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Juan Luis Cebrián

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The House, From the Roof Down

Posted: 06/07/2012 4:48 am

To "start the house from the roof down" (empezar la casa por el tejado) is a Spanish expression that roughly translates to "beginning at the end." In Spain, there's a custom of planting a flag on top of buildings when rough construction is complete, as an expressive demonstration that the peak has been crowned. But I have also noticed that in many countries the construction of houses, especially those made of wood, actually begins at precisely the roof. And some skyscrapers are built such that their structure extends from the top-most floor, like the ribs of an umbrella, which avoids having to dig deeper foundations. This is precisely what the architects of Europe's single currency, the Euro, did during its design. Instead of establishing a political entity, which would have guaranteed the unity of the market, they decided to begin at the end by assuming that, sooner or later, the demands of monetary policy would oblige both the creation of a fiscal entity and the coordination of the political economy -- both foundations necessary for a project of this sort.

The world financial crisis -- initially unleashed by the explosion of American subprime mortgages and the bankruptcy of Lehman Brothers -- has turned into a problem that is primarily impacting the European Union and, within it, the countries of the Eurozone. The nationalization of Spain's Bankia, a decision by the government in Madrid, has raised all kinds of alarms in the last few weeks. Some compare this situation the one that arose in Europe in 1931, when the bankruptcy of Austria's Creditanstalt devolved into a banking panic that incalculably worsened the effects of the Great Depression. Despite the fact that right now a run on the Spanish bank deposits is not anticipated, the uncertainties of the upcoming Greek elections, along with the possibility that a Greek exit from the Eurozone could infect Europe's largest economies, has led many companies to take out insurance against the risk of an eventual breakup of the single currency. Swiss and German Banks are offering deals for Italian and Spanish depositors to open accounts in Zurich or Frankfurt -- and clients are feeling increasingly motivated to do it, ever since economists like Paul Krugman mentioned the possibility of banks in the Southern European nations would enact a corralito -- that is, freeze their funds and forbid withdrawals.

The fact is that the current Eurozone crisis has brought Europe to an historic crossroads. If the European currency disappears, the entire political project will most likely also crumble. That would mean seven lost decades of this continent's history, and the failure of humanity's most important political experiment since World War II. The scenario would represent a catastrophe of such magnitude that it makes many people think that, sooner or later, things just have to work themselves out. To break up the Euro is infinitely more expensive and costly than to save it, and the first victim of the unraveling process would be precisely the one making its resolution most difficult: Merkel's Germany. The country sends nearly half of all its exports to the Eurozone, and a failure of the Euro system would inevitably lead to a recession in German accounts. Europe's descent into a long period of economic deterioration would immediately infect both the United States and emerging markets. The world would embark on a path to global recession. The certainty that, in this case, it's not "the worse, the better" but "the worse, much worse" is what stokes some people's optimism regarding the resolution of the current crisis. This has highlighted the need for expanding the path to European integration, which will inevitably follow the route of federalism. Yet, even as important ideas are discussed, it's critical to deal with the most pressing needs first and foremost. The house is on fire and, before deciding on structural reforms for the future, we have to put out the flames that are threatening to destroy the whole building. To do so means recapitalizing struggling banks, restoring liquidity to the markets, and ensuring that the financial system won't suffer the same fate as in the early 1930s. To put out the flames, a firehose of money is necessary, and it's the stockholders and bondholders of financial institutions on the brink of failure who must pay the consequences -- not the depositors. This is the only way we can break the vicious cycle that the politics of fiscal austerity generates by promoting unemployment, decline in demand, and, thus, bigger hurdles to growth and debt repayment. Austerity is indeed necessary, and fiscal consolidation crucial -- but these actions will only bear fruit if we are able to get demand back up. Within this framework, on top of everything, Europe will have to revise the parameters of the welfare state and ensure a level of social protection that's in line with its economic yield.

To connect those urgent problems with the issues we referred to before, there is already talk of a Banking Union -- of centralizing oversight of European financial institutions and their deposit insurance, coordinating budgetary policies, and establishing a true fiscal union. This means that the same Europe that resists political federalism, for fear of losing prestige and sovereignty (or so national politicians would say), seems willing to accept the financial federalism that would precede it. It's a way to keep on building the house from the roof down. However, I've already said that a fair number of buildings are constructed using a similar technique, and the European flag has been waving on our rooftop for decades now. So, then, bring on the experiment, I say. For it to conclude with success, though, the firefighters better get here ASAP.