Dando um tempo no vinho por agora.
4/12/12
By George Soros
Far from abating, the euro crisis has recently taken a turn for the worse. The European
Central Bank relieved an incipient credit crunch through its longer-term refinancing
operations. The resulting rally in financial markets hid an underlying deterioration; but
that is unlikely to last much longer.
The fundamental problems have not been resolved; indeed, the gap between creditor
and debtor countries continues to widen. The crisis has entered what may be a less
volatile but more lethal phase.
At the onset of the crisis, the eurozone’s break-up was inconceivable: assets and
liabilities denominated in the common currency were so intermingled that it would have
caused an uncontrollable meltdown. But, as the crisis has progressed, the eurozone has
been reoriented along national lines.
The LTRO enabled Spanish and Italian banks to engage in very profitable and low-risk
arbitrage in their own countries’ bonds. And the preferential treatment received by the
ECB on its Greek bonds will discourage other investors from holding sovereign debt. If
this continues for a few more years, a eurozone break-up would become possible
without a meltdown – but would leave creditor countries’ central banks holding big
claims that would be hard to enforce against debtor countries’ central banks.
The Bundesbank has seen the danger. It is now campaigning against the indefinite
expansion of the money supply, and it has started taking measures to limit the losses it
would sustain in a break-up. This is creating a self-fulfilling prophecy: once the
Bundesbank starts guarding against a break-up, everybody will have to do the same.
Markets are beginning to reflect this.
The Bundesbank is also tightening credit at home. This would be the right policy if
Germany was a freestanding country, but the eurozone’s heavily indebted members
badly need stronger demand from Germany to avoid recession. Without it, the
eurozone’s fiscal compact, agreed last December, cannot possibly work. The heavily
indebted countries will either fail to implement the necessary measures or, if they do,
they will fail to meet their targets because of collapsing demand. Either way, debt ratios
will rise, and the competitiveness gap with Germany will widen.
Whether or not the euro endures, Europe is facing a long period of economic stagnation
or worse. Other countries have gone through similar experiences. Latin American
countries suffered a lost decade after 1982, and Japan has been stagnating for a quarter
of a century; both have survived. But the European Union is not a country and it is
unlikely to survive. The deflationary debt trap threatens to destroy a still-incomplete
political union.
The only way to escape the trap is to recognise that current policies are
counterproductive and change course. I cannot propose a cut-and-dried plan, only some
guidelines. First, the rules governing the eurozone have failed and need radical revision.
Defending a status quo that is unworkable only makes matters worse. Second, the
current situation is highly anomalous, and exceptional measures are needed to restore
normality. Finally, new rules must allow for financial markets’ inherent instability.
To be realistic, the fiscal compact must be the starting point, although some obvious
defects will need to be modified. The compact should count commercial as well as
financial debts and budgets should distinguish between investments that pay and
current spending.
To avoid cheating, what qualifies as investment should be subject to
approval by a European authority. An enlarged European Investment Bank could then
co-finance investments.
Most important, some new, extraordinary measures are needed to return conditions to
normal. The EU’s fiscal charter compels member states to reduce their public debt
annually by one-twentieth of the amount by which they exceed 60 per cent of gross
domestic product. I propose that member states jointly reward good behaviour by
taking over that obligation. They have transferred to the ECB their seignorage rights,
valued at €2tn-€3tn by Willem Buiter of Citibank and Huw Pill of Goldman Sachs,
working independently. A special-purpose vehicle owning the rights could use the ECB
to finance the cost of acquiring the bonds without violating Article 123 of the Lisbon
treaty.
Should a country violate the fiscal compact, it would be obliged to pay interest on all or
part of the debt owned by the SPV. That would surely impose tough fiscal discipline.
By rewarding good behaviour, the fiscal compact would no longer constitute a
deflationary debt trap. The outlook would radically improve. In addition, to narrow the
competitiveness gap, all members should be able to refinance existing debt at the same
interest rate. But that would require greater fiscal integration. It would have to be
phased in gradually.
The Bundesbank will never accept these proposals, but the European authorities ought
to take them seriously. The future of Europe is a political issue: it is beyond the
Bundesbank’s competence to decide.
The writer is chairman of Soros Fund Management. His latest book is titled ‘Coming4/12/12 Europe’s future is not up to the Bundesbank - FT.com
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