How to solve the crisis of the euro area?

Last year, the debt of the peripheral European countries constituted the main issue which must have been identified and quickly under-balanced. Those which have it fact thrived in 2010, but in January 2011 they were taken with the trap tightening peripheral spreads…

Last year, the debt of the peripheral European countries constituted the main issue which must have been identified and quickly under-balanced. Those which have it fact thrived in 2010, but in January 2011 they were taken with the trap tightening peripheral spreads and rebound of the values financial to the periphery. The news of January was however not encouraging: on January 6, Santander had problems with its obligation guaranteed over five years, involving a rise of 50 basic points of the CDS; on January 14, a member of the council of Central Bank European, Axel Weber, evoked the inflationary threats and the possibility of a tightening of monetary policy; and on January 19, the European Ministers for Finance met for finally deciding anything to make.


In order to include/understand the evolution of the situation, it is advisable to analyze the wheels of the European system. There is no unified government and, instead of speaking with one voice, the European Union resembles a choral society who transfers sometimes with the cacophony - in fact, there are two people with the head of Europe: Manuel Barroso, who direct the Commission, and Hermann van Rompuy, which chairs the Council, knowing that it is not certain that Chancelière Merkel and President Sarkozy test the need to place themselves under their authority. To obtain results, it is necessary to carry out diplomatic negotiations accompanied with many concessions, which explains why a new agreement can be announced with the press by a part before being contradicted by the other. On the other hand, the peremptory necessity for the Union is to reinforce its links still more, and of measurements as unpopular as the Irish rescue are presented as being taken in the interest of Europe.

Graph of Spreads bond-holders of the periphery of the euro area vs. Bund

In this context, where in are we now? The European decision makers must themselves of going beyond rhetoric to convince the markets of the perenniality of the euro area - they must take decisive measures in order to install sufficiently flexible, relevant and correctly financed mechanisms, and not simply designed “to punish” the markets. There were many articles in the press these last weeks revealing that negotiations would be in hand on such a program, with a perimeter which would go largely beyond that what we had anticipated. It would be a question of reinforcing the European Facility of Financial stability (FESF) and of making it still more flexible. It would also be a question of setting up series of measure complementary aiming curing the defects of the Pact of Growth and Stability and at making in kind avoid of such crises in the future. These measurements could include the suppression of the agreements of indexing of the wages, the raising of the age of the departure to the retirement, to adjust the tax rates of the companies (Ireland should take guard there), to improve the banking supervision and to modify the constitutions in order to prohibit excesses of public debt. If such is the case, the interest to bind these measurements to the rescue plan is due to the fact that the principal governments of the euro area, carried out by France and Germany, have a means of pressure to force the periphery involved in debt to conform to it. In addition, these measurements aiming at preventing a future crisis can be presented to the German voters like a currency of exchange for the granted financial support. Let us recall that at the time of the rescue of Greece, the German press did not cease putting forward contrast between the generosity of the Greek Welfare state and the rigour of the German State, the Germans having had to undergo severe reforms of their retirement scheme and job market during the ten last years. Even in France, the retirement age was lately recorded, in spite of big demonstrations.

If (what is far from being acquired) these proposals were to be adopted, which would it occur? With my direction, that would not be especially of good omen for the periphery. The austerity would remain of setting in order to reduce the levels of public debt. The suppression of the indexing of the wages would increase the pressure on the real incomes, in particular if the prices of the raw materials were to continue their bullish tendency. The installation of the modes of retirement could encourage the consumers to save more, which would penalize consumption. In background, the ECB insists on the need for being vigilant with regard to inflation; if that were to result in a rise of interest rates, that would affect in a disproportionate way the peripheral countries, the mortgage deeds being primarily contracted atfluctuating rate (indexed on the rates of the ECB), contrary to the north of Europe where they are mainly fixed rates.

These measurements would constitute certainly a good news for the peripheral obligations, which undoubtedly explains why the spreads were tightened as much since the beginning of the year - a tendency called probably to continue. Lastly, that should distil a feeling of confidence with regard to the euro, although the rise of the euro compared to the American dollar would penalize the competitiveness of the exporters of the north of Europe in the short and medium term.

Of all that the Eurosceptics are done to like nothing, who estimate that the events of these two last years give them reason on the fact that the euro was built on sand. The Eurosceptics consider indeed that the euro does not constitute of anything an economic project, nor a political project and even less one popular project. There remains nevertheless a historical project, founded on the will to tighten the union of the area, and, as all will be done from the points of view economic, political and popular it to as a long time maintain, it is the historical spring which will prevail.

How to solve the crisis of the euro area?