"Euro periphery" needs investment

Submitted by Matthew on 20 July, 2011 - 9:46

George Irvin is a professor at the School of Oriental and African Studies in London, and author of Super rich: the rise of inequality in Britain and the United States. He spoke to Solidarity about the new stage of the eurozone crisis created by the jump, from 8 July, in the interest rates that Italy has to pay to sell bonds (IOUs) on world markets.


Eurozone politicians have been so slow to react that the bond markets are rightly worried about the poor and inadequate nature of the response.

Bond markets a few months ago worried about excessive deficits and high public debt-to-GDP ratios. Now bond markets are starting to worry about poor economic performance and economies being squeezed. They're worried that fiscal austerity will slow growth to such an extent that the debt to GDP ratio will have to increase.

The current row between Merkel [the German chancellor] and the European Central Bank (ECB) over the issue of whether private banks should take a haircut is a sideshow. It doesn't begin to resolve the problem.

The ECB has to buy more national bonds, there has to be a much greater bailout facility, and the ECB has to find a way of issuing jointly-backed euro-bonds.

The Germans banned euro-bonds from being built into the original architecture, so the ECB can't issue its own bonds.

The irony of that is that if a euro-bond could be devised quickly and sold on international markets, it would be enormously successful. The euro has not become a major world currency because it's so difficult to get hold of in the form of bonds. You can only hold national, not European, euro-bonds.

But when the German and French finance ministers meet they will be discussing not that but the same old argument about whether private banks should take a haircut [agreed cut in what's repaid to them on the bonds they hold], or whether the ECB is right and a haircut on the part of the banks will prompt Greece to default.

There's a perfectly sensible argument for Greece to default and leave the eurozone given the political constraints on it. Greek labour is being asked to pay enormously for a debt it had little part in creating.

But on the other hand, the cost of default might be enormous and much of that cost might fall on Greek labour as well.

If Greece defaults in an uncontrolled way, then its entire banking system will collapse. The assets held by the Greek Central Bank are mainly Greek euro-bonds; thus a default on those euro-bonds would its banking system will have no assets. Even if a new drachma could be put in place within 48 hours---which would require something of a miracle---it would immediately lose value.

The Greek Central Bank doesn't have the reserves necessary to prevent an immediate collapse in value of a new drachma. The collapse would make imports two, three or four times more expensive and ordinary Greeks have to buy imported food and imported clothing. Default would not be painless for ordinary Greeks.

Anyone who currently has debts denominated in euros would find those debts doubling or trebling when denominated in new drachmas.

Many Greeks who have taken out mortgages in euros would find themselves attempting to pay off mortgages which had become effectively unserviceable.

The left needs to make two arguments. In the very short term we should argue for European authorities to buy up Greek euro-bonds, assume Greek debt, and issue a Europe-wide bond.

The larcenous interest rates that Greeks are being asked to pay on the loans from the European stability fund should be reduced. They're being asked to pay over 5%, and the Germans can borrow money on the international market at less than 3%. It's not German taxpayers who're paying Greece. The money's flowing the other way.

In the longer term, the eurozone needs quite different architecture. It needs to be able to issue eurozone bonds, and it needs a unified fiscal system. Europe needs a treasury, and it needs a wage policy to make sure wages are in some sense tied to productivity gains and that productivity gains happen faster at the periphery than they do in the centre. That in turn would reduce income disparity and make countries like Greece more competitive.

I would be in favour of a sort of “Marshall Plan”, financed by European euro-bonds, for the periphery. Take European infrastructure: investment has repeatedly been blocked; development of the so-called “TENs system” [schemes aimed at developing trans-European networks for transport, energy and telecommunications] has been lamentably slow. Investment in decent, integrated infrastructure for the whole of Europe would greatly help market integration and it would help to ‘crowd in’ private investment as well.

I'm essentially talking about a much more federal Europe. To give an example, suppose the United States didn't have a federal treasury and individual states were largely financed on their own bonds. Relatively productive states would do very well, whereas states like Mississippi would have to pay perhaps 10% for ten-year bonds.

Europe needs a treasury if it's going to survive. If that doesn't happen, European integration will be set back thirty or forty years.

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