It is not possible to create growth by magic, like a rabbit out of a hat, and certainly not without having money available for investment. This is why Daniel Gros is amazed by how European politicians, with the new French president François Hollande at the forefront, keep repeating one word: growth.
For the German economist, who is part of the Brussels think-tank the Centre for European Policy Studies (CEPS), to discuss "austerity versus growth" is a "false debate" that does not take forward the search for a solution to the euro crisis by a single step.
The real debate, he says, should be about banks, particularly those of southern Europe, which are in a much worse condition than was previously thought.
"The Greek and Spanish banks are sitting on a growing mountain of debt,” says Gros. “Only Europe can save them. Greek and Spanish governments are too weak. This is a major European problem."
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Last year, after strong political pressure, European banks accepted "haircuts", that is to say a write-off of Greek government debt. Since then, these same banks are withdrawing from the southern euro zone area, before the next round of haircuts. Spain, Italy and Portugal are being abandoned on a huge scale by foreign investors. In Greece, the next phase has already begun: even the Greeks are sending their money abroad. According to Gros, this capital flight is enormous. "Four, five, six billion euros per month. Nobody can stop it."
This process goes hand in hand with another, no less frustrating one. With northern European banks pulling out, southern European banks are sinking more and more into debt. These bonds that foreign investors are ditching are just ones being bought by Southern European banks. They do so under pressure from their governments, but also because it saves them money. In exchange for this favour, governments in turn offer new loans to banks at lower interest rates.
Very favourable rates. Last winter, the European Central Bank granted very cheap loans for 1,000 billion euros, to keep exchange on the European loan market moving. Southern European banks eagerly used these loans, at a 1% interest rate for government loans that earn them 6% or more. An act of patriotism that allowed them to earn a little cash.
Although this seems to be a solution, it creates a perverse dynamic in which banks and governments become so interdependent that they fundamentally weaken one another.
"Greek banks are completely finished," adds Daniel Gros. "It seems a national problem, but that’s just an optical illusion. Because what happens if suddenly the southern banks do not (or cannot) repay their borrowing to the ECB? "Because of the euro, we are all in the same boat," explains Thierry Philipponnat, from the lobby group Finance Watch.
Indirectly, the ECB is us. All of us. Other countries in the euro zone must comes to the rescue if things go bad in southern Europe. They have to to save the European monetary union. For this reason, the ECB is under heavy pressure from Germany and the Netherlands to stop these cheap loans. The internal financial market is the foundation of the euro. Capital flight from south to north damages the fabric of the union. According to Ignazio Angeloni, an adviser to the ECB in Frankfurt: "Financial integration in Europe fell for the first time since the early '80s."
The French have a wonderful word for it; “détricotage”. Banks retreat back behind their borders and wrap themselves in a woolly jumper, while at the same time the jumper is unravelling. To strengthen their countries, they stop granting loans to a lot of other countries. Central banks are more stringent in the North than in the South.
"All of a sudden, geography plays a role," says Philipponnat. A London banker recently noted that during a Chinese delegation visit, the first question the Chinese asked was: "How can we distinguish a Greek euro banknote from a German euro banknote?"
Many say that only a European Union bank can release the banks and governments from this suffocating embrace. A union bank with a rescue fund put together by the banks themselves, would mean that governments are no longer obliged to bail out failures. This would solve the current dilemma of "too big to fail", where the big banks can get away with anything because they are sure to be rescued by the government when things go badly. If they suffer themselves, they will assess the risks differently.
The European Commission has prepared a proposal but its publication has been delayed for two years because member states do not want it. It calls for much tougher European supervision and equates to a transfer of national sovereignty, which is, for many countries, a difficult or taboo subject.
Europe is turning around. Because governments do not want a strong European system of financial regulation, the risk to the taxpayer of seeing European bills flooding in, in the form of rescue packages which devour billions, is increasing. And there remains very little money to stimulate the kind of economic growth that French President-elect François Hollande is currently championing.
"The greatest threat to Europe’s financial stability is the fact that some euro zone countries are financed by banks that, if they go bankrupt, are themselves dependent on the governments to which they lend money, " Philipponnat explained recently at a conference organised by the ECB. "We all know that this does not work."
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