Eurozone examines the prospect of issuing debt paper jointly

Olli Rehn, Vice-President of the EC in charge of Economic and Monetary Affairs and the Euro (on the left), received Andris Vilks, Latvian Minister for Finance. (EC Audiovisual Services).

Yesterday, Eurostat, the EU statistical service, confirmed with its usual second estimate that Eurozone’s economy contracted by 0.6% during the last quarter of 2012. This is not at all a small figure. Given that the Gross Domestic Product in the 17 euro area of 17 countries is close to €10 trillion annually, a 0.6% loss means that Eurozone citizens lost €60 billion from their gross earnings. Unfortunately, the loss of income means also loss of jobs. According to the same source, in January 2013 Euro area unemployment rate reached 11.9%, meaning that compared to January 2012, the unemployed people increased by 1.909.000.

As for the youth unemployment, it has already surpassed the alarm levels. In January 2013, 5.732.000 young persons (under 25) were unemployed in the EU27, of whom 3.642 million were in the euro area. The youth unemployment rate in January 2013 was 23.6% in the EU27 and 24.2% in the euro area, compared to 22.4% and 21.9% respectively in January 2012.

No need for someone to hold a doctorate degree in Economics to understand, that the repercussions of the financial crisis on the real economy are still taking their toll. It is also obvious that those repercussions are having a growing negative effect on incomes and jobs. It is also clear that the austerity measures applied in many Eurozone countries, are not only hampering their own growth potential, but through their reduced demand for consumption and investments they affect negatively the real economy of the entire Eurozone. It was for this reason that Germany lost 0.6% of its GDP during the last quarter of 2012.

Seemingly those developments have sounded the alarms in Brussels and in some other Eurozone capitals, including Berlin. There is no other explanation why in the Ecofin Council of 5 February, Ollie Rehn, the EU Commissioner for Economics, was positive over the introduction of some more policy measures in favour of the countries under troika programmes, namely Greece, Portugal and Ireland. To be reminded that those three Eurozone member states are applying draconian fiscal austerity programmes imposed by the troika of EU-ECB-IMF for three years now.

Rehn speaking during the Ecofin said “I am very pleased with the agreement today that the Troika should propose the best possible option for a potential adjustment of maturities for EFSF and EFSM loans for Portugal and Ireland”. In plain English, this is an announcement of the extension of their loans by 15 years. It is a giant step forward, towards the return of those two countries to a normal economic state and an earlier return to capital markets on their own account. Understandably such an extension of the loans which used to bail them out, means a lot. For one thing annual repayment instalments will be drastically reduced.

The next remark by this Commissioner, which can be translated as a relaxation of his so far severe attitude, is what he said about Estonia and Greece. Let’s follow him: “today we have seen another important development that is concerning Latvia’s interest in joining the euro. It is worth recalling that less than one year ago, the talk of the town was of Grexit, which is an ugly word for an uglier concept, namely the breakup of the euro area. Now, those fears have virtually or completely disappeared”.

The euro-bills

It was not only the above remarks however, that signified a clear change of Rehn’s stance, over the economic policies mix to help Eurozone regain a growth path. On this same occasion, Rehn opened the way for the issuance of a Eurobond, a much discussed proposal to help Eurozone out of its sovereign debt crisis, but blocked by Germany.

This last country never discussed the prospect of making the 17 countries’ sovereign debt anything close to remind of a commonly guaranteed obligation. Still Rehn said last Tuesday, ”As Minister Noonan explained, we made a commitment to set up an expert group to study partial replacement of national issuance of public debt and the focus will be on studying the preconditions for a redemption fund and/or eurobills. This group will be shortly set up and will involve experts in economics, public finance, law, financial markets, debt management. It will have the deadline of end of March 2014”.

Hallelujah! This is a good start. Presently, Greece is borrowing only with short-term bills. If Eurozone decides to undertake collectively this burden the country’s borrowing cost will greatly diminish. In any case, the Commission and behind it Berlin, seem to have understood that Eurozone is to live as an entity or it will disintegrate violently.