The EU is trying to solve a different crisis
Europe has a banking crisis, not a wages crisis - EU Observer Op-Ed by Sony Kapoor
EUOBSERVER / COMMENT - To a hammer every problem looks like a nail. EU leaders are once again proposing familiar solutions driven more by what is possible, even convenient, than by what the problems actually are.
Given that recent rhetoric has almost exclusively been about competitiveness fiscal and sovereign debt problems, one could be forgiven for having already forgotten that this was first and foremost a financial crisis.
At their summit today, EU leaders will discuss the outlines of a so called comprehensive deal that will address the on-going crisis in the EU now and forever, or so they tell us. The main focus of this deal is fourfold. A primary focus is fiscal retrenchment where promises will be made to cut expenditures and bring deficits under control. This will be supplemented by stronger sanctions under the stability and growth pact and a debt brake – a legally binding limit on deficit spending. Having failed to tackle the problem of destabilising leverage in the financial sector they are now focusing on fiscal straitjackets that will dampen already anaemic growth. Do they know where growth will come from? Have they thought through how further restrictions on policy space in the EU may result in more financial instability?
Another main focus of the deal is the so called competitiveness pact that is basically about wage restraint for blue collar and public sector workers with some lip-service paid to productivity and employment.
As I remember it, excessive and badly designed compensation structures in the financial sector were major factors in the financial crisis. Having failed to address that (bonus levels are back to pre-crisis levels), our dear leaders are focusing on squeezing workers' wages instead. Have they considered indexing banker bonuses to growth in productivity or real contribution to the economy?
When the opportunity presented itself, our leaders chose to hide rather than tackle problems in their banking systems. As a result, the EU was unable to act decisively to tackle Greek debt problems. German and French banks that held large amounts of Greek bonds were too weak to share the burden of adjustment with Greek taxpayers. In a manner akin to Mubarak blaming the ‘foreign hand' for street protests in Egypt, our leaders found it easier to blame lying Greeks and lazy Italians rather than own up to the black holes at the centre of their own banking systems.
The re-designed stress tests, another part of the comprehensive deal, will continue to perpetuate the myth of a healthy German and French banking system. Have our leaders thought how this smoke and mirrors exercise undermines public trust and market confidence in the EU?
A final part of the package deals with increasing the size of the European Financial Stability Fund to the size promised a whole year back but does nothing to address its deeply flawed design. Also in the package is a plan for a permanent European Stabilisation mechanism that is only marginally better in design than the EFSF. Countries will get into financial trouble but the combination of high conditionality, inadequate financial support instruments and penal interest rates inherent in the package will not allow them to get out. Have our leaders got an exit strategy? Are they willing to accept losses on the EFSF or bilateral loans provided Greece and Ireland cannot afford to repay?
Two countries in Europe, Iceland and Ireland, have already been brought to their knees by banking systems that were far too big. Others such as the UK and Belgium have suffered large fiscal and economic costs due to troubles in their large banks. Yet, tackling the ‘too big to fail' problem is not even on the agenda in the EU. Are we going to allow the lobbying by large EU banks to bring even more countries to their knees in Europe?
The most effective way of restoring confidence in the EU banking system is to have rigorous and stringent stress tests, an EU wide moratorium on bonuses and bank dividends and allowing the use of EFSF funds for bank recapitalisation. The squeeze underway in Ireland and Greece that will immediately worsen their debt problems can no longer be ignored. Easing the terms of financial support and credible strategy to remove debt overhang will help revive these moribund economies. The success of a comprehensive deal rests on the ability of EU leaders to show that tomorrow will both be different and better than today. As things stand now it will be different but worse.
The writer is managing director of Re-Define, an international economic policy think-thank.