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«Journal of ECONOMICS AND BUSINESS Journal of Economics and Business Vol. XV – 2012, No 1 & 2 (17-35) _ FINANCIAL CRISIS, EURO PERSPECTIVES AND THE ...»

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Journal of Economics and Business

Vol. XV – 2012, No 1 & 2 (17-35)





Ansgar BelkeT 1 PF FPT

Univesrsity of Duisburg-Essen and DIW Berlin, Germany

ABSTRACTU: After having pointed to the large-scale problems of the status quo U related to the euro area financial and debt crisis we describe the current crisis management framework and assess what its consequences and institutional follow-ups are. We then look at the implications of the latter for the Balkans: do they imply trouble for the Balkan EU perspective? We also briefly sketch what needs to be done in institutional terms in order to prevent future crises. The main part of the paper is devoted to an assessment of the seminal proposal of a European Monetary Fund. We derive that it is a preferable blueprint in our context. We finally convey an outlook on different issues: first on the still open and critical issues in euro area crisis management, second on the interaction of bank and sovereign debt resolution and, finally, also on the future economic performance of the Balkans, i.e. Croatia, Macedonia joint with Turkey, with an e-mail: ansgar.belke@uni-due.deU


I am grateful for valuable comments from Fabrizio Coricelli, Camelia Turcu and other participants in the Conference 'Europe and the Balkans: economic integration, challenges and solutions', Orléans, February 3-4, 2011. This paper is also based on presentations at the Jeddah Economic Forum, the Global Economic Symposium Istanbul and the InWent Conference on Exit Strategies Mumbai 2010.

Note that the paper refers to data and institutions prevailing at the turn-of-year 2010/11, i.e. exactly the information set also underlying my keynote lecture at the Le Studium Conference February 2011 in Orléans.

EAST-WEST Journal of ECONOMICS AND BUSINESS eye on the post-crisis era. We point out that the latter will be closely intertwined with the problem solution capacity in the euro area.

KEYWORDSU: EU governance, European Council, European Financial Stability U Facility, European Monetary Fund, policy coordination, scoreboard, Stability and Growth Pact JEL ClassificationU: E61, E62, F55, P48 U Introduction: Large-scale problems of the status quo The scale of the current debt problem is large. For Greece, 110 billion euros have already been agreed upon. A second package is in the making. The EFSF plus EFSM (European Financial Stability Mechanism) headline amounts to a nominal value of 500 billion euro, whichin reality corresponds to a sum of 255 billion euros, due to a couple of deductions. Most importantly, only those countries can act as guarantors for other states if they have a triple-A rating, i.e. the highest credit rating: Germany, France, the Netherlands, Austria, Finland and LuxembourgT 2. If PF FPT the needs of Ireland and Portugal are considered to be of the same magnitude as Greece, this directly implies that the package might not necessarily be able to deal with Spain. If after Ireland also Portugal turns to the EFSF then in the end after all experience with this crisis only the ECB can prevent financial market meltdown.

The first basic problem connected with that addresses the fact that the euro area is a monetary union, but not a fiscal or even political union. This is precisely why there is no guarantee clause (note that we later on argue that Art. 125 TFEU is not a ‘no bail out’ clause). “No bail out” is not credible with integrated financial markets. When markets are close to meltdown creditors have little choice.

Deciding on the way of “bailing in” the private sector is the second fundamental problem. The European Council was faced on October 29, 2010, with the pioneering question whether it should agree on a permanent ‘crisis resolution mechanism’ demanded by markets and debtor countries in exchange of a ‘bail in’ mechanism as demanded by Germany. The existence of the turning point per se and its actual solution have initiated huge turmoil in the markets.

Correspondingly, the IMF would provide net credits at the amount of only 160 billion euro. In sum, TP PT analysts estimate that, hence, a total of 475 billion euro could be paid out as financial support.

EAST-WEST Journal of ECONOMICS AND BUSINESS Hence, details of the envisaged involvement of the private sector should be resolved quickly. Should it take place always? Should one re-design the timetable of repayments without altering the present value of the former (rescheduling) or even diminish the present value down to a level which appears to be sufficient to arrive at sustainable public finances (restructuring)? What about haircuts? Should they only be applied to new debt or should old debt also be considered?

Otherwise we might see tensions rising between the “North” and the “South” of the euro area (Belke, 2010a). On the one hand, there is the view of the German Chancellor Mrs. Merkel who interprets Art. 125 TFEU as a “no bail out clause” and argues accordingly that the monetary union cannot become a transfer union.

Hence, the “North” sees a member state failure as an option. This necessitates tough conditionality and rules for orderly bankruptcy. On the other hand, Mr.

Trichet - really standing for the “South”? - does not stop claiming that “we are all in the same boat”. In that sense, a member state should not be left alone if it is in trouble. In the extreme, this view implies that there is neither a plan B necessary nor is there any floor to the rating of collateral foreseen at the ECBT 3.

PF FPT In the wake of the October 29, 2010, European Council, the tensions between the “North” and the “South” came back on the scene. The aim of policy should thus not only be to prevent failures, rather it should also prepare for it. An EMF could be based on permanent EFSF. Since the available collective action clauses are insufficient, there is the necessity of mopping up law.

It has to be mentioned that there are a couple of differences in sovereign and private defaults. Therefore, sovereign-debt crisis are more complicated to deal with, since instruments to handle the situation in an orderly way are much more limited than in the case of private debt. In the latter case, the problem can be solved by liquidating the borrower’s assets and, referring to corporations, dissolving the organization (Gianviti et al., 2010, p. 19). All these considerations also have a bearing for the euro perspective of the Balkans, as later on explained in this contribution.

The remainder of the paper proceeds as follows. In section 2, we describe the current euro area crisis management framework and assess what its consequences and institutional follow-ups are. In section 3, we look at the implications of the latter for the Balkans: do they imply trouble for the Balkan EU perspective? In section 4, we briefly sketch what needs to be done in institutional terms in order to I gratefully acknowledge comments from Daniel Gros on this issue.



prevent future crises. The main emphasis of this paper is laid on the seminal proposal of a European Monetary Fund. In section 5 we derive that it is a preferable blueprint in our context. Section 6 conveys an outlook on different issues: first on the still open and critical issues in crisis management, second on the interaction of bank and sovereign debt resolution and on the future economic performance of the Balkans, i.e. Croatia, Macedonia joint with Turkey, in the wake of the crisis.

Euro area crisis