Possible scenarios for Greece and the Eurozone

In my reading, the message that the Greek people is sending to the Europeans is the following: We want to end insecurity one way or another. Either take your decision and kick us out, or if you don't, start making real investments for growth in Greece. But whatever you do, give us a long-term perspective so that we can start working on this. Now you might question if a clear decision, one way or another, will really end insecurity, but in my mind the sovereign has spoken: Stop kicking the can down the road.

All decisions will take time, because several Eurozone governments need to get new negotiating mandates from their Parliaments. That means, if the ECB does not extend the lifeline for Greek banks beyond the next few days, negotiations need not even begin.

Europa carrying the Euro - Statue outside the European Parliament   
- CC BY-NC Sean_Marshall

If the Greek banks survive the next few days and weeks, in my view there are several medium-term scenarios from the viewpoint of the Europeans:

Scenario 1) Announcement of a haircut for Greece, probably over time and conditional on real structural reforms. This would be the responsible choice and Cyprus has shown leadership already, but this means a loss of face for those politicians who promised their electorates full repayment. They will need to suggest the haircut to their electorates and Parliaments in a way that doesn't lead to massive resentment. But the truth is: If the creditors do not agree to a partial voluntary haircut, a full unwanted haircut will come along with a Grexit. But even if our politicians have the courage to voice this message, Scenario 1) still carries an incalculable risk about Portugal, Spain and Italy. They might ask for a haircut themselves, and a European debt conference would have to be called. Would this be the end for the Eurozone?

Scenario 2) Stopping all discussions and all financing immediately, kicking Greece out and redoubling support for the "good" reformers Italy, Spain and Portugal while sending humanitarian aid to Greece. Message: Greece didn't play by the rules, and we prefer a strong Eurozone without Greece to a weak Eurozone with Greece. This would lead to a total haircut for Greece but at the cost of a Grexit and probably massive humanitarian hardships. This is what the populists in the Northern European countries have asked for all the time - but I doubt the Eurozone governments want to take responsibility for such an irreversible decision.

Scenario 3) A solution somewhere between Scenarios 1) and 2) which allows Greece to stay in the Eurozone. But I suspect that any deal must include some sort of a haircut or else Tsipras will not agree. Are the creditors willing to agree to a haircut?

Scenario 4) Kicking the can down the road again, bleeding Greece out: starting negotiations but without coming to an agreement, stopping ECB emergency loans and waiting until the Greek banks run out of money and disaster runs its course. This would lead to a Grexit as in Scenario 2, except that the Europeans can deflect the blame ("we tried all we could, but the Greek government didn't agree").

The finale for Greece and the EU

The #Grexit debate has reached its peak. The next two weeks will decide if Greece stays in the euro or not. This is the biggest crisis that the EU has faced in a long time and probably its biggest crisis ever.

It is becoming clear that the Greek government will probably force the other Eurozone countries to choose A or B: Continue lending money to Greece without conditionality, or bear responsibility for Greece's exit from the euro. Whichever way you turn it, there are only bad solutions left.


Solution A: Keep on lending money to Greece without conditionality

• No substantial improvement for the Greek people in the near future
• More money needs to be transferred to Greece without guarantee that this money will be paid back
• Negotiations for a third bailout package may need to start so that Greece can pay back the remaining outstanding debt
• Public opinion in many other Eurozone countries will turn downright hostile toward the EU, right-wing parties will become more powerful. In the worst case, people will be so disappointed and disgusted by this European Union that we will see the breakup of the European project.

Solution B: Exit of Greece from the Eurozone

• All funds given to Greece are lost
• Massive economic and social problems for the Greek people, for example because the price of imported medicine will sharply increase as the drachma devalues
• Massive financial loss for the French and Italian governments which together own 38% of the Greek government debt
• Possible knock-on effects in Portugal, Italy, Spain which may strive for an exit from the Eurozone themselves to avoid further painful restructuring of their economies
• Massive speculation against the stability of the euro which in the worst case may lead to the collapse of the Eurozone

This is a huge challenge for our politicians and for European solidarity as a whole.  Nobody wants the European project to break apart, but whichever scenarios is chosen, it will create massive losers.

Europe's politicians are just as fed up with this entire situation as the European people, but it is now absolutely fundamental that our politicians keep a cool head. Otherwise, we may look back to the next two weeks as the beginning of the end of the European project.

European Financial Transaction Tax – the story of a broken dream

The G20 summit last week made significant advances in the introduction of a global financial transaction tax (FTT). Not only France, Spain and Germany but also Argentina, Brazil, Ethiopia and South Africa have declared themselves in favor of an FTT, or Robin Hood tax, which is set to take money from the traders and distribute it to the world’s poor. International NGOs like Oxfam, CIDSE and ActionAid build momentum around this tax that could for example be used to finance climate change mitigation in the global South. The European Parliament has long supported the introduction of an FTT. And even the European Commission has recently declared itself in favor of an FTT, albeit claiming its benefits for the European budget rather than for developing countries.

A pan-European financial transaction tax, however, always seemed unlikely because of the UK’s defiant veto in the Council of Ministers. The city, British politicians fear, would take a heavy blow if every transaction lost 0,05% of its value to the state. And this despite the fact that, according to Sony Kapoor, a trader who takes a 10-minute coffee break comes back to a far higher change in stock prices than just 0,05%.

