We did suggest at the end of last year that the euro zone's troubles may well linger on all through 2012, lurching from crisis to crisis, rather than be resolved with one definitive solution. After all, the euro project took years to bring to inception. Its problems can hardly be expected to be resolved in a mere two years, can they?
The fear remains that the markets will force an outcome. Negotiations on resolving the Greek debt problem rumble on, as there is an issue (still!) on how much of “voluntary” loss creditors are willing to take. The next crunch deadline, good until the one following that I presume, is now 20th March when a bond repayment is due from the Greek sovereign.
None of this actually solves the key problem. The first mistake was to try to arrange a voluntary haircut in the first place, when the Greek government should simply have defaulted. That of course would have triggered credit default swap payments, but as that is what the CDS market is supposed to do – cover default risk – this shouldn’t have been seen as the great bogey man that it was. But leaving that for now, let's assume that the creditors do agree some form of restructuring; are we good to go?
Not by a long shot. As The Economist states this week, “Greece will need propping up for a long time.” If international investors get heartily sick of the euro, Ireland and other periphery euro zone countries may find that their debt becomes difficult to roll over too.
It all gets back to the same thing: fiscal union. Or some form of central budgetary authority. That line in The Economist makes clear that fiscal transfers will need to be made from the northern to the southern euro zone. That’s how monetary unions work, except it raises less taxpayer ire when the transfer is from the US Federal government to Louisiana, or from the UK government to the North East, compared to a transfer from Germany or Holland to Greece or Portugal.
And in the meantime we must kick the “orderly withdrawal from the euro” solution into the long grass. It’s just not feasible. The instant a country announced a withdrawal, there would be a run on its banks which would precipitate an EU-wide bank crash. And the world can’t wear that because this time governments don’t have the funds or borrowing ability to nationalize the banks again. It would be a complete disaster.
For the euro to be long-term viable, governments can only spend what a euro zone central budget-setting authority approves, or otherwise cut their spending. “Cut spending” is the short way of describing painful structural reform and lower welfare expenditure. That will not be easy. But when the money has run out, what alternative course of action is there?
And to think we wouldn’t be in half this trouble if all EU countries had simply retained their own currencies in the first place.
The author is Professor Moorad Choudhry, Head of Business Treasury, Global Banking & Markets, Royal Bank of Scotland. The views in this article represent those of Moorad Choudhry as a private individual, and do not represent the views of Royal Bank of Scotland or of Moorad Choudhry as an employee of Royal Bank of Scotland