the government has been forced to
call new elections in exchange.
In February 2012, the four largest Greek banks agreed to provide the
€880 million in collateral to Finland in order to secure the second
bailout program.
[388]
Political impact
Handling of the ongoing crisis has led to the premature end of a
number of European national governments and impacted the outcome of many
elections:
- Greece - May 2012 - The Greek legislative election, 2012
were the first time in the history of the country, at which the
bipartisanship (consisted of PASOK and New Democracy parties), which
ruled the country for over 40 years, collapsed in votes as a punishment
for their support to the strict measures proposed by the country's
foreign lenders and the Troika (consisted of the European Union, the IMF
and the European Central Bank). The extreme right-wing and left-wing
political parties that have opposed the policy of strict measures, won
the majority of the votes.
- France - May 2012 - The French presidential election, 2012 became the first time since 1981 that an incumbent failed to gain a second term, when Nicolas Sarkozy lost to Francois Hollande.
- Finland – April 2011 – The approach to the Portuguese bailout and the EFSF dominated the April 2011 election debate and formation of the subsequent government.
- Greece
– November 2011 – After intense criticism from within his own party,
the opposition and other EU governments, for his proposal to hold a referendum on the austerity and bailout measures, PM George Papandreou
announced his resignation in favour of a national unity government
between three parties, of which only two currently remain in the
coalition. Meanwhile, the popularity of Papandreou's PASOK party dropped from 42.5% in 2010 to as low as 7% in some polls in 2012.
Following the vote in the Greek parliament on the austerity and bailout
measures, which both leading parties supported but many MPs of these
two parties voted against, Papandreou and Antonis Samaras
expelled a total of 44 MPs from their respective parliamentary groups,
leading to PASOK losing its parliamentary majority. Early elections were
held in May 2012.
- Republic of Ireland – November 2010 – In return for its support for
the IMF bailout and consequent austerity budget, the junior party in the
coalition government, the Green Party set a time-limit on its support
for the Cowen Government which set the path to early elections in Feb 2011, following which Enda Kenny became PM.
- Italy
– November 2011 – Following market pressure on government bond prices
in response to concerns about levels of debt, the Government of Silvio Berlusconi lost its majority, resigned and was replaced by the Government of Mario Monti.
- Portugal – March 2011 – Following the failure of parliament to adopt the government austerity measures, PM José Sócrates and his government resigned, bringing about early elections in June 2011.
- Slovakia – October 2011 – In return for the approval of the EFSF by her coalition partners, PM Iveta Radičová had to concede early elections in March 2012, following which Robert Fico became PM.
- Slovenia – September 2011 – Following the failure of June referendums on measures to combat the economic crisis and the departure of coalition partners, the Borut Pahor government lost a motion of confidence and December 2011 early elections were set, following which Janez Janša became PM.
- Spain – July 2011 – Following the failure of the Spanish government to handle the economic situation, PM José Luis Rodríguez Zapatero announced early elections in November.
"It is convenient to hold elections this fall so a new government can
take charge of the economy in 2012, fresh from the balloting" he said.
Following the elections, Mariano Rajoy became PM.
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