Sony: Nice to see you Barry, let’s jump straight into it. What would you say is the state of play in the Eurocrisis?
Barry: European officials and leaders were telling us at the beginning of the year that the crisis was over. I doubt that most people believed them, although the markets were surprisingly sanguine for a time. None of the underlying problems had or have been solved; even before the fiasco surrounding Cyprus it was clear that the crisis would to be back. There had been no real re-balancing within Europe, no progress on banking union, and no agreement on limited fiscal union. So, I do not think anything has been solved, which renders me more pessimistic with the passage of time.
My view has always been that there would be no Eurozone collapse. At the same time I see no signs of a miraculous resumption of growth. Ruling out these alternatives leaves only the option of a lost decade in Europe, as the member states stumble towards deeper integration. But increasingly I worry that the political system cannot support a lost decade.
This appeared as a Comment piece in the Observer (Guardian) on 11th December
EU leaders promised to stop Europe’s spiral into economic oblivion. They needed to immediately restore confidence in the solvency of Spain and Italy, urgently take steps to kick start growth and credibly commit to changes addressing the institutional weaknesses of the Euro area. They failed on all three fronts and are now almost out of time.
Given the inability of EU leaders to tackle the problems of Greece, a small economy, investors have been losing faith in their ability to support the much larger economies of Spain and Italy that faced economic problems. This has driven up the borrowing costs to unsustainable levels. Unless policy makers can demonstrate how troubled EU economies could meet their borrowing needs at non-penal interest rates, the crisis would continue to deepen.
Europe’s dance of death between sovereigns and banks has now turned frantic and much more dangerous. Troubled countries, such as Italy and Spain, continue to weigh their banks down. Growing problems in French, Cypriot and Belgian banks are putting pressure on the countries.
As Mohamed El-Erian argues, action is needed on multiple fronts to stem the worsening crisis but I don’t fully share his priorities.
Given how important additional ECB support is to helping stem the panic in the Euro crisis at this stage, it is useful to look at how much it would actually help. An increasing number of shrill commentators have been implying that enhanced intervention from the ECB may be a 'silver bullet'. It will be no such thing. We at Re-Define have been calling for the ECB to do more since before this call became fashionable but we have no illusions about what such an intervention can achieve.
Having brought Europe to the brink, EU leaders must now pull us back. They face the near impossible challenge of meeting the sky-high market expectations while operating within severe financial, political and time constraints, all of their own making. They owe it to Europe to pull a rabbit out of the hat now, but are incapable of pulling this off.
The economic problems facing the Eurozone were big but solvable within the political space available. With procrastination problems have grown and pettiness and parochialism has shrunk political space to a point where sensible economic decisions no longer seem possible. Bad politics has driven bad policy which in turn has made the politics even more fractious. For the sake of Europe, our leaders must act now or die (politically) trying.