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2013: A Year in the Crisis

15. January 2014, von Alexandre Abreu, Comments (0)

So here we are in 2014. As this edition of the Euro Crisis blog draws to a close, it is time to say farewell to the readers and greet the new contributors who will take over and comment on the Euro zone crisis as it develops from here on in. Farewells are also an appropriate time for stock-taking exercises, however, so I think it is appropriate to end my contribution by reviewing what the latest year has meant for the bigger picture of the Euro crisis – at least the way I see it. What progress has been made in the various fronts? And how much closer are we to a resolution of the crisis?

Perhaps not surprisingly, my views are considerably less optimistic than those of most other analysts, many of whom seem to consider that the worse of the crisis is largely behind us. I, on the contrary, believe that we are still far from hitting the bottom, let alone from a resolution. And I also believe that we end the year 2013 in a worse position that we started it.

First, take the superficial element of the crisis: the sovereign debt levels of the eurozone countries. (Superficial in the sense that, as I and many others have argued before, they are a consequence, not a cause, of the crisis.) Between the second quarter of 2012 and the same quarter of 2013 (the latest for which Eurostat has available comparable data), in a context of widespread austerity, absolute public debt levels increased in Austria, Belgium, Cyprus, Estonia, Finland, France, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovenia, Slovakia and Spain. That is to say, in every single eurozone country except for Germany and Latvia. As a percentage of GDP, government debt increased in all 18 eurozone countries except for Austria, Germany and Latvia – including to such remarkable levels as Greece’s 169%, Portugal’s 131%, Ireland’s 126% and Spain’s 92%. Not quite unexpected given the obviously recessive consequences of austerity, but certainly not a sign of progress towards a resolution: greater debt levels mean a greater burden constraining the possibility of counter-cyclical fiscal policy (particularly with the Fiscal Compact in place) and, at least in the Portuguese and Greek cases, a greater amount which will not, for it cannot, be repaid (whether this be through haircuts or sovereign defaults).

More significantly, though, the more fundamental economic variables which encapsulate the nature of the crisis have either deteriorated or remained unaltered during the course of 2013: the massively negative external debt, or international investment position, of the peripheral Euro zone countries (the ‘divergence’ component of the crisis) remained basically unaltered, save for some marginal improvement in the case of Ireland. As for the overall economic performance (the ‘stagnation’ element of the crisis), the outlook also continues to be profoundly depressing: annual GDP growth in the euro area as a whole in 2013 is estimated at -0.4%, while euro area unemployment remains at a record 12.1%. At the same time, the constraints weighing down on that performance have not alleviated: the deleveraging of the private (household and corporate) sector remains to be done, while the spectrum of deflation is an ever-more-present possibility, further worsening the debt overhang and giving rise to recessive debt-deflation dynamics.

At the political and institutional levels, we now have a Fiscal Compact in place which has basically banned counter-cyclical fiscal policy at a time when monetary policy has become well-nigh ineffective; a ‘banking union’ which has not broken the vicious links between troubled banks and troubled sovereigns; a minuscule EU budget slashing all hopes of a recovery led by counter-cyclical policy at the European level; unrelenting insistence on austerity as supposed way out; discontent with the European project growing steadily across the EU; the far right increasingly showing its ugly head as it takes advantage of the European leaders’ incapacity or unwillingness to address the real root causes of the crisis; and a full-fledged humanitarian crisis in large swathes of the European periphery. Hardly grounds for optimism.

Having said this, it is no doubt true that the eurozone crisis has changed its character during the course of 2013: in contrast to earlier on in the year, we no longer experience the crisis as a series of acute episodes, in which the possibility of a dénouement is just around the corner. Instead, we have entered a largely chronic stage, with neither collapse nor improvement in sight. A significant indicator in this respect consists of the interest rate levels on sovereign debt throughout the eurozone: even though the economic outlook has continued to worsen, interest rates, particularly in the eurozone periphery, have fallen significantly over the course of 2013, thus alleviating one of the most acute dimensions of the crisis. By and large a continuation of the ‘Draghi effect’ (the ECB’s manifest willingness to do whatever it takes to prevent defaults in the Euro zone, provided that austerity remains in place), but unintelligible without taking into account the extent to which resistance to austerity has so far failed to materialise at the political level (thus rendering this deleterious low-level political-economic equilibrium much more stable than it seemed 12 months ago).

