Bowles: 'Saving the euro is paramount'
by Sharon Bowles
26 August 2011
The chairwoman of the European Parliament's Economic and Monetary Affairs committee gives her verdict on how the debt crisis has been handled, and where to go from here
Too little, too uncertain, too late: that has been the response of European Union leaders to the eurozone debt crisis. For me, the impossible is the failure of the euro – the costs on everyone are too huge. Unfortunately, short-sightedness and delay has neutered the measures taken at every stage, so now options thought among the more improbable have to be examined.
Looking back, I took a pro-active line pushing for more and quicker action, in both speeches and private meetings, in part because of an awareness of the conflicting views forming the headwind against which EU leaders have to move. The other part was market savvy, a factor distinctly missing in the undisciplined and varying messages of some eurozone leaders.
The United Kingdom also stayed too long on the sidelines saying "we are not at the centre of the problem; we are not in the euro". When chancellor George Osborne finally spoke out in support of the logic of closer fiscal union and eurobonds, it was not seen in Europe as impertinence. Many eurozone colleagues remarked to me that it was helpful; they were glad and wished it had been said sooner.
Even outside the eurozone we are intimately linked to the fate of the euro and other countries' sovereign debt through the interconnection of our banks with their banks and their sovereign debt. But while the City of London trembled, major UK news providers did not pick up on the warnings, not even when Mervyn King let it be known that the Bank of England was putting in place contingency plans.
More recently there has been up and down news coverage – in between phone hacking and riots – but the issue has not gone away, will not go away and is global just as Lehman was. Too much Western sovereign debt and lack of growth coupled with all the spare cash sitting in central banks of China and other upcoming countries is not a happy story.
At every layer we seem to have the same problem; that if we could take collective action and move available cash to where it is needed for the common good we can make it work. But against that all the instincts of individuals and countries pull to the opposite. We also have to face the fact that the fundamentals of running growth through debt – encouraged by giving debt tax privilege over income – have run up against the buffers.
In the UK our recovery would go better if there were more personal spending – I spend to save your job and help a better outcome for us both. But it is not happening; instead individuals follow personal prudence, paying down debt and saving for a rainy day. In the eurozone, Germany could use more of its strength to support eurobonds so it can keep its export machine churning. But the individual German worker has not had big wage rises and does not feel able to pay up at the personal level.
So where are we going with Europe's debt crisis? Some analysts say only a major disruption will resolve matters, as with Lehman: let it happen and mop up. Others suggest much larger sums in rescue funds to stabilise markets. Chancellor Angela Merkel will not give in yet, because German public opinion does not see a direct threat, which is wrong, and because genuine bailout via a 'transfer union' or eurobonds is no way to guarantee future fiscal probity – which is correct.
I had hoped that, at the July 21 leaders' meeting, a final big, workable mechanism would be agreed and I called it the last chance saloon. It did not go far enough, and is even being undermined now. I am not sure what comes after last chance saloon – it was not said lightly – but I fear the mop and bucket approach. Can we learn from analysis of the mistakes and see what improbables we have to ponder? The list of where they went wrong includes the saga of punitive interest rates – what was the point of rescue loans that were too costly to be sustainable for the payers and made a tidy profit for the rescuers? At least this was corrected in July.
Why is there a fixation on the European Financial Stability Facility, the rescue fund, having to be AAA-rated, just because some guaranteeing countries have AAA, which severely limits the deployable size of the fund. The extra cost of running on AA would have been small (Japan does okay on AA-) and was in any event dwarfed by the punitive interest rates. A switch now would allow much more of the fund to be deployable, but as we are later down the track it may also need more resources.
The demands in markets for up to €3.5 trillion is too much; €1 trillion deployable was a minimum that might have worked in January. Possibly an AA fund and continued European Central Bank intervention and recapitalisation might be enough. There are certainly some 'improbables' to examine here, including extension of the role of the ECB and challenge to the 2 per cent inflation target, but saving the euro is paramount.
Why was the smaller €60bn fund run from the EU budget not maintained as a rapid deployment fund – with reimbursement from the more cumbersome EFSF? Too late to fix, but the lesson here is surely that the EFSF procedures must be streamlined; markets just do not wait for months at a time. Frankly, it does show the superiority of having an institutional approach rather than intergovernmental ones, so roll on the ECB action.
Why are bondholders and banks still being protected if the end result brings everyone down anyway? Maybe I will throw in here the current round of requests for collateralisation for guaranteeing member states. The resources of the EFSF are scarce enough; double and treble dipping by using up loans as collateral, whether that be for a guaranteeing state or to back up repo facilities for banks at the ECB, just looks inefficient.
The alternative improbable is a eurobond, ideally with some differential to address the moral hazard of rewarding profligacy. Accompanying that, of course, will come some greater fiscal integration and a further project to ensure the integrity of the EU and the single market is not undermined by eurozone intergovernmental procedures.
