Summer pause gives time to rethink Eurozone’s problems

Olli Rehn, Vice-President of the EC in charge of Economic and Monetary Affairs and the Euro (on the right), received Jack Lew, US Secretary of the Treasury. (EC Audiovisual Services, Brussels).

The United States Secretary of the Treasury Jack Lew on his way back to Washington from the G20 meeting in Moscow made a stop-over in Athens on Monday to meet the Greek Prime Minister Antonis Samaras. Probably this is not major news. However, what Lew said under the Acropolis about his encounter with the German Minister of Finance Wolfgang Schäuble in the Russian capital, is surely of great interest.

Reportedly the American visitor told the Greek PM that Germany is expected to relax its austere attitude towards Greece and consequently vis-à-vis the entire southern Eurozone. Even if Schäuble didn’t say it straight away, the fact that Lew mentioned that to his host in Athens has its own value. The truth is that both Greece and Portugal have problems in applying their troika (European Commission – European Central Bank – International Monetary Fund) imposed austerity programmes while Italy’s fiscal performance is a big question mark for Brussels and Berlin. Eurozone is also in dire-straits with its banking sector, where the big lenders have to either cut down their size and assets or urgently find a hell lot of more good quality capital. Let’s take one thing at a time.

Fiscal deficits

Undoubtedly the summer pause will offer the opportunity to Eurozone’s decision makers to rethink the single euro money problems. The fact however that the euro appears unbending with the dollar and the rest of the major world currencies is an infallible sign that Eurozone is not cornered. As luxury is a standard in Europe, seemingly the old continent has also the luxury of more time to fix its imbalances.

As of mid-July, EU legislators abandoned Brussels and Strasbourg and returned to their constituencies. Before leaving though they told us that in September they will address the two burning Eurozone problems, that is fiscal excesses and bank supervision. The relevant Press release goes like that, “MEPs are taking a break from official meetings the coming weeks, but behind the scenes work will continue to prepare for important legislative files later this year. Parliament will have to decide on matters that will affect the EU and Europeans for years to come, such as the long-term budget, banking supervision, data protection and better protection for temporary workers”.

Of the issues mentioned above budgets and banking supervision are of key importance for the “years to come”. On both accounts the Parliament has shown a remarkable resilience and legislators have already accepted a tough Multiannual Financial Framework 2014-2020 for EU institutions’ spending. This seven years long EU budget comprises fewer resources than the previous one for the 2007-2013 period. In this way the EU Parliament has greatly contributed in cutting down government budget deficits all over the 28 membered EU.

Oversized banks

Passing to the issue of banking supervision, the Parliament has no reason to counter the supremacy of the European Central Bank. In reality this project is in a very advanced stage of implementation, with the ECB having been very active for quite some time now organising and manning its independent bank supervision department, after given the green light from the Council, the Commission and the competent Parliamentary committee. What is still pending for the realisation of the European Banking Union is the OK from Germany for the Bank Resolution Mechanism.

No doubt that the creation of the European Banking Union will herald a new era in European Union, probably not for all of its 28 member states. However for the 17 Eurozone countries which will all participate plus the willing of the other 11 member states, the banking union will be a giant step towards a common confrontation of both problems; the excess indebtedness of the southern part of Eurozone and the weak capital position of the banking sector. For one thing ECB’s supervision over banks will gradually cut off the umbilical cord between sovereign debt and national lenders, while the Bank Resolution Mechanism will take care of those financial firms which may prove not viable. Hopefully before the end of 2014 the EU Banking Union will be in place.

Greece and Portugal

The next crucial issue the EU has to confront from September onwards is obviously the political uncertainty and the weakness of Greece and Portugal in effectively controlling their government deficits and debts. The same is true for Italy and Ireland but in a much less urgent way. Not to forget that Italy has just exited the excessive deficit category after a ground-breaking Commission decision. As for Ireland, the country is judged by the troika of EC-ECB-IMF as effectively applying its fiscal consolidation programme and expected to be able to come out to the capital markets on its own account later on in 2013 or in early 2014.

In reality this arrangement leaves only Greece and Portugal in the red zone. In both countries the problems are twofold. On the one side, their political establishment seems impotent to plan a long-term exit from the fiscal deficits region. Secondly, there is a persistent tendency of more and more private debtors, households and business alike, being unable to serve their obligations. This is an obvious repercussion of the deep recession both economies are still in. In this respect the question that Brussels and Berlin face is what policy line to follow? Relax the austerity programmes or reinforce economic growth with more loan injections from outside sources like the European Investment Bank, the EU or direct aid from Germany? Up to now both methods are used, but in a restricted way.

The good side is that both countries taken together account for a very tiny part of Eurozone’s economy. If Eurozone didn’t face an acute banking problem itself, Greece and Portugal would have presented not a major issue. In any case after the German elections of 22 September, Berlin would have more manoeuvring space to tackle this matter and fortunately there is ample time for that.