Overcoming Crisis in Europe - Arts Online - Monash University

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					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
• Slovakia, Germany and Estonia
  among the eurozone states,
  with GDP in 2011 above 3%.
• Devaluation: export-
  dependent 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
                 -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 ….
•   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
• Ring-fencing of banks – commercial and retail
  separation – the UK cannot believe the EU is so
• 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 on-
  balance 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
• 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
• Even the UK could join later
• … but no more principalities

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