As I was participating in the meetings of the International Monetary Fund in Washington last weekend, it appeared increasingly that the understanding of the European crisis was often superficial, leading to Armageddon scenarios.
The Eurozone is clearly in crisis. Some of its members have turned their backs to their commitment under the European Stability Pact and let their fiscal discipline veer outside of any reasonable boundary. The absence of any form of fiscal consolidation and monitoring of the situation led to unbearable public debt levels for several countries. Had the Euro not been their common currency, they would have resorted to competitive devaluations. Instead, interest rates became the only variable in the equation, and started increasing dangerously.
Over the past year, the inability of European leaders to take decisive action (rather than spectacular summits) led to a wider and deeper crisis. This ineptitude resulted in a ten-fold increase of Greek interest rates as well as a level of contagion with Italy and Spain that could become unsustainable.
With the misinformation and rumors that have circulated, I will take this opportunity to spell out the reality of the situation:
• The future of the Euro is not at stake
• The Eurozone will not explode
• Greece will not leave the Eurozone
• European banks are weak but not in need of a bailout
• Eurobonds already exist, and going further is not possible until fiscal consolidation is in place
• The European Fund for Financial Stability does not need to be increased at this stage
• Europe is not in recession
• Greece is indeed putting drastic measures in place: they need to be implemented
• Portugal and Ireland's public indebtedness is improving and their costs are improving
With this in mind, what can Europe do to convince investors that its member states are indeed determined to resolve the crisis?
First and foremost, the implementation of the July 21st agreement is urgent. Overcoming the hurdle of the German "Bundestag" vote is a huge relief and a step in the right direction. Now the Republic of Slovakia (which is dragging its feet) has to approve it immediately. The execution of the plan is crucial to maintaining Europe's credibility.
Second, the troika must extend the 8 billion euro tranche to Greece, assuming enough progress has been made by the Greek Government on the execution of their commitments and plans.
Third, European Banks have to shrink by around 25%, and do it without taxpayer money. Their "universal bank" model should not be maintained as it is today. They have enough means to deleverage themselves without going to the Treasury for additional equity. The ECB is there for liquidity, and that is all they need.
Four, fiscal consolidation has to be seriously considered, decided and implemented to allow a sustainable structure where the disciplined countries pay for the lousy ones. It is a question of survival.
Europe is perfectly capable, with the multilateral financial and structural support of the International Monetary Fund, to address these issues. The solution is in Europe, not in Washington or Beijing. Europe cannot continue to act irresponsibly and must assume its responsibilities to avoid a global crisis.
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