PUBLIC DEBT CRISIS NOT A EURO CRISIS
Chicago (IL), le 1er avril 2011. Discours prononcé par le Consul général de France sur le thème Public Debt Crisis not a Euro Crisis à la Chambre de commerce franco-américaine.
Chicago (IL), April 1, 2011. Speech given by the Consul General of France on the theme Public Debt Crisis not a Euro Crisis at the French-American Chamber of Commerce, Chicago Chapter.
Outline of the crisis :
1) Bankruptcy of Lehman Brothers (credit bubble in the States) on September 15, 2008 and break down of the global financial markets
2) Rescue of the international banking system through a large amount of credit from the States, nationalizing part of the banking system (TARP in the States). Hundred of billions of taxpayer dollars were spent to recapitalize the financial institutions and to avoid a credit crunch.
3) Large increase in public deficits that raises questions about the creditworthiness of sovereign debt.
Why did the Euro take the central stage in the public debt crisis ?
Let’s go back to 1992 and the Maastricht Treaty. This Treaty established a monetary Union without a political Union, a common central Bank without a common treasury. The Treaty does not impose disciplines except for what is called Maastricht criteria limiting the budget deficit to 3 % and the public debt to 60 % of the GDP. Today, the Euro zone includes 17 States out of the 27 EU members.
The introduction of the Euro in 1999 has, as a consequence, narrowed the interest rate differential. In fact, for a couple of years, the sovereign debts of all member countries were managed by the ECB European Central Bank on equal terms and at almost the same interest rate as the strongest economy, namely Germany. Since borrowing costs were greatly reduced, there was no pressure to correct excesses. On the contrary, it encouraged some bubbles for example in Spain in the real estate sector.
After the financial crisis, the interest rate differential started to widen. For instance, on March 14, of this year, the interest for a 10-year Greek bond was 12.4 % in comparison to 3.23 % for the German Bond. The new Greek government discovered an abyssal deficit (15 %). Cut-off from the financial markets, it was forced to ask for help from the European Union. After a long discussion on how to circumvent the non bailout clause (and the German constitutional court), Greece was given 110 billion euro on May 2, 2010. A couple of days later, a European Stabilization Fund of 750 billion euro was set-up to face any new emergency (440 euros from member States, 60 from the EU and 250 from the IMF). The next on the list was Ireland, the victim of its banking system, which received 85 billion euro from the European Stabilization Fund in November 2010.
It was clear that the flaws in the Euro construction had to be fixed. A process was started to reinforce the economic coordination and convergence among the Euro countries. The first major step was President Sarkozy and Chancellor Merkel’s meeting in Deauville last October where it was decided that a permanent mechanism (500 billion euro) should be put in place by 2013 to replace the European Stabilization Fund. This rescue system would allow, in the future, some losses on creditors in specific cases under strong terms and conditions (so-called haircut). This crisis resolution mechanism was very controversial because it was interpreted as opening the way to a possible default.
On March 11, 2011, the euro countries decided to :
- increase the European Stabilization Fund’s full lending capacity to 440 billion euro ;
- agree on a pact for the Euro (budget coordination, financial markets supervision, common corporate tax base, labour costs in line with productivity, sustainability of pensions benefits, debt brakes…)
- restructure Greece’s bailout : reducing the interest rate from 6 to 5 % and extending the timeframe from 4,5 to 7,5 years.
What are the lessons from the crisis :
- It is not a Euro crisis. Today, the Euro remains strong. Too strong even from the point of view of European exporters (about 1.31 on average against the dollar).
- It is clear that we need to put our house in order (to reduce each member countries’ public deficit and amount of national debt).
- Contrary to some comments, the solution is not less Europe but rather more Europe, more integration and, as a first step, a stronger economic policy coordination for competitiveness and convergence (the Pact for the Euro).
“The Euro is our common destiny and Europe is our common future”. Angela Merkel.