LONDON -- It was said of one nineteenth century British politician that he never missed a chance to let slip an opportunity.
European leaders were quick to define last month's Euro summit of 2011 as the day European leaders seized the moment and faced the crisis down.
Instead it will be seen as a huge missed opportunity, the turning point at which history failed to turn. And, in my judgment, the Euro leaders will soon be back in crisis sessions.
Last month I warned that, although Chancellor Merkel and President Sarkozy had brokered a deal which kept Greece liquid, their four political 'no go areas' -- no bailout, no default, no devaluation and no more money -- represented the capitulation of economic necessity to political expediency. I argued that the wrong conclusions arose from a wrong analysis.
Over too long a period it has suited European leaders to believe that theirs is a fiscal crisis in the weaker states, and so they have analyzed their problem in just one dimension: profligacy in the periphery demanding tougher and tougher austerity.
But Europe's problems can only be truly understood in three dimensions: not just as a fiscal crisis but as a pan-European banking crisis -- which started as, and continues to be, one of massive unfunded bank liabilities -- and as a trans-continental crisis of low growth, in part the result of the euro's deflationary bias.
Together, and in lethal combination, these three problems threaten to create a tragic roll call, year after year, of millions of European citizens unnecessarily condemned to unemployment in a wasted decade.
Having started from the wrong analysis, leaders have been making exactly the same kind of mistaken judgments we have seen in the U.S., where there are four political no-go areas: no higher taxes, no entitlement cuts, no economic stimulus and no infrastructure investments. These political constraints have also trumped an agenda for growth, and yet another engine of the world economy is being shut off from anything other than an anemic recovery.
At moments of crisis, statesmen and women have to lead markets and display irresistible resolve. The best example is when, pushing uphill against the constraints of the day, Roosevelt's new deal of the 1930s turned orthodoxy on its head and pursued stimulus instead of austerity.
In April 2009 at the London G-20 summit the world had to underpin its economy by the boldest and most dramatic of measures. And, at its moment of truth last month, Europe needed to summon up the power to restructure its ailing banks, coordinate monetary and fiscal policy and radically reform the euro, removing its structural barriers to growth.
Specifically the Brussels summit needed to accept the inevitability of fiscal transfers; trigger their precautionary facility, including for Italy and Spain; and, at a minimum, expand the European stability fund, underpinning it with a backstop facility far bigger than its current size.
Yet not one of these items even reached the agenda. Action, however, that is deferred at one point of crisis will mean even more radical action is required at the next juncture. What might have satisfied markets a few weeks ago -- a Brady style bail out for Greece -- will not now be sufficient to end Europe's economic agony, as interest rate spreads and debt-servicing costs rise, and as the pan-European stresses in the banks come to the surface.
Already both the creditor and debtor countries (the former through bank stress and the latter through both bank and sovereign stress) are being sucked in.
Of course in the short term the ECB can use its secondary market purchase program while it considers how to be the long-term lender of the last resort. But it will rightly ask what fiscal guarantee is in place for it to perform this role. The funding needs of Italy, Ireland, Greece, Portugal, Spain and Belgium just to 2014 could be around four or five times as much as the current €450m backstop facility. This could require, at a minimum, credit enhancements to help restore market access at bearable levels, or cover of up to €2 trillion (approx. $2.83 trillion).
On top of this, bank restructuring may cost as much as €200 billion in new capital, and perhaps even €300 billion (approx. $425 billion). This would require an overall backstop -- partly euro member state-financed, partly IMF -- equivalent to a quarter of Eurozone GDP.
Then we will also have to create a European debt facility (perhaps for up to 60 percent of national GDPs) and, as a sequel to that, greater fiscal and monetary coordination. This will, in turn, mean fiscal transfers based on the model of -- if not yet on the scale of -- what has taken place in the U.S. But, even if all these stabilization measures are agreed, Europe's growth will remain anemic and, far from falling according to plan, deficits and unemployment may remain too high.