If a European financial transaction tax cannot be established, German and French politicians recently suggested that the Eurozone should simply go ahead and introduce the tax on its own. Other parts of the world would certainly fall in line behind the biggest economy in the world once the tax had been introduced. However, not only does the EU's impact assessment show that the Eurozone would lose 80% of its financial transactions to London and other stock exchanges according to Dr. Bart Van Vooren, Assistant Professor of EU law at Copenhagen University. The introduction of a universally applicable FTT would also heavily conflict with the freedom of capital mobility enshrined in the European treaties: “(A)ll restrictions on the movement of capital between Member States and between Member States and third countries shall be prohibited” (Article 63 TFEU). Countries may discriminate between inner-European transactions and foreign direct investment, but within the common market, an FTT would not stand before the European Court of Justice, says Dr. Bart Van Vooren.

The only means of introducing a Financial Transaction Tax therefore seems to be a global agreement. But would elected governments ever trust an international organization to enforce the first global tax in history? Realism seems to win this battle in a second.

See below my video interview with Dr. Bart Van Vooren:



Update 08-11-2011: The Economic and Financial Affairs Council today debates the Commission's proposal for an FTT. But according to Sony Kapoor and Dr. Bart Van Vooren, the FTT is a welcome object of political talk. Public opinion is in favor of it, and its implementation reaches beyond the political life of most heads of government and ministers. Talk about a European FTT without the UK's consent is therefore not much more than cosmetics. 

MountEUlympus at the EPP Summit

In the footsteps of Julien Frisch, Joe Litobarski and Andrew Burgess, your humble blogger will cover the summit of the European People's Party (EPP), held this Saturday evening in preparation for the European Council on Sunday (and Wednesday).

Angela Merkel at the EPP Summit in June 2011
Source: Flickr CC BY europeanpeoplesparty

The EPP currently brings together 17 of the 27 European heads of state or government, among others Angela Merkel, Nicolas Sarkozy, Donald Tusk and Silvio Berlusconi. Discussions at the summit will mainly center around the Eurocrisis, which already brought one EPP government down last week (Iveta Radicová's liberal-conservative coalition in Slovakia). Will EU leaders, Merkel and Sarkozy most of all, be able to come to a sustainable agreement? Will they be able to produce a consistent solution that appeases the markets and brings back politicians' credibility? These are the questions that this blog will address at the EPP summit.

I will be live-tweeting directly from the summit (follow my account @mounteulympus or the hashtags #epp and #euco) and provide you with a round-up in the aftermath of the summit on this blog. You can send me your questions, comments and remarks by comment function, via Twitter or through the contact form, and I will try to address them at the summit.

Christine Lagarde is right

It is surprising how harsh the reactions were from the German side when French finance minister Christine Lagarde told policy-makers in Berlin to step up domestic consumption. German enterpreneurs suggested other Member States "do their homework" and step up their own competitiveness so that they wouldn't need additional German investment. The government and Commissioner Günter Oettinger agreed that German products should remain cheap as not to compromise its export revenues.

But in my view, Christine Lagarde is absolutely right. As I have expressed here, Germany's so-called "competitiveness" is essentially a public bailout of the enterprises on the shoulders of the working population. Of course it is true that Germany has the strongest economy in Europe and contributes much to growth in other Member States. But that can be increased by shifting resources back from the businesses to the consumer: A legally imposed minimum wage as practiced almost everywhere in the EU would raise aggregate consumption - and note that people have proven on various occasions throughout the crisis that they did not save the money they had at their disposal - which then means

• more consumption of domestic goods and services
  
• more consumption of foreign (inter alia European) goods and services
• more possibility to invest in enterprises at home and abroad, and thereby a greater involvement of the citizens into economic decision-making and a greater democracy in some enterprises
  

Yes, it also means that enterprises have less financial room for manoeuvre and investment. It means that some enterprises will relocate, to European states with a lower labor cost (beneficial for inter-EU trade) or to extra-European states (bad for the EU). But as the high-skilled services sector is taking ever-increasing importance and businesses have already come back from Asia in fear of technology theft, a large part of enterprises will not compromise the conditions that they find in the education level, social climate and infrastructure of central Europe.

Therefore, Christine Lagarde is absolutely right. For the last ten years, German entreprises, withholding pay rises of the employees despite inflation and higher product revenues, have benefitted from a society that does not take to the street except against nuclear power and right-extremists. They have benefitted from a disunited, individualized workforce that can be easily put under pressure. They have benefitted from state contributions if they employed a recipient of social security.

Let's not talk about repaying those ten years. But it is about time the employees/consumers obtained their rights for the benefit of the rest of Europe.


Update: Couldn't say it better than Robert von Heusinger in this article (translation: Google Languages/myself):

"Let's take the economic growth as the epitome of wealth and power of an economy. Here the matter is clear: France grew by an average of 1.5 percent in the last ten years, while Germany only grew by paltry 0.8 percent. Also in terms of employment as the epitome of participation and self-esteem of the people, the country across the Rhine performed better: while France's employment grew by 0.8 percent per year on average, in Germany it only climbed by 0.5 percent.

Where does this French success come from? From domestic demand, private consumption. It averaged 2.2 percent, four times as high as in Germany (0.5 percent). How did France achieve this - in spite of globalization? Through higher wages, that's the simple answer. The slightly more sophisticated one: it was achieved through an economic policy that recognizes interrelationships instead of blindly reducing national debt, shrinking the state sector, and relying merely on competitiveness."

Update 2: Christine Lagarde is completely wrong, on the other hand, if she suggests to finance consumer spending through tax cuts. That would take money away from state services like education and research and development that dearly need it. Consumer spending has to be financed through the real economy. The money has to be shifted from the enterprises to the citizens, not from the state to the citizens.