Opinion Sur
It has been several months since Europe has been moving on the edge of the abyss, and in its displacement it spreads fear of contagion and of a new global recession. As a result of a late, slow and ineffective management of the financial global crisis that began five years ago, Europe now finds itself immerse in a profound sovereign debt crisis that first showed its teeth in Greece, that quickly spread to Ireland, Portugal and Spain, and that nowadays acquires unsustainable dimensions after having set off the alarms in Italy, the third European economy. Like a summer fire, the crisis spread from a country that only represents 2% of the European GDP (Gross Domestic Product), until it took on a set of countries whose economies exceed a third of the Euro-Zone product; not including France, over whose bonds attacks and requalification threats arose this week. Consequently, panic won the world’s stock enclosures, recording a volatility that had not been recorded since 2008. Quoting Angela Merkel before the Bundestag (German parliament): ‘The situation Europe faces is the most serious since World War II’. ‘The world is watching us’, ‘if the Euro falls, Germany will fall as well’. In her urgency to obtain the full backing of the German deputies to her position in the Brussels Summit, Merkel came clean: the European crisis has such an extent and depth that it widely transcends the ‘Hellenic tragedy’. .
However, for months the European drama was restricted to the Greek’s debt risk of default: ‘Europe’s failure to adjust its squander has shifted to the dehumanized adjustment that is demanded from Greece’ said Daniel Cohn-Bendit in a fiery speech before the European Parliament. The ‘charade’ ended when the qualifiers severely punished the Italian and Spanish debt (120% of the GDP), and they threaten the French one. The Greek pensioners are not the only responsible for the German contributor’s sacrifices, now the Italian pensioners’ resilience also shakes ‘innocent’ Berlusconi. Finally today it is openly recognized that the crisis transcends Greece: today, the Euro’s and the whole financial system’s survival is at stake, not just the banks holding the Greek debt’s.
In response to this crisis’ out-of-control progress, the complex European bureaucracy awoke from an incomprehensible lethargy and it started a slow and intricate solution building process which Trichet has denominated ‘global and lasting’.
Gathered at the Brussels Summit, the presidents of the 17 countries that constitute the Euro-Zone, in consultation with the 27 that constitute the EEC, outlined a multiple and simultaneous approach plan, which has three fundamental pillars: the banking recapitalization, the Greek debt’s restructuring and the expansion of the Greek rescue fund (EFSF):
– Banking recapitalization. The maximum quality capital required will be of the 9%, which should be reached by June 30th 2012, a capital equivalent to 106 billion Euros. The idea is that the banks themselves can come up with the necessary capital to reach the minimums set by the European Banking Authority (EBA). Before the end of the year, entities must inform their national supervisors of the way in which they plan on gathering the funds they are missing in order to reach the set minimum. If any bank is unable to finance itself independently, it is the national supervisor’s role to offer the resources and, ultimately, the European rescue fund’s. Banks that should require more capital than they can acquire by their own means will not be able to pay their executives dividends or bonds until they have reached the 9% cushion.
– The Greek debt’s restructuring. The heads of state have agreed to forgive 50% of the Greek debt. The new discharge, which will be voluntary, exceeds the 21% agreed the past 21st of July during the previous European meeting. This agreement took place at the very last minute. The Executive Director of the International Finances Institute, an umbrella organization for the main creditor banks, only relented when the Euro zone agreed to mobilize 30 billion to guarantee the rest of the Greek debt’s payment. What still remains undefined are the terms in which the banks will agree to a voluntary payments suspension.
The German Chancellor disclosed after the Summit had finished that in December she will approve the second help plan for the country. The idea is to give another credit of 100 billion Euros to the Hellenic authorities. In exchange, the Athens’ Government must take on a permanent supervision of the EU. The date in which this second bailout will apply depends on whether other measures have positive results or not, reason why it may be delayed.
– Expansion of the Greek rescue. The European Union has decided that this plan’s amount should rise to a billion Euros. A number with which the EU will have to face the banking recapitalization of those countries that cannot face it by themselves, or the purchase and/or bonds guarantee in the secondary market for those countries that should suffer the harassment to their national debt. This way, this prevents the ECB from buying debt, an action that does not satisfy Germany. In parallel, Brussels will work to increase the EFSF, using resources from the IMF and from emerging countries, especially China.
In the short term, the solution formed in Brussels would be avoiding the Greek default and the European financial system’s collapse. Its current undercapitalization level and the toxicity of its balance would have inexorably led to credit freeze and, therefore, to an economic recession and a social tragedy. What still remains unclear is how to face the tax crisis and the indebtedness that challenges several countries of the Euro zone from there on. Besides, except for Germany, they all face, to different extents, serious competitiveness issues, which demands great efforts in terms of wage, employment and austerity levels in public expenditure.
Are countries in Europe politically and socially willing to bear the tremendous adjustments that the survival of the integration scheme they belong to and the currency symbol that unites them demand from them? Will the Euro hang on before such an economically and politically challenged Europe? Lastly, will the austerity plans that are put to the test today in Greece, Spain, Portugal, Italy, etc., constitute a source of economic restructuring, competitiveness and growth or will they deepen the tax deficit and the need of indebtedness? Will Europe enter a gradually virtuous circle or will it slide into a greater austerity, greater deficit and greater debt vicious circle?
These are questions the world poses with uncertainty and anguish. So far, there is only one certainty. If the solution approved in the Brussels Summit stabilizes Europe financially, its growth will be very weak and full of difficulties in the next few years. The OECD just corrected the European GDP growth prospects for 2011 from 2.3% to 0.8%, a prospect of clear stagnation. Without growth it is very unlikely that the sovereign debt crisis can be eased. Same way it is very hard to consolidate the Euro as a common currency without political leadership.
Seeing the problem from the Latin American economies’ perspective, Europe’s financial stabilization substantially diminishes the risk of a recession’s contagion or an abrupt fall in terms of demand. We will not suffer from a crisis such as 2009’s contagion effects, for now, but we will suffer from the effects of stability and, consequently, from a shrinking international commerce: we will export less, grow less and therefore, we will be forced to adjust the extent and quality of public expenditure to a weakest tax situation. And we must do it ASAP because, if indeed the European solution diminishes the risk of recession and contagion, we will enter a week face of the capitalist development in the center of the system anyhow. The Latin American economies’ commerce and activity level will depend greatly on the dynamic China and India are still able to preserve.