So there is a final inescapable economic dimension; what I call the 'global Europe' plan -- a determination that Europe stops looking inwards and start to look outwards to export markets in the eight fastest growing economies (India, China, Brazil, Russia, Indonesia, Turkey, Korea and Mexico) that will generate most of the worlds new growth. Today, only 7.5 percent of Europe's exports go to these fast rising economies, which will create 70 percent of the world's growth.
The key to achieving sustained growth is not only a repositioning of Europe from consumption-led growth to export-led growth, but radical capital product and labor market reforms to equip the euro area for global competition -- and a G20 agreement with America and Asia to coordinate a higher path for global growth.
None of this was discussed in any detail in Brussels.
Yet without that agenda for growth, even the most painful of austerity measure is unlikely to prevent the social tragedy of high unemployment. European leaders, who assumed for ten years that the stability pact was all they needed to cope with a crisis, will find that they also have to face up to unprecedented constitutional change.
One of the reasons I opposed Britain joining the euro was that the euro had no crisis prevention or crisis resolution mechanism, and no line of accountability when things went wrong.
Today, because of the unanimity required in the voting structure of the new European stabilization fund, European leaders are still seeking agreement on funding the first phase of the European stabilization fund, long after a second, bigger phase is overdue; they remain unsure who is responsible in a crisis, not least because of their ambiguous relationship with the independent European Central Bank; and few, even now, are able to contemplate the massive constitutional issues raised by fiscal integration.
But every time the big questions are avoided, and every time the outcome is a patchwork compromise, the next crisis gets ever closer and threatens even more danger. Without action along the lines I suggest, no one can assume that Europe's historic strength is enough to prevent the most punishing of future outcomes.
I find myself agreeing with what Gordon Brown says.
And find myself reeling from the idea that I agree with what Gordon Brown says.
Gordon Brown bears personal responsibility for having created the heavily discredited Financial Services Authority - the lax performance of which helped to lure Britain into its own current economic and fiscal crisis.
http://en.wikipedia.org/wiki/Financial_Services_Authority#Criticisms
Brown's long tenure as Chancellor of the Exchequer made Britain far more vulnerable to the bubbles and crashes that originated here in the US, and also the consequent bank losses and downturns throughout the EU.
While I can find things about Brown's chancellorship to applaud, his performance in that role and the policies he implemented are nothing to applaud or to invest confidence in.
Finding myself in agreement with anything Brown writes merely causes me to go back and re-examine my own views, because I have no confidence in his.
Oh right - the one that for 13 years continuously sucked up to the bankers and relaxed regulations. Because apparently you weren't too bothered when in 2007 you personally opened the new Lehman Brothers building in London stating that they were a "fine company".
You rode the gravy-train when things were going well because it gave your government the illusion that everything was going well. Whatever happened to the end to "boom and bust" that was so loudly proclaimed from your office? Well it turns out we never really had the boom and all we got was one massive bust caused by your government's willful negligence for political expediency.
Still we shouldn't be surprised. You completely shafted private pension-holders upon coming into office in order to get a quick windfall it should have come as no surprise then that you would spend the next 13 years grubbing for any spare cash you could and that included sucking up to financial institutions whose profits any half-decent economist could see were built on smoke and mirrors.
"and few, even now, are able to contemplate the massive constitutional issues raised by fiscal integration"
Sorry, but what does he expect? That (I suppose this was directed against Germany) we should ignore the Constitutional Court's rulings and by that abandon the whole Basic Law/ constitution? We are not talking about a minor amendment which would allow the government to transfer this authority to the European level. On the contrary.
All our democracies, at their very core, are build around the thought that the authority to pass budgets and raise taxes lies with the democratically elected parliaments. If it was enacted the way he envisions it, national parliaments would loose that authority and it would be given to either the governments (EU Council or a EU Commissioner appointed by the EU Council) or it would be passed to the EU Parliament which is so far not elected on the "one person, one vote" principle.
On top of that, there is much poison in the chalice: While it is maybe the right thing to do for and among the Eurozone nations (shared destiny) the ones reaping all the benefits without sharing the destiny are the 10 non-Eurozone EU members (like Britain). We could have the absurd situation that a British Commissioner, or more generally the British government had a direct say over where and how the Eurozone spends its money.