But this equilibrium will not last, for austerity and deflation are exactly the key ingredients of permanent recession in our current debt overhang situation – and sooner or later the electorate, in at least one of the more chastised countries, will prefer default and the possibility of a euro exit, for all their risks, to the certainty of perpetual impoverishment. In 2013 the crisis turned into chronic stagnation, but we should not let ourselves be fooled by this apparent calm: it only takes one card to bring the house down.

May you have a happy 2014, dear reader – and in these times of crisis, may Europe and its peoples live up to the lofty democratic ideals which the continent has spawned throughout its history.

Europe For Citizens

“This project has been funded with support from the European Commission. This publication reflects the views only of the author, and the Commission cannot be held responsible for any use which may be made of the information contained therein.”

Dijsselbloem or DijsselDoom – a Dutch Perspective

9. April 2013, von Adriaan Schout, Comments (0)

I already presented my reservations against the appointment of Dutch Minister of Finance, Jeroen Dijsselbloem (Labour Party) as President of the Eurogroup. The public outrage following the bankruptcy of the banking sector in Cyprus has raised new questions concerning his ‘presidency’ (for which in Dutch the more modest ‘chairmanship’ is used). My initial doubts concerned the question whether this prestigious position would be in the interest of the Netherlands – and I was bold enough to propose Olli Rehn as possible candidate for a permanent chair after his departure from the European Commission in 2014.

The Cypriot turbulence in March immediately tested Dijsselbloem’s ability as a chair. He had become minister of finance in the Netherlands only in November 2012 and his appointment was almost immediately followed by rumours about his candidacy as president of the Eurogroup. In that respect, the criticism of his lack of experience and authority during the Cyprus crisis came as no surprise. For his two rescue proposals for Cyprus the media treated him on nicknames such as “DieselBoom”, “DijsselDoom” and “EuroBaldrick” (borrowed from the series Blackadder) as well as on appeals for his resignation. The fierce debates he provoked centre on the question as to whether the deposit holders are really completely safe. ‘True’ EU believers – and bankers who long for stability – would have preferred a banking resolution including European deposit guarantees in order to prevent bank runs whereas EU sceptics wished for the dismantling of the euro. Moreover, as was to be expected, Dijsselbloem was scorned as a Dutch puppet of Germany and blamed for defending the Dutch position instead of being a neutral chair.

Yet, in view of political realities like the upcoming elections in Germany and the public reservations against saving zombie banks and eurozone countries, the decisions of the Eurogroup to dismantle the Cypriot banks and to bail in seem inevitable. Moreover, given the lack of money in any country, it is highly unlikely that former Eurogroup President Juncker would have been able to orchestrate a different outcome. Approximately € 3 trillion is needed to stabilise banks in the eurozone. It is simply impossible to avoid more haircuts. Still, Dijsselbloem’s presentation of the measures appeared cold and his alleged Dutch bluntness provoked comments like the one by Juncker that you sometimes have to lie as chairman of the Eurogroup – as if financial markets preferred unreliability instead of predictability.

Also, the role of the chairman of the Eurogroup seems to be widely overestimated, if one has a close look at the EU power structure. A lot of criticism on Dijsselbloem is politically naïve in view of the strong resistance against the Cyprus bail-out not only in Germany but also in countries such as France where EU Affairs Minister Moscovici talked about “casino banking” on Cyprus. It seems widely regarded as reasonable to bail-in bondholders and deposit owners – particularly in the absence of an effective European resolution mechanism.

