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Main Content
Can Eurozone Countries Be Allowed to Go Bankrupt?
Chancellor Angela Merkel was right after all, only she should be more careful in the future. This seems to be the half-veiled warning behind the ruling handed down by the German Constitutional Court last Wednesday.
Germany’s contribution to the European Financial Stability Facility was lawful, but should other bailouts appear on the horizon it will be down to the Bundestag to give the green light in cases of large expenditure.
The ruling comes as an admonition to all those who assume that Germany’s economic might can automatically save the euro if there is the political will to do so. Germany’s strength is not unlimited and its taxpayers should not shoulder endless costs and liabilities to rescue countries that reverted to carelessness in managing their finances straight after they had made it in the euro club.
However, the conscious choice not to let the countries in southern Europe go bust implies Germany and the wealthy nations of northern Europe will be footing the bill of the rescue package under the motto ‘integration, integration, integration’. The eurozone crisis and the dark cloud forecast by frantic financial markets are finally pushing the powerhouse of the continent to take steps to turn the monetary union into a fiscal union.
This is a highly sensitive subject since raising taxes on a European level will have two obvious consequences: first a big chunk of financial policy will become the prerogative of a new centralised European government (a Commission with reviewed powers which will be monitored by the European Parliament). Secondly massive income transfers will have to occur to make up for gaps between rich and poor regions on a continental scale.
Germans especially, regard the notion of a transfer union as blasphemy: they are willing to provide advice on best practices and transfer rules on fiscal discipline and labour reforms to help laggard countries to regain competitiveness in international markets. However they are not prepared to stand by and watch as their money flow southward ad infinitum.
And rightly so. On the one hand, history has taught us that often deprived regions prefer to rely on permanent subsidies rather than finding their way out of poverty. This has been the case of the former Eastern Germany which is still supported by the affluent Western Germany and of the Italian Mezzogiorno which has been heavily reliant on subsidies from the North for the past sixty years.
On the other hand, Germany and to a lesser extent France, will be asking southern European countries freedom to set the tone of their economic and fiscal policies in exchange for financial assistance. It could turn out to be a process very much alike that of the IMF when it dictates what economic behaviour a bankrupt country should adopt in exchange for funds to keep it afloat.
In a worst case scenario a fiscal union will herald for peripheral countries - such as Greece and Portugal and to a lesser extent Spain and Italy - an era of loss of autonomy and deindustrialisation. Their role reduced to that of protectorates, they will provide the industrialised core with raw materials, cheap labour, food and an outlet for products manufactured somewhere in Germany or Finland. At best they will see their tourism flourish and their shores and art cities bought over by swathes of wealthy northern Europeans.
Therefore the months to come will be of capital importance to find the right balance in the European architecture of the future.
Two elements need to be taken into account: the configuration of the European transfer system in terms of risk-taking and liabilities and the portfolio of contributors to the European Financial Stability Facility (EFSF).
Given that it has turned out to be far too easy for prodigal states to pass on their debts to the community and to endanger the very existence of the monetary union, the new arrangement should look like a federal system based on the Swiss model, where a taxpayer in Zurich is not responsible for the level of expenses of a taxpayer in Lugano.
Individual states would mainly be independent in making decisions on how to levy taxes and expenditures, while a low amount of Europe-wide taxes would provide for a minimum welfare standard throughout the continent such as unemployment benefits and medical care. Each country would remain responsible for its own debts. Those who will mishandle their finances will have to face the consequences, including introducing austerity measures on their population or in extreme cases file for bankruptcy (and leave the Euro for as long as it takes for their economies to reacquire competitiveness on the international markets).
The intrinsic flaw in the Maastricht Treaty and the Stability and Growth Path was the lack of political supervision. The convergence criteria were vague and no mention was made about structural strengths and weaknesses of countries, which permitted inefficient countries like Greece and Portugal to secure a place in the eurozone and to enjoy low interest rates which were set to suit the economic might of Germany.
With regards to the range of contributors in the European Financial Stability Facility, not only governments (that is taxpayers) should be involved in funding this expensive safety net for countries in financial trouble. If there is one thing that the economic crisis of the past few years has taught us is that risk has to go hand in hand with responsibility: in 2008 reckless banks plunged the world in a deep recession; those very same banks were bailed out by the governments who considered that failure of financial institutions would have brought general collapse, mass unemployment and social unrest.
If banks were made to contribute to fund the EFSF, for example through a financial transaction tax, this would establish a sort of reciprocity between governments and banks that would automatically regulate a financial sector which has gone wild for the past twenty years.
The major obstruction to a financial transaction tax comes from the Unites States and Great Britain who are all too aware that such an initiative might stunt the lavish lifestyle of the financial hubs of Wall Street and the City of London.
Most importantly countries in Southern Europe have to take charge of their fortunes and enforce a substantial shift in mentality. Germany and other successful countries can provide sound advice on financial discipline and industrial know-how, but the strength to turn things around and to implement long overdue structural changes has to come from the countries of the ‘olive zone’. There is potential for a new Mediterranean renaissance.
The alternative is one we can easily picture: bankruptcy in Greece, Portugal and later on Spain or Italy is bound to trigger not only the collapse of those countries but also the end of all the financial banks that are most exposed to their debts. Such a scenario will put the 2008 economic crisis into shade and will probably decree the end of the Western world as we know it.
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