And that: we are masters of the unsaid words, but slaves of those we let slip out. WC.
"in my judgment, the Euro leaders will soon be back in crisis sessions"
in my judgment the Euro leaders are a crisis, looking for somewhere to happen.
"Europe's problems can only be truly understood in three dimensions"
Which means turning a blind eye to time, the future of our kind.
"At moments of crisis, statesmen and women have to"
accept that their renditions of reality are trumped by reality.
"Specifically the Brussels summit needed to accept the inevitability of"
us survivors cutting our lifecraft free, from the entanglements of their sinking Titanic.
"being sucked in"
to the mad addict gambler’s last gasp attempts at breaking even. By putting the lot on red. Like that ink in the EU’s un-audited account books.
"a final inescapable economic dimension"
Get a gaming company to write an economics simulation. Then all those who think they know how to play can do so. Inside a safe and secure padded cell, away from us.
"global growth"
A bit like a balloon on an air line?
"no line of accountability when things went wrong"
So what’s your excuse for unilaterally signing us into Europe?
"they remain unsure who is responsible"
Humm… Just so.
"every time the big questions are avoided"
a democracy dies? The Peter Pan syndrome.
I really find it strange that none of his proposed measures to solve this include an answer to the question: "How do we hold the financial sector accountable?" On the contrary: He suggest to fully, unconditionally bail out all banks (yes, even as a German I understand we so far did not bail out the Greek people but global investors and Greek banks).
How can ANY worthwhile solution not include Europe's largest financial hub?
Otherwise just you are now just a blogger who replies to other people's articles and that is all the power you now have, dear Gordon.
I haven't followed the crisis in Europe as closely as the gravity of the situation merits, but their politicians seem to be just as myopic as ours if they think that they can rescue their economies while dogmatically refusing to do bailouts, allow devaluation of the currency, or spend more money. Avoiding a default in the Eurozone makes sense, but how do they expect to do that by pushing the very austerity policies that are guaranteed to cripple Greece and Ireland's economy? Bailing them out is preferable, or even inflating the currency...it shouldn't be political poison for Sarkozy and Merkel to stick their necks out that far when they know they will be harmed in the long-run.
The four no's for the US were right on as well...our politicians won't raise taxes or sacrifice entitlements, and they won't go for more stimulus.
It's not so much that the way to help the economy isn't clear, it's that governments lack the political will to follow it.
It's not about Greece. They will be bailed out because once the last agreed upon deal is sealed after the national parliaments voted for it Greece will have something between a decade or two when they do not need to turn to the private markets in order to finance their annual budgets. They also will get additional investments from the European Regional Funds.
The four "no's" Gordon Brown writes about are about permanent changes in the EU:
- no bailout = Eurobonds as a future tool
- no default = the whole of all already existing Eurozone debt is pooled and then distributed among all Eurozone nations = Eurobonds for already existing debt
- no devaluation = no QE program by the ECB = changing the statutes of the ECB in a way that political influence dictates the central bank's actions = a dependent central bank
- no more money = no automatic transfers (on a large scale)
What Mr Brown proposes is:
Eurobonds, a significant beefing up of the EFSF/ESM beyond its present scale, more money for the European funds to invest (exclusively) into struggling economies and more money for the ECB (which is backed by the national central banks).
All over the world the banksters, the multinationals and the Super rich have accumulated all the wealth, to the utter destruction of democracy, republic and any power for the citizens.
All over the world the solution must be the same: tax the rich, jail the banksters, take back the fraudulently acquired wealth times three.
Invest in infrastructure, the citizens safety net and green energy.
The world has the greatest level of productivity in history from automation and tech, and FDR and other liberal democratic nations. Many countries succeed great following these principles, but that was never enough for the greedy pigs and they have the time resources and inclination to waste massive amounts of time and money to rule the world like they did before the USA was formed.
Let's not let them.
"As riches increase and accumulate in few hands . . . the tendency of things will be to depart from the republican standard." Alexander Hamilton
"I hope we shall . . . crush in [its] birth the aristocracÂÂy of our monied corporatioÂÂns." Thomas Jefferson