Constantin Gurdgiev is head of research with St. Columbanus IA and lecturer in finance at Trinity College, Dublin
The rhetoric surrounding the continuing crisis in the euro area has been firmly that of a nuclear powerplant meltdown. From the problems emerging in the peripheral states, namely Greece, Ireland and Portugal, to the destabilization of the near-core or containment states such as Spain and Belgium, and on to the core -- Italy and, increasingly, France, the entire sequencing of events does indeed resemble the stages of a reactor going bust.
In this light, it is instructive to consider the nature of the measures that the euro zone has been laboriously pushing forward for dealing with the crisis.
Let’s start from the top. The main vehicle for delivering solutions to the sovereign debt crisis in Europe is the much-hoped-for enlarged or levered EFSF to be subsequently morphed into a somewhat-permanent sarcophagus around the peripheral states -- the ESM. While heated debates about the EFSF’s leveraging capacity are occupying the financial press, the real issue is that even if successful in raising €1-trillion, the EFSF/ESM vehicle will not do the job of repairing the collapsing common currency. At best, it can buy time. But it can’t alter the ugly equation of too much debt and too little growth that drives euro area dynamics.
This is why in addition to PIIGS and Belgium, we are now witnessing temperatures rising in France and Austria and even the Netherlands. It’s growth, under the EFSF/ESM arrangements, that is expected to recover -- albeit over the longer term and with lower interest costs -- the funding. And it’s growth that the euro zone lacks endemically.
In brief, summarizing data in the table above, the euro area has no potential to grow faster and it is growing slower than pretty much everyone else. Public debts are high and, based on BIS data, at an average public and private debt of 320 per cent of GDP, the euro area’s real economic debt is well in excess of the other advanced economies’ 302 per cent of GDP. Deficits might be lower, as projected, based on austerity measures announced through August; but given anemic current account surpluses, a structurally deleveraging banking sector and no safe-haven status for its bonds, the euro zone will have trouble raising new funding to sustain even these deficits.
This is also why the entire debate about closer federal integration as the solution to the crisis is academic at best. Centralization of power at the federal level across the euro area might breathe in some temporary dose of fiscal responsibility -- although it remains to be proved that this outcome is achievable within the strengthened euro area. But it won’t create conditions for economic growth, simply because the euro area as a whole is no longer an engine for real business creation, productive investment, entrepreneurship or competitive development. The euro area combines some of the world’s fastest aging economies with a decades-old ethos of entitlements-driven policy making. Telling a European that one has to earn her or his health-care benefits or social insurance or pension or access to amenities and infrastructure is equivalent to challenging a brick wall to be flexible and dynamic. Europe as a cultural, political and economic institution has evolved into a status quo preservationist society, where anything new is seen as a challenge to be resisted -- i.e. regulated, restricted, taxed.
All solutions put forward to date -- especially the euro-bonds and top-up bonds proposed by the EU Commission this week, as well as the idea that the ECB should dramatically expand its sovereign debt buying programs -- are amounting to a desperate search for another credit card to roll existing overdrafts into. In effect, the euro area is electing to get sober by getting more drunk and is doing this while walking along the precipice of the fiscal and growth cliff.