Overcoming Crisis in Europe
Peter O’Shea
Monash University, January 2013
What Sort of Crisis?
• Is it really a euro crisis? It
wasn’t a problem when
economic growth was strong in
mid 2000s. Yet debt was high
then.
• Slovakia, Germany and Estonia
among the eurozone states,
with GDP in 2011 above 3%.
• Devaluation: exportdependent countries like
Germany owe countries like
Greece a huge favour
Govt, Household, Financial Sector
Debt in Largest Economies
Source: McKinsey, Q2, 2011
Note: Asset-backed securities are removed from McKinsey data since underlying mortgages and
other loans are already included
Unity: At what price?
• The countries with the biggest deficit
problems are Ireland (-13.4%), Greece and
Spain (both -9.4%), or the UK (-7.8%). Only
Sweden, Hungary and Estonia are in surplus as
at October 2011.
• Instead it’s a crisis of unity: what price are the
wealthier countries willing to pay to have a
long-lasting and sustainable peace in Europe?
Risk of Default
Why the focus on Europe?
Because it’s an incomplete union.
Why a euro exit is unlikely
• The consequences of exit would be far worse
• There are other solutions to avoid default since as
forced debt writedowns in 2011 and the debt
restructuring in 2012
• The EU has deep pockets, such as the collective
gold reserves, collective cash reserves, enormous
unmobilised private savings reserves throughout
the EU but particularly the north
• Plus the ECB’s reserves – with long overdue bond
buying activity of late
The EU’s Policy Response
• Financial Stability and Loan Assistance
- The Greek Loan Facility
- The EFSM & EFSF – soon to be ESM – in
Luxembourg (which can be seen from Germany!)
- Some facts: no member state has given any funds
to the facilities – they are all loans
-Money is raised via bonds, guaranteed by
states, only in default do states pay up
-EFSM funds guaranteed by the EU budget,
also IMF funds and some bilateral
-You can buy bonds on the Luxembourg stock
exchange
-No different from lending through EIB or IMF
Fiscal Coordination
A logical step if union is to complete
The Treaty on Stability, Coordination
and Governance in the Economic
and Monetary Union ….
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Closer coordination of state fiscal policies
Closer Cmn oversight of state budgets
Reinforced deficit and debt levels
A penalty mechanism
Will it work? All based on peer pressure
Growth pact and growth targets - Hollande’s re-election?
Financial Regulation
• Banking supervision overhaul
• A big problem earlier identified with the crisis
• Regulation of everything from derivatives,
directors’ pay, credit ratings agencies, hedge
funds, credit default swaps, banking prudential
requirements
• Ring-fencing of banks – commercial and retail
separation – the UK cannot believe the EU is so
slow
• Moves to banking union – ECB as supervisor and
maybe deposit guarantee scheme
The Real Problems
• Unemployment – no action
• A failure to stimulate
innovation – R&D funding
down, the EIB and EIF require
co-financing and prohibit profit
• A chronic and long overdue failure to reform welfare and
other government spending (excruciatingly slow and
seemingly impossible
• Anti-business sentiment, particularly in France –
manufacturers (and millionaires!) don’t want to go near
it for fear of being nationalised
• … let alone venture capital firms
Tax Havens
• HNWIs had hidden $21 trillion of unreported
private financial wealth in tax havens in 2010
• The size of the United States and Japanese
economies combined !!
• Could have generated tax of
US$190-280 bn
• More than the EU budget for
2012 of €129.1 billion and could
chop Greece’s debt in half (total
debt $399.3 billion in 2011)
EU efforts uncoordinated
• The UK versus the EU, with Switzerland in the middle
• Liechtenstein, Andorra, San Marino, Monaco … why?
• The globalisation of banking and finance, OFCs onbalance sheet assets at US$4.6 trillion
• Some so-called legitimate – better regulation, better
protection, services etc – but a lot of it is not
Tax evasion too
• Cost of tax evasion – including avoidance of
tax or social security contributions by
individuals or companies — $3.1 trillion every
year
• Addressing these would solve many of the
EU’s “financial” and “euro” problems … or
those of the less needy
A Solution?
• Can the EU step back? Does it really want to? Do
the people really want to go back to pre-war
nation states?
• A “structural” overhaul… a constitution with
separation of federal and state powers (clear),
with the ECJ to adjudicate
• Is the popular democratic problem really that
insurmountable? … more than half way there
• Greater fiscal union, tax independence, cultural
independence
• Even the UK could join later
• … but no more principalities