Eurozone to add growth to its strategy
AFP PHOTO / GEORGES GOBET
The Eurozone seems to be preparing for nothing less than a full change of course in its strategy in an effort to counter its sovereign debt crisis. The reason for this is that the currently applied severe fiscal diet imposed not only to 'sinner' countries like Greece, Portugal. Ireland and Spain, but to surplus member states it is leading to a deepening recession, a prospect that may send the entire world to a new period of negative growth, if not a new round of financial meltdowns.
The International Monetary Fund (IMF) in its recent spring conference came to the conclusion that Europe had done a lot towards fiscal consolidation, but the time has come to pay attention to growth. This criticism towards the Eurozone is also shared by all the major economic powers of the world from London and Washington to Beijing and the rest of BRIC capitals. Actually all those main trading partners of Europe have loudly expressed their willingness to help the Eurozone, not only to overcome its sovereign debt problem, but to create financial firewalls to protect it from possible attacks, while attempting to brake the present vicious cycle of deficits and recession and return to a growth path.
To this effect all the major IMF members states including US, China, Russia and the rest of BRICs accepted to contribute tenths of dollar billions to an IMF account to support the Eurozone. Apart from the outside pressures on Eurozone to rethink its severe fiscal contraction strategy there is growing opposition also within the euro area against the present arrangement.
For one thing, all three Eurozone programme countries with the leftovers of their pressing power are now opposing the strong austerity policies imposed on them, arguing that this has lead their economies to the deepest recession the western developed world has known after the WW II. Incidentally, Greece has lost 15-18% of its GNP over the past three years. As things stand now Greece, Portugal Spain and Italy are heading deeper and deeper into recession, while the Irish 'tiger' is suffocated by a fiscal straight jacket.
However, what is even more important for the internal political developments in Eurozone, Paris no longer accepts this prospect as the only way out. With the now visible change of attitude of the French 'connection', Europe is questioning the applied fiscal consolidation strategy, after Paris asked for a growth chapter in the Fiscal Pact. Brussels could not avoid taking a good note of this. So it was not by accident that this past week the President of the European Council, Herman Van Rompuy, speaking at the European Business Summit in Brussels, said that "there is no magic formula" for economic recovery. "Reform takes time", he added and concluded that “Europe must remain an attractive market, but this could be achieved only by quality growth and in a social and fair environment”.
Given all that it seems now that the Eurozone is preparing for two major changes of strategy. According to cross checked information those changes will help controlling the sovereign debt, recapitalise adequately the banks and give the Eurozone breathing space to apply growth enchanting measures. In view of all that, the new steps now under discussion in the Brussels, Berlin and Paris corridors of power contain the following new ideas.
The banks
The recapitalisation of the Spanish, and most probably some other Eurozone banks, will be realised with money from the European Financial Stability Facility/ European Stability Mechanism. The money however will not come to the banks through the national treasuries as in the cases of the Greek and Irish lenders. In this way a further inflation of the relevant national sovereign debt will be avoided. It must be noted that in the cases of Greece and Ireland more than half of the support packages are used to recapitalise the Greek banks, with EFSF/ESM loans and guarantees accorded to the Athens and Dublin governments. Unfortunately, in this way the Greek and the Irish sovereign debt may sky-rocket further. From now on this financial practice will change. Banks will be directly recapitalised without the national debt being inflated.
More time
Coming to the time element of the fiscal consolidation, all Eurozone countries are expected by the end of next year to reduce their fiscal deficits to levels bellow the acceptable 3% of the GNP threshold. Given the political resistance, the social unrest and the deep recession in Greece (unemployment 22.5%), Spain (unemployment 24.4%), Italy, Portugal and to a lesser degree in Ireland, the reduction of the fiscal deficit to 3% in twelve months from now seems politically, socially and economically impossible.
Van Rompuy said it clearly last week that there will be changes, which will be discussed in an extraordinary European Summit toward the end of May or beginning of June. Converging information says that in Brussels, Berlin and Paris there is under consideration an extension of one or two years for the fiscal deficits to be reduced bellow 3% of the GNP. The problem is however that markets may react quite negatively to such a prospect. To avoid this, decision makers are looking for ways and means to pre-empt a massive investor attack to the weak spots of Eurozone, possibly in Spanish and Italian debt markets. This said, market sharks will think twice before betting their money on Eurozone's disintegration.
No doubt the next weeks will produce very interesting developments, not only for the Eurozone but for the global financial markets.
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