053_Global13_Arena_V5

Global 13

Arena Eurozone Decoded Decoded: The future of the euro As a tentative calm returns to European markets, buoyed by last summer’s commitment by the European Central Bank’s president to preserve the euro at all costs, leading economic adviser at UBS Investment Bank,George Magnus, surveys the fragile financial landscape and asks, what lies ahead for the euro system? D European Central Bank (ECB), promised that he would do pervisory Mechanism in the ECB with effect from 2013. -There is no question that the centralisation of supervision is anunion, beginning with the establishment of a, so-called, Single Su-uring another acute phase of market turbulence in the eurozone in late June 2012, Mario Draghi, president of the whatever it took to save the euro. Since then, and especially after idea whose time has come, if Europe is to push the banking union the ECB’s announcement of a new sovereign bond purchase initia- agenda forward, and deepen the monetary union. And yet it still tive – called Outright Monetary Transactions – in early September, raises protectionist hackles in many eurozone countries. Inside the the sense of crisis in European financial markets has evaporated. eurozone, Germany remains anxious about the ECB’s monetary in- By early December, yields on long-term Italian government dependence and the scope of its supervisory role; outside the zone, bonds had fallen to the lowest level in two years. Spanish yields had so are Sweden, Finland and Poland. fallen back to levels in March, and even in Greece, where yields If properly structured, a banking union would sever the current had reached almost 40 percent in March, they had dropped to about damaging linkages between weak sovereign and weak bank bal- 15 percent. Comforting as these market developments have been, ance sheets. But this goes much further than supervision in at least the euro crisis is a long way from being resolved – a task that lies two important respects. First, there has to be a pan-European de- in the hands of European leaders, not the ECB. posit insurance scheme to put all banks and their depositors on a The ECB, however, has managed to buy some time. It has as- similar footing. Second, there has to be a strong, central resolution sured financial markets that it will lean heavily against the self- authority, which could shut down weak banks, force mergers and fulfilling market risk of a country leaving the eurozone, reflected in changes in ownership, and dispose of assets. Both of these meas- high rates, for example, in Spain and Italy. The so-called ‘tail-risk’ ures would entail transfers of resources from the rich north to the of a break up in the euro, therefore, has disappeared. poorer south. Becalmed markets, though, do not mean the crisis is over. Greece’s latest €44 billion lifeline with easier debt service condi- All countries share one large, common tions, will count for little if domestic political and social devel- problem, namely the extinction of opments culminate in an impasse with creditors, and debt repu- diation. And despite the ECB bond plan, Spain has not yet asked economic growth. European GDP is for help. It almost certainly will within the coming months, as its solvency credentials are deteriorating. Italy, whose credibility had expected to contract again in 2013 been restored by technocrat Prime Minister Mario Monti, might face new risks if the national elections, now brought forward to With German elections due by the final quarter of 2013, no new February after Monti’s decision to stand down in December, result major initiatives to resolve the euro crisis seem likely beforehand. in weaker government and governance. Portugal is likely to get The ECB’s bond purchase plan, once activated by Spain, might a second financial programme as its debt sustainability begins to keep financial markets stable for a while. But the euro system will resemble that of Greece. And France, whose own debt and deficit remain hostage to two important and unpredictable phenomena: dynamics are being subjected to closer scrutiny, may be ‘one to the random decisions of governments, sometimes in the face of watch’ in 2013. domestic unrest, and the absence of a universally acceptable tem- All countries share one large, common problem, namely the ex- plate to restore economic growth, apportion responsibilities to both tinction of economic growth. Eurozone GDP is expected to con- debtors and creditors, and transfer banking and fiscal sovereignty tract for a second consecutive year in 2013. Two major problems and resources to robust central institutions. underlie this malaise. First, the widespread implementation of How will this all end? No one has ever successfully grafted a ‘austerity’ policies is having effects on the economy that are sig- political union on to a monetary union, but no one should overlook nificantly larger than expected. Second, while debtor nations have the strong political commitment across the eurozone to preserve no choice but to cut and implement painful structural reforms, the single currency, or the popular will to make it work. A rea- creditor nations are not playing their full part. They are resistant to sonable guess is that ‘muddling through’ will continue throughout the call for larger financial transfers from richer, northern Europe 2013, that stronger integration initiatives will emerge to shape the to the south, and they are unwilling to consider longer adjustment euro in 2014–15, and that Germany and other northern European programmes for debtors. creditor countries will have to transfer more sovereignty, even if Without a solution to the growth crunch, other policy initiatives this entails the complex issue of changes to the European Treaties. to improve debt sustainability and the health of the banking system But this is a political judgement, not a prediction. Politics are just seem almost doomed to flounder. New rules to coordinate and su- as likely to cause best-laid plans to go awry. pervise fiscal policies are widely trumpeted but of little relevance to this crisis. The most important fiscal initiative – the mutualisa- George Magnus is an economist and an adviser to UBS and other tion of debt issuance throughout the eurozone – isn’t even on the investment banks agenda. More important are the proposals to create a banking globalfirst quarter 2013 www.global-briefing.org l53


Global 13
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