Hence, Dijsselbloem seems to have withstood the criticism well so far. Yet, there are issues for which he could be criticised, which in some cases can be blamed on his lack of experience. First of all, he made himself more important than he really is by ̶ during the hearing before the European Parliament ̶ taking the blame for the bailing-in of savings below €100 000 in the first deal with the Cypriot government. Firstly, the chair (President of the Eurogroup) is not a decision maker but mainly a spokesman: it was the decision of the Eurogroup to bail in those savings. Secondly, he referred to the bail-in of Dutch bondholders. A chair should be as neutral as possible and avoid telling the world how good his native country is in dealing with a crisis. Particularly Dutch politicians should take care not to be too outspoken. Dijsselbloem’s presentation of the Netherlands as a role model fuelled the criticism that he was pursuing a national agenda. Thirdly, he talked in terms of “core” and “periphery countries” as well as “the north” and “the south” whereas a chair should avoid divisions at any cost (as he later seemed to have realised).

Even though these issues are mainly issues of style and nothing serious, the international press once again saw a reason to complain about Dutch bluntness and about pushing through the Northern austerity agenda. Similarly, when Dijsselbloem, as Dutch Minister of Finance, attacked the Commission’s request for an additional € 11.2 billion for the budget for 2013, a question basically unrelated to the euro crisis, this led to head lines such as ”Dijsselbloem, president of the Eurogroup, joining forces with the UK” (EurActiv 3 April 2013). This shows that it seems to be inevitable that the chair of the Eurogroup is not regarded as neutral but as a national politician.

If Cyprus can cause an existential euro crisis overnight, it is very likely that more and more serious crises are to be expected. Against this backdrop, complaints about Dutch bluntness, accusations of Dijsselbloem acting as a German puppet or being part of the British camp, are particularly unhelpful both for the EU and for the Netherlands. What the Eurogroup urgently needs is a professional chair!

Europe For Citizens

“This project has been funded with support from the European Commission. This publication reflects the views only of the author, and the Commission cannot be held responsible for any use which may be made of the information contained therein.”

Halftime in Cyprus

27. March 2013, von Alexandre Abreu, Comments (0)

Analysing the latest acute episode of the euro crisis, Cyprus, on March 26th is a bit like writing a match report at halftime: you’re bound to get much of the story right, but if you try to predict the final outcome, you may very well miss – by an inch or by a mile. And as it happens, this particular crisis episode is very much at halftime: after intense negotiations and some extraordinarily clumsy backing and forthing by the Eurogroup and the Cypriot authorities, a deal has finally been brokered that involves a 10€ billion emergency loan, differential treatment of the various banks, austerity (as always), a bail-in of the holders of bonds and deposits over 100,000€ (the big novelty) and no penalty on holders of deposits under that amount (albeit after an announcement to the contrary with indelible consequences, more on which below). However, the banks in Cyprus remain closed to the public as I write, with strict restrictions on movements and withdrawals in place, and no one really knows what will happen once depositors are once again allowed to access their money. My own guess, taking into account the rationality of bank runs and the stage that has been set by the political handling of this crisis, is that the Cypriot banking system may well come crumbling down in a matter of days – and it’s anyone’s guess what that could unleash. We shall soon find out, however, so rather than play the role of Cassandra here, I shall instead dwell on some of the lessons that, even at halftime, we can already draw from the Cypriot crisis – and there are some interesting ones to be drawn.

1. It ain’t over till it’s over. By now, there have probably been a hundred different speeches claiming that the worst of the euro crisis is behind us. In some instances, this has been based on wishful thinking regarding the imaginary virtuous properties of the fiscal compact and structural reform (read: permanent austerity, labour market deregulation and privatisation). In other cases, it has been supported by the peripheral countries’ ‘return’ to the bond markets (really due to the OMT) or the reduction in their current account deficits (mostly a consequence of recession). For all this magical thinking, however, the fact of the matter remains that the eurozone as a whole is in recession and looks set to plunge even deeper; the number of countries that have had to resort to emergency loans has by now reached a handful (Greece, Portugal, Ireland, Spain and Cyprus); the social and economic situation is dire across the eurozone periphery and catastrophic in the hardest-hit countries; and the question in many people’s minds is which country will be next, with several candidates in line. So really, it’s far from over.

