Eurozone summit hype is at odds with reality
- 10 July 2012
So we start today with the latest Eurogroup summit grabbing some of the news headlines. However before I dip into the details and indeed flaws exposed let us look for the usual hype that accompanies such agreements. We do not have to look far as we find it in the first line of the Eurogroup Statement:
In line with the Euro Summit statement of 26 October 2011, the Eurogroup will prepare the Euro Summit meetings and ensure their follow-up.
As we consider that “follow-up” is invariably exactly what they have not done this is not the best start! And of course it becomes a candidate for my financial lexicon. And somewhere in an alternative universe or as Star Wars put it “in a place far far away” these next two points may seem reasonable too:
…ever closer coordination of economic policies
…financial stability in the euro area
Meanwhile in the real world economies diverge even more widely and the Euro area could not be less stable without actually breaking up! Perhaps this is a scientific experiment to examine the dangers of sleep deprivation…
What did they say?
There was an admittal of reality here:
The Eurogroup supports the recently adopted Commission recommendation to extend the deadline for the correction of the excessive deficit in Spain by one year to 2014.
Actually the chances of Spain achieving the target (budget deficit of 3% of Gross Domestic Product) in 2014 are not that high but they are better than the zero chance that 2013 has. The problem remains the weakening trajectory of her economy as falling GDP raises the deficit and reduces the GDP you divide it by. If you want a case study of what a disaster that can be then Greece has provided it.
Only yesterday I discussed the promises made by Presidents Barross and Van Rompuy on the 24th of May that economic growth would be a priority at future summits. It must have slipped their mind last night as the subject is not mentioned in the statement.
It now seems clear that the bailout of Spain’s banks will come from the European Financial Stability Facility or EFSF, or my unstable lifeboat. They seem determined to drive it forwards into a zone where it could easily founder. At least for now it appears that it will only have to provide some 30 billion Euros which it might manage with the help of the European Central Bank. Although a central plank in a successful bailout has been broken already as admidst the hype they have forgotten that you should start with too much ammunition rather than too little. You might have thought that they would have learnt from making this mistake before (Greece, Ireland, Portugal…).
Also if you praise Ireland as “well-performing” then it is very noticeable if you do not describe Portugal as such! And of course we are back to that Orwellian phrase “on track” with all of the disturbing implications that it has come to represent.
Confusion over sovereign liability remains
During this process I have found myself in a lonely position arguing that if a country borrows money then in general it should count against its national debt. Many bought the hype that it could somehow be invisible and/or ignored. With thanks to the Wall Street Journal for its interview I present the words of the German Finance Minister Wolfgang Schauble who illustrates the inconsistency of such an argument:
We expect that the final liability of the state will remain.
It might look as if he fully agrees with me with those words but not quite as he goes on to say that apparently you can be liable for something that does not count. Sounds like a politician’s fantasy world doesn’t it?
Let us now move to economic reality
Today has brought us some update on the economies in the Euro area as we have seen industrial production figures released. Let us examine them.
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