Host: Richard Werly
Date: 27 October 2011
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The following is a digest of the webinar discussions held on Thursday, 27th October, 2011, with our host Richard Werly.
The Eurozone now seems decided to put its acts together
This is the main conclusion one can draw following the 26th October summit. Contrary to what happened on 21 July, the European plan is now global, covering all aspects of the Euro crisis: new restructuration of the Greek debt, recapitalisation of the banks, strengthening of the EFSF, and new measures to beef up the Eurozone economic governance.
It does not mean these measures will be sufficient. As we have seen in July, financial markets will judge only after taking a closer view and after analysing the European plan. Nevertheless, some positive elements are here to stay:
- German leadership of the Eurozone has been accepted;
- The need to respond simultaneously on various fronts has been accepted;
- The need to prove that the Eurozone is ‘fluid’ has been understood.
The Eurozone challenges now lie with the implementation of the plan
This is no surprise: the devil, once again, will be found in the details. We can expect reactions on various fronts:
- Banks’ recapitalisation might have an impact on the real economy, if banks are forced to reduce their exposure to companies, etc. Applying stricter norms always makes it more difficult for financial establishments to extend credit lines.
- Appeal to emerging economies will only be successful if Europe is in position to propose a grand bargain. It is well known, for example, that Brazil is already circulating a non-paper asking for Europeans to review their quotas at the IMF, so emerging economies get more representation in Bretton Woods institutions.
- The Eurozone governance efforts will most probably bump into the sovereignty of member states. Germany, by proposing a revision of the European treaties, has indicated a valid option, but everybody knows how revision to treaties can be difficult and can bring about uncertainty.
There is a need – more than ever – to re-contextualise this Euro crisis and the Eurozone response
Judging the Eurozone by its past failures to address the Euro crisis is not satisfactory.
- Though European governments are shy to admit it, this Euro crisis come at a time of decline. It does not mean it is irreversible. It just means that Europe has to adjust to its economic, demographic, and political difficulties. This crisis is a systemic one.
- The Greek crisis has illustrated major deficiencies in the Eurozone architecture. Lack of surveillance is obvious. There is a wish to correct it. There is even an attempt, now, to put Greece under a kind of EU supervision. In addition, it is obvious that further Greek debt restructuration will be needed. So we don't buy the argument that this crisis is not a Euro crisis: it is, indeed, a crisis demonstrating the Eurozone shortcomings.
- Germany's leadership will have tremendous political consequences on the EU. Expect political and diplomatic impact following the Euro crisis. The present rift between non-Euro members and Eurozone countries is just a first sign of this changing landscape.
Europe will have to confront several major issues, while trying to put down the fire from the Euro crisis
- Concessions will have to be made to emerging countries, while, politically speaking, European voters are less and less in favor of globalisation and free trade, putting their economies at risk. Here is one of the main political challenges for the EU. Our assessment is that, one way or another, a return of some kind of protectionism barrier will be difficult to avoid.
- The question of leadership will not fade away. For the moment, Germany is leading the pack, but a redefinition of the European institutions is needed. From an outsider point of view, only the Commission can make a difference and be the economic government of Europe. Will member countries accept to surrender more powers to the Commission? It has to be seen. Will countries like France or Italy continue to accept German ‘diktats’ if the crisis starts fading away? This has also to be seen.
- Most importantly, the future of European economies is at stake: if Europe fails to deliver more growth, and to bring in new dynamism in its internal market, its plan will not deliver much. More than ever, the mantra ‘It's the economy, stupid!’ will dictate its conditions. Our assessment is that the European currency is here to stay, but the coming years are going to be painful, and therefore, difficult to manage politically.
Questions? Post a comment below, or e-mail Richard Werly at email@example.com