I SUPPOSE many would call me a cock-eyed euro-optimist. Certainly I’ve been supportive of the common currency since the early days and had high hopes for the euro – a novel concept in its inception. But I have to admit, I am beginning to lose all hope that the euro, at least the euro we now know, will succeed. Yes, I am disappointed that I have held onto that optimism for so long, but I am even more disappointed that the Eurozone’s leadership, especially Germany and the European Central Bank (ECB), also seems to have given up hope.
Let me explain how the chain of one disappointment after another led me to where I am now: exceedingly pessimistic about the euro’s future.
My basic, and indeed, my fundamental mistake, was my enduring assumption that the ECB is the equivalent of the US Federal Reserve Bank. It is not. And although the new head of the ECB, Mario Draghi, appears to offer a refreshing change, the ECB lacks something vital, namely the courage and policy flexibility of the Fed. When needed, the Fed goes all nine yards and fires up its financial bazookas. Meanwhile, the ECB seems hesitant to even light up a couple of sparklers.
I didn’t always see it like that. Just a month ago, it looked as though the ECB, viewed by many (erroneously, as it turns out) as a lender of last resort, was on the verge of activating all its firepower with a massive bazooka strike. Nothing of the sort happened.
As the weeks passed, my disappointment in the ECB grew. Not only do the ECB’s actions, or inactions as it were, suggest a lack of confidence, it also suggests an ugly political aspect; it appears they are more keen on keeping the Eurozone’s rich nations happy, than they are about stabilising the Eurozone. Could you imagine if the Fed decided that they weren’t going to help the US economy by putting more quantitative easing out there, simply because it would create inflation in New York? Even if the markets are on the verge of collapse? It’s unthinkable.
But this is what is happening in the Eurozone. The periphery states, which includes Italy, though it is in fact the third largest economy in the Eurozone, all share two major yet flawed characteristics: each has a rusty and overblown public sector just aching for reform, and their economies are all export-oriented.
Without the security of the Eurozone, Italy, for example, could intentionally devalue its “new-old” currency, the lira, risk-on government debt would fall and exports would recover. Voila. Italy’s economy is back on track. And this is exactly what they need to do right now. Indeed, as the new Prime Minister Mario Monti has argued, they must make structural reforms in order to avoid a similar fate.
The real problem is that Germany and France don’t seem to understand that they will continue to put pressure on Italy by preventing the ECB from swift action. Italy is dying, it needs the oxygen that only the ECB can provide, but Germany and France are staying the ECB’s hand. By depriving Italy of the help that they so desperately need, they are taking a huge risk. A dying man is a desperate man, and he will find a way to prevail, by any means necessary. For Italy, that could mean turning its back on the Eurozone.
Here’s what I believe needs to be done in order to resurrect the economies of the periphery. The ECB must ease, by a massive amount – perhaps by as much as €2.5 trillion. That would result in a massive devaluation of the euro, to be sure, but it would allow the peripheral states to recover their export industry, and cut their respective deficits through growth.
I don’t think the rich Eurozone nations understand that you can’t cut through a deficit without growth. It’s like digging in the sand; peripheral economies would just sink lower and lower, until there was no way out.
How could I not be disappointed when the Eurozone’s key leadership, Germany’s Angela Merkel and France’s Nicolas Sarkozy, failed to draw a distinction between pure economic decisions and political decisions? They talk about a smaller European Union with the same conviction as they touted a haircut on Greek debt. And look at where we are now – Italy is left hanging with a better than 7 per cent yield. Evidence that in the Eurozone it’s politics first, stability later.
It’s time for the ECB to stop playing favourites. We need bazooka-like assistance, right here and right now, the periphery needs to know that for them, it’s sink or swim time, because this boat is full of holes.
Italy’s precarious position is what pushed me over the edge. I realize now that the window for the Eurozone’s survival is shutting, and the time is quickly running out before its slammed shut for good.