Well, the Economist have finally scrambled out of their dugout and have now joined the fray. Welcome!
Today they have a leader entitled “The bill that could break up Europe“, with the sub heading “If eastern Europe goes down, it may take the European Union with it”, so I think we can all get the message easily enough.
Many west Europeans, faced with severe recession at home, will see this [an Eastern European "bail out" - Edward] as outrageously unfair. The east Europeans have been on a binge fuelled by foreign investment, the desire for western living standards and the hope that most would soon be able to adopt Europeâ€™s single currency, the euro. Critics argue, with some justice, that some east European countries were ill-prepared for EU membership; that they have botched or sidestepped reforms; and that they have wasted their borrowed billions on construction and consumption booms. Surely they should pay the price for their own folly?
Yet if a country such as Hungary or one of the Baltic three went under, west Europeans would be among the first to suffer (see article). Banks from Austria, Italy and Sweden, which have invested and lent heavily in eastern Europe, would see catastrophic losses if the value of their assets shrivelled. The strain of default, combined with atavistic protectionist instincts coming to the fore all over Europe, could easily unravel the EUâ€™s proudest achievement, its single market.
Indeed, collapse in the east would quickly raise questions about the future of the EU itself. It would destabilise the euroâ€”for some euro members, such as Ireland and Greece, are not in much better shape than eastern Europe. And it would spell doom for any chance of further enlarging the EU, raising new doubts about the future prospects of the western Balkans, Turkey and several countries from the former Soviet Union.
The thing is, all of this is much more complicated than it seems at first glance. Surely local policies by individual governments and decisions by householders have been partly to blame for the mess. But so have lending decisions by Western banks, and the national central banks who supervise them. And then we have the policy decisions (or the lack of them) taken in Brussels or at the ECB in Frankfurt. We are singularly lacking in any form of self cricisism here, and yet, paraphrasing Oscar Wilde just one more time, losing one child may be put down to an accident, but losing all your children, all at the same time, surely that must be negligence. When you are up before the judge it just doesn’t wash to say that they were all very badly behaved, and you couldn’t control them. Whatever happened to our sense of parental responsibility?
Put another way, if you are a teacher and 10% of your students fail then that is their problem, but if 90% fail, then it is your problem, or it should be.
So Sunday is D Day, the day when we finally have nowhere to hide, and we need to take real decisions. Obviously this situation needs more than simply “tweaking”, it needs confronting head on. There is a gap in EU and Eurozone architecture and this lack now needs to be addressed. Short of this the markets, which already have woken up to the problem, will not settle and will not be convinced.
There is no longer a middle road, as I have argued here we need EU Bonds, and we need to clear the pathway for euro membership for those Eastern states who want it (see this post). Talk of beefing up the balance sheet of the European Investment Bank simply won’t wash at this point – we can see what is already happening to the spreads as the rumor mill goes to work. (Borrowing costs for the EIB’s 10-year bonds has already risen to 90 basis points above the benchmark German Bunds, a yield which is drawing ever closer to the borrowing costs of countries like Spain and Austria).
What we need are full blown EU bonds (ie backed by the Union and not by individual member states or subordinate entities), and we also need a fiscal component (ie simply making loans cheaper to obtain won’t work). Of course, in the short term our leaders may need some sort of dual discourse, one for the markets and one for the voters (who have hardly been prepared for all of this), but this is for the politicians to sort out, since they dug themselves into the mess in the first place, so over to you Angela and Nicolas. You go live in 48 hours.
Bailing out the same mythical Polish plumbers who just stole everybodyâ€™s jobs will be hard for Europeâ€™s leaders to sell on the doorsteps of Berlin, Bradford and Bordeaux, especially with the xenophobic right in full cry. German taxpayers are already worried that others are after their hard-earned cash (see article). The bill will indeed be huge, but in truth western Europe cannot afford not to pay it. The meltdown of any EU country in the region, let alone the break-up of the euro or the single market, would be catastrophic for all of Europe; and on this issue there is little prospect of much help from America, China or elsewhere. It is certainly not too late to rescue the east; but politicians need to start making the case for it now.