Sharon Bowles is chairwoman of the European Parliament's Economic and Monetary Affairs committee and an MEP for the south east of England
Too little, too uncertain, too late: that has been the response of European Union leaders to the eurozone debt crisis. For me, the impossible is the failure of the euro – the costs on everyone are too huge. Unfortunately, short-sightedness and delay has neutered the measures taken at every stage, so now options thought among the more improbable have to be examined.
Looking back, I took a pro-active line pushing for more and quicker action, in both speeches and private meetings, in part because of an awareness of the conflicting views forming the headwind against which EU leaders have to move. The other part was market savvy, a factor distinctly missing in the undisciplined and varying messages of some eurozone leaders.
The United Kingdom also stayed too long on the sidelines saying "we are not at the centre of the problem; we are not in the euro". When chancellor George Osborne finally spoke out in support of the logic of closer fiscal union and eurobonds, it was not seen in Europe as impertinence. Many eurozone colleagues remarked to me that it was helpful; they were glad and wished it had been said sooner.
Even outside the eurozone we are intimately linked to the fate of the euro and other countries' sovereign debt through the interconnection of our banks with their banks and their sovereign debt. But while the City of London trembled, major UK news providers did not pick up on the warnings, not even when Mervyn King let it be known that the Bank of England was putting in place contingency plans.
More recently there has been up and down news coverage – in between phone hacking and riots – but the issue has not gone away, will not go away and is global just as Lehman was. Too much Western sovereign debt and lack of growth coupled with all the spare cash sitting in central banks of China and other upcoming countries is not a happy story.
At every layer we seem to have the same problem; that if we could take collective action and move available cash to where it is needed for the common good we can make it work. But against that all the instincts of individuals and countries pull to the opposite. We also have to face the fact that the fundamentals of running growth through debt – encouraged by giving debt tax privilege over income – have run up against the buffers.
In the UK our recovery would go better if there were more personal spending – I spend to save your job and help a better outcome for us both. But it is not happening; instead individuals follow personal prudence, paying down debt and saving for a rainy day. In the eurozone, Germany could use more of its strength to support eurobonds so it can keep its export machine churning. But the individual German worker has not had big wage rises and does not feel able to pay up at the personal level.
So where are we going with Europe's debt crisis? Some analysts say only a major disruption will resolve matters, as with Lehman: let it happen and mop up. Others suggest much larger sums in rescue funds to stabilise markets. Chancellor Angela Merkel will not give in yet, because German public opinion does not see a direct threat, which is wrong, and because genuine bailout via a 'transfer union' or eurobonds is no way to guarantee future fiscal probity – which is correct.
I had hoped that, at the July 21 leaders' meeting, a final big, workable mechanism would be agreed and I called it the last chance saloon. It did not go far enough, and is even being undermined now. I am not sure what comes after last chance saloon – it was not said lightly – but I fear the mop and bucket approach. Can we learn from analysis of the mistakes and see what improbables we have to ponder? The list of where they went wrong includes the saga of punitive interest rates – what was the point of rescue loans that were too costly to be sustainable for the payers and made a tidy profit for the rescuers? At least this was corrected in July.
Why is there a fixation on the European Financial Stability Facility, the rescue fund, having to be AAA-rated, just because some guaranteeing countries have AAA, which severely limits the deployable size of the fund. The extra cost of running on AA would have been small (Japan does okay on AA-) and was in any event dwarfed by the punitive interest rates. A switch now would allow much more of the fund to be deployable, but as we are later down the track it may also need more resources.
The demands in markets for up to €3.5 trillion is too much; €1 trillion deployable was a minimum that might have worked in January. Possibly an AA fund and continued European Central Bank intervention and recapitalisation might be enough. There are certainly some 'improbables' to examine here, including extension of the role of the ECB and challenge to the 2 per cent inflation target, but saving the euro is paramount.
Why was the smaller €60bn fund run from the EU budget not maintained as a rapid deployment fund – with reimbursement from the more cumbersome EFSF? Too late to fix, but the lesson here is surely that the EFSF procedures must be streamlined; markets just do not wait for months at a time. Frankly, it does show the superiority of having an institutional approach rather than intergovernmental ones, so roll on the ECB action.
Why are bondholders and banks still being protected if the end result brings everyone down anyway? Maybe I will throw in here the current round of requests for collateralisation for guaranteeing member states. The resources of the EFSF are scarce enough; double and treble dipping by using up loans as collateral, whether that be for a guaranteeing state or to back up repo facilities for banks at the ECB, just looks inefficient.
The alternative improbable is a eurobond, ideally with some differential to address the moral hazard of rewarding profligacy. Accompanying that, of course, will come some greater fiscal integration and a further project to ensure the integrity of the EU and the single market is not undermined by eurozone intergovernmental procedures.
Sharon Bowles is chairwoman of the European Parliament's Economic and Monetary Affairs committee and an MEP for the south east of England
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