2. Every unhappy eurozone member is unhappy in its own way. Each troubled eurozone country has its own set of specific troubles, including the unraveling of massively bloated financial systems, busted housing bubbles, distorted specialisation patterns, loss of international competitiveness, or various combinations of the above. Make no mistake about it, however: there is one common cause underlying all of these epiphenomena, and that cause is an ultimately flawed monetary union without a sovereign to back it.

3. All creditors are equal, but some creditors are more equal than others. Throughout the Eurozone crisis, creditors (typically bondholders) have by and large been treated as sacrosanct. The argument has always been that default or suspension of debt/interest repayment is really not an option, because once you scare investors away, it’s well-nigh impossible to regain their trust. In the Portuguese case, for example, this is used to justify paying out 10 billion euros in interest on public debt in 2013 (more or less equivalent to total public spending on health), even as the economy collapses for lack of domestic demand and even as it is increasingly obvious that a default, or at least major haircut, isinevitable further down the road (public debt amounting to 120% of GDP, with an implicit average interest rate of 5%-6% and absent inflation, can never be repaid by the government of a shrinking economy). Now, what the Cyprus banking crisis has shown is that creditors are not so sacrosanct after all, and it’s alright to scare them away if most of those creditors are not financial institutions from the European core – particularly if there’s a fair chance that these creditors might be scared away from Cyprus and onto Luxembourg or the Netherlands. Indeed, taking into account how all the Cyprus-bashing as an offshore haven for Russian mobsters and oligarchs fails to recall the amount of money laundering that takes place in Luxembourg, the Isle of Man, the Netherlands – and even Germany, for that matter –, one might add that all offshore havens are equal, but some are more equal than others.

4. Once the cat is out of the bag, you probably won’t be able to catch it. The Cypriot banking crisis has been quite extraordinary not only because this is the first time that creditors are called upon to suffer losses as a pre-condition for a bail-out, but also, and especially, because the initial plan involved overriding the EU-wide insurance on deposits under 100,000€ by levying a 6,7% penalty on those deposits. This figure was subsequently reduced to 3%, and then dropped altogether, but by then the cat had already been let out of the bag: depositors in Cyprus, across the Eurozone periphery and in fact across the Eurozone as a whole now know that, under certain circumstances, the European authorities are willing to sacrifice small depositors. Now that’s what I call a sure way of triggering some major bank runs across the Eurozone. But then again, let me not play Cassandra here.

Europe For Citizens

“This project has been funded with support from the European Commission. This publication reflects the views only of the author, and the Commission cannot be held responsible for any use which may be made of the information contained therein.”

Getting Cyprus Wrong – and Germany Too?

27. March 2013, von Almut Möller, Comments (1)

The agreement on Cyprus concluded this week will turn out as a burden to policy-makers in Europe for both next steps related to Cyprus and the Eurozone rescue as a whole. The best take I have read so far is by Bruegel’s Nicolas Véron, who in his latest commentary addresses the manifold arenas in which the case of Cyprus will play out in the months to come.

Véron also discusses the role of Germany, making the point that the Cyprus agreement was held hostage by Germany’s federal electoral campaign, and Berlin as the “unquestioned central actor” in the Eurozone contributed to undermining trust won back in 2012. I agree that domestic politics played a major role for the governing coalition of Chancellor Merkel. The last thing Merkel wants is a euro controversy tainting the so far bright prospects of her re-election, and headlines in German local newspapers this week did her a favour by stating “Citizens’ deposits safe in German banks”.

