Eurozone crisis

Standard and Poor's has threatened to downgrade the rating of 15 Eurozone countries, including Germany. This, without doubt, would have serious implications on their cost of borrowing with negative implications on the euro bailout fund as well. The pressure to find a lasting solution to the crisis has thus escalated. While there is a consensus that the collapse of the euro would have negative implications on the global economy with Barack Obama acknowledging that the eurozone poses the greatest risk to US well-being and the Asian markets jittery over the success of the ongoing discussions over the likely solutions, yet the two largest economies in the Eurozone - Germany and France - are not yet in agreement on the best way forward. Germany has categorically refused to heed French calls for increasing the Eurozone rescue fund, or issuing Eurobonds or indeed pressurising the European Central Bank to purchase bonds. More recently, Germany's Merkel and France's Sarkozy do appear to be on the same page with respect to pushing for draconian penalties on Eurozone countries that fail to meet their budget deficit targets, which in turn, would require empowering Brussels to monitor national budgets and automatically initiating penalties for those who fail to meet their targets. The loss of sovereignty such a measure entails may not be acceptable to the governments and public of several Eurozone countries and may necessitate a referendum. Merkel has also talked of fiscal union which would require Brussels to impose similar taxes on countries that are at markedly different stages of development with different industrial bases - a challenging if not impossible task to say the least. Meanwhile, there has been agreement on the next tranche of loans for Greece to avoid an imminent default, however the critical issue of where additional resources would come from has been left vague. So far the solutions do not appear to take account of the wishes of the people of the debt-ridden Eurozone countries. In Greece, where the democratically-elected government was replaced by technocrats, the initial public acceptance of a host of reforms appears to have whittled away as public protests have once again hit the streets. In Italy, too, the much-maligned but democratically elected government of Silvio Berlusconi has been replaced by technocrats and there is already concern that the belt-tightening reforms are unlikely to find a welcome chord with the public. While Pakistan in terms of the debt-to-GDP ratio has yet to reach the levels currently in some Eurozone countries, yet we have been subjected to technocrat governments in the past and our experience suggests that decisions by non-representative governments are easily overturned by those who represent the will of the people. Perhaps in acknowledgement of this the European Union summit scheduled for 8th and 9th of December (today and tomorrow) is expected to focus on recommendations contained in a report submitted by the chairman of the EU Summit Herman Van Rompuy. The report suggests moving towards an economic union to match the monetary union that already exists and includes: (i) stronger budgetary discipline consisting of swift financial sanctions for breaking rules that would necessitate reinforcing automatic sanctions for eurozone countries running budget deficits above the EU limit of 3 percent of GDP, and for those with deficits higher than the 3 percent limit the European Commission and eurozone finance ministers could request for changes in the draft budget before it is submitted to the national parliament if the draft is not in line with agreed plans. Additionally, if a eurozone country receiving bailout loans persistently does not meet agreed conditions, the Commission could get exceptional powers of ex ante approval of all major economic reforms; (ii) eurozone countries could use the possibility of enhanced co-operation, provided by the current treaty, to take steps towards closer integration of labour markets, pension and social security system sustainability and pragmatic tax co-ordination and open the possibility to move, in the long-term, towards joint debt issuance - or eurozone bonds; and (iii) EU leaders and the European Parliament should agree before March 2012 to give the European Commission more intrusive powers of budgetary control and linking bailout loans with very close monitoring of eurozone economies and rapid deployment of the leveraging options for the eurozone bailout fund, the European Financial Stability Facility (EFSF), under the partial insurance scheme for primary market bond buying and the co-investment scheme. It remains to be seen if Eurozone national governments or people would accept ceding their sovereignty to Brussels in this way. However it is unlikely that the people would quietly allow their governments to socialize public debt given that the prevailing sentiment is that the beneficiaries were the politicians, the rich and the influential while it is the public, the common man, who is being asked to pay the cost. Political unity is still too far away. Copyright Business Recorder, 2011