Europe's Not-So-Cunning Rescue Plan
Wall Street Journal Europe
I am pleased to announce that I will be buying €1 trillion of bonds issued by
euro-zone governments. Well, not buying them—guaranteeing that anyone with the
courage to do so won't suffer the first tranche of losses should things turn out
less well than trumpeted by the team of Angela Merkel and Nicolas Sarkozy. I
suppose I should mention that I don't actually have €1 trillion ($1.37
trillion). But fear not: I plan to make a deal with the Chinese. In return for
their financial support I will promise never, ever to take tea with the Dalai
Lama, to stop complaining about their currency manipulation, and to abase myself
in any other way they deem appropriate.
That position of servitude creates a small problem.
Jean-Claude Juncker, president of the Euro Group, has announced that Europe will
not make political concessions in return for investment in the bailout fund
because "we do not assume we have to give China something back." His view is
echoed by German Finance Minister Wolfgang Schäuble. But this presents no
problem for me: In the tried and true tradition of euro-zone pronouncements, I
will simply announce that my arrangement with the Chinese involves only decent
reciprocity, and can't be defined as political concessions as the term is used
by Messrs. Juncker and Schäuble.
One more hurdle. Chinese President Hu Jintao is
unenthusiastic, as he is making clear on his current visit to Europe with a
160-person trade delegation intent on learning more about European green
technology. When Mr. Sarkozy's beggar-in-chief, Klaus Regling, head of the new
bailout fund, flew to Beijing to propose that China chip in a mere €100 billion
from currency reserves equal to over €3 trillion, he was told by Vice Finance
Minister Zhu Guangyao not even to put a possible role for China on the agenda of
the G-20 meeting Thursday and Friday in Cannes.
If necessary, I might raise some cash by creating
special investment vehicles (the very instruments Europeans railed against
Americans for creating) to borrow money to lend to already deeply indebted
countries. Just how more borrowing can solve the problem of excessive borrowing
remains unexplained, as does how Greece can avoid default when the write-downs
agreed by the banks will leave Greek debt at 120% of GDP in 2020. Greeks may be
angry, but they aren't stupid. Seeing default as inevitable—and assuming the
government doesn't fall first—they just might use the referendum called by their
prime minister to tell Merkel, Sarkozy & Co. to take their austerity program
and … well, move it to Paris.
Doubt any of this and consider the reaction of the
markets. After a bout of euphoria, bond investors realized they had been taken
on a tour of the financial equivalent of a Potemkin village. The bailout fund,
the European Financial Stability Facility, neither shocked nor awed the markets:
no one knows where the €1 trillion is to come from. No surprise, then, that
yields on Italian and Spanish bonds rose despite continued purchases by the
European Central Bank. The bond vigilantes just don't believe that Italian Prime
Minister Silvio Berlusconi, faced with a fractious parliament, can deliver the
reforms he has promised, and drove the yield on Italian five-year paper to its
highest level since the euro was born in 1999.
Nor do any serious observers believe that the plan to
recapitalize Europe's banks to strengthen them against haircuts such as the 50%
reduction in the value of sovereign debt "voluntarily" agreed by euro-zone banks
is more than smoke and mirrors. The banks have announced they can meet the new
capital requirements by trimming dividends and bonuses, asset sales, and by
internal balance-sheet shuffling. No capital-raising necessary. The banks are
helped, of course, by the fact that European regulators have set the goal at
€106 billion, rather than the €200 billion-€300 billion many analysts suggest
the banks need.
More important than the financial shell game being
played by euro-zone politicians is the statement by Simon Henry, chief financial
officer of Royal Dutch Shell PLC, and by the reaction of the rating agencies.
Mr. Henry says his company is less concerned about the sturm und
drang associated with the so-far fruitless hunt for real money to bail out
troubled countries and banks than about the Europe's competitiveness. The
problem of excessive debt, he argues, "can only be addressed by underlying
economic growth, and we do not see the European Union creating the conditions
for that, in fact quite the opposite."
He is, of course, more than a little annoyed at France's
decision to ban hydraulic fracturing to extract shale gas and, he might have
added, thwarting a longer-term plan to bring down energy costs and reduce
reliance on Vladimir Putin's Russia.
Lurking in the wings are the rating companies, their
sights now set firmly on France, which hasn't had a balanced budget in more than
30 years.
One day after the euro-zone summit, Mr. Sarkozy lowered
the official forecast of his country's 2012 growth to 1% from an already-measly
1.75%. With a disapproval rating of 69%, and trailing François Hollande, the
Socialist candidate, by 20 points in the polls, Mr. Sarkozy is desperate to
retain France's triple-A credit rating. But by agreeing to participate in
guarantees for weaker nations' debt, Mr. Sarkozy has almost certainly has
invited a downgrade.
Irwin Stelzer is a Senior Fellow and Director of
Economic Policy Studies for the Hudson Institute. He is also the U.S. economist
and political columnist for The Sunday Times (London) and The Courier
Mail (Australia), a columnist for The New York Post, and an honorary
fellow of the Centre for Socio-Legal Studies for Wolfson College at Oxford
University. He is the founder and former president of National Economic Research
Associates and a consultant to several U.S. and United Kingdom industries on a
variety of commercial and policy issues. He has a doctorate in economics from
Cornell University and has taught at institutions such as Cornell, the
University of Connecticut, New York University, and Nuffield College,
Oxford.
No comments:
Post a Comment