Are you catching up all the tools, actions and countermeasures designed to save the eurozone from a break-up? Let’s count them together. Bilateral loans to Greece, IMF loans, SMP, EFSM, EFSF, LTRO, Sixpack, Fiscal Pact, ESM, OMT… It’s difficult to find a politician, not to say an ordinary citizen, who understands all these abbreviations. And still, these letters mean hundreds of billions of euro.
Each of these tools represents also a set of rules, which should be followed for the tool to have positive impact. Even more sets of rules and regulations are being prepared, especially in the form of upcoming banking union. Political authorities of EU call for deeper integration, common debt issuance, or tax cooperation. But do we really need more rules, or the real remedy for eurozone problems is effective enforcement of the old ones?
For those who remember times not so long time ago, Euro convergence criteria as a part of Maastricht treaty, later supported by the Pact of Stability and Growth tool, were introduced in order to convince the German voter that Italians, Spaniards, Portuguese and other euro countries will behave responsibly and thus avoid monetary financing of their chronic budget deficits. The result? Out of 27 member states, 23 breached the Pact of Stability and Growth, most of them repeatedly and not a single fine was issued and enforced.
Thus tragedy of commons has developed in EMU. Not only governments misused the indiscriminating ECB monetary policy of converging interest rates to finance growing welfare state, but even during the Eurozone crises they soon adjusted to a “first come (for the bail out) – first served” game. Current tendency to postpone the toughest measures (Greece, Spain, Portugal) or to renegotiate existing deals (Ireland) suggests the trend is not changing.
Financial crisis, followed by the economic crisis and sovereign debt crisis started 5 years ago. During this time, the banking sector has not been restructured. Structural reforms leading to higher productivity and truly flexible labor markets have not yet been implemented. Deconstruction of unsustainable welfare states did not even start and the level of sovereign debt in EU grows. In this situation, political representatives call for an ECB intervention. As we see from the development of the role of ECB in sovereign debt crises, a significant shift from the prohibition of monetary financing of governments within Eurozone countries as written in ECB statutes to temporary European Financial Stability Facility (EFSF), then permanent European Stability Mechanism (ESM) despite the fact it is prohibited by Lisbon Treaty (a debt of each member state remains a liability of that individual state) and finally to proposed common Eurozone bond purchases by ECB leads to situation, when even European institutions are not following their core rules.
What are the alternatives? The Fiscal Compact is nothing but waste of time. The problem of Eurozone is not the lack of rules, but commitment to the existing rules. Ignorance of rules of Pact of Stability and Growth cannot be substituted by new set of rules (e.g. Six Pack or Fiscal Compact). Rules based, not decision based (EU Council) system of punishment is required, to avoid the tragedy of commons situation which ruins the eurozone today. If ECB is supposed to stay independent and yet play a role in bailing out the financial sector, it should be a supervisor of banking sector and not a savior of irresponsible states and banks.
We all have been told an apocalypse may happen if we don’t save the euro-project. But nobody said what will happen, if we sacrifice everything to save it.
The article was originally published in Finnish here.