The question is, despite the opposition trying to capitalise on the government’s potentially damaging slip and on the anti-Merkel mood in Cyprus and other parts of Europe: with a different government in power in Berlin, would the stance on Cyprus have looked significantly different? I doubt it.

German sociologist Ulrich Beck provided what I consider the key to understand German thinking in an interview published by the London School of Economics’ EUROPP blog this week. It is a crucial hint to understand the German soul throughout the past, present and future of the crisis, which is why I quote it in full length:

“(…) Germany’s austerity policies are not based simply on pragmatism, but also underlying values. The German objection to countries spending more money than they have is a moral issue which, from a sociological point of view, ties in with the ‘Protestant Ethic’. It’s a perspective which has Martin Luther and Max Weber in the background. But this is not seen as a moral issue in Germany, instead it’s viewed as economic rationality. They don’t see it as a German way of resolving the crisis; they see it as if they are the teachers instructing southern European countries on how to manage their economies.”

From the crumbling of the City of London during the first wave of the crises through the debt and governance failure in Greece to what is now being described as a ‘fatal business model’ in Cyprus in German papers, there has always been a moral, even moralistic undertone in the German debate, which people outside Germany are struggling with. For Germans themselves, however, it makes a lot of sense. There is a sense of unfairness felt in Germany when witnessing a growing anti-Germany mood in the streets of Cyprus, Italy, Greece and elsewhere: after all we are the good Europeans, not the bad ones, in helping others to find their way back to what we believe is a ‘good’ way of running an economy, and a government responsive to citizens’ needs. And we are even helping with our taxpayers’ money.

In government circles in Berlin this is framed positively and, with what I believe is a genuine sense of responsibility, as help in ‘forging a new social contract’ in countries affected by the crisis. In other parts of Europe, however, Germans cause increasing outrage for allegedly not tolerating any other system than their own, and for playing a moralistic blame game against “hubris, greediness and wilful negligence” (this is how a leading German conservative daily put it today, suggesting to turn the headquarters of the soon to be closed Laiki Bank into a “museum of greed”).

I understand that it is getting harder to believe in the rest of Europe when reading such commentary (and the list of similar quotes has become long in the course of the crisis) that Berlin has good intentions, and that it genuinely does not want to dominate or destroy other countries’ economic and social models. Keeping in mind the hugely formative driving force to German thinking as described by Ulrich Beck might deliver a key to understanding Germany better.

But Germans have to do their part too. In my observation there is still a lack of real understanding of how and why Germany is perceived by others as lacking empathy among policy makers in Berlin. And those who indeed are aware of these perceptions are playing an increasingly dangerous game by ignoring them or playing them down as a natural sight effect that comes with strong leadership.

If I was to revisit the findings of a set of papers that we published in mid-2012 on how Germany is viewed by other EU Member States, by now the results will certainly give much more reason for concern regarding Germany’s role in Europe. Perceptions matter in European politics, and they might turn against German leadership and narrow Berlin’s room for manoeuvre – to the detriment of Germany and Europe.

Europe For Citizens

“This project has been funded with support from the European Commission. This publication reflects the views only of the author, and the Commission cannot be held responsible for any use which may be made of the information contained therein.”

Blog Authors

Adriaan SchoutAdriaan Schout

Dr Adriaan Schout is Deputy Director Research/Europe at Clingendael, Netherlands Institute of International relations. (read more...)

Alexandre AbreuAlexandre Abreu

Dr Alexandre Abreu is a 33-year-old Portuguese economist with a PhD from the University of London. Currently he is a lecturer in Development Economics at the Institute of Economics and Business Administration, Technical University of Lisbon, and a Researcher at the Centre for African and Development Studies of the same University.

Almut MöllerAlmut Möller

Almut Möller is a political analyst in European integration and European foreign policy. She is currently the head of the Alfred von Oppenheim Centre for European Policy Studies at the German Council on Foreign Relations (DGAP) in Berlin. (read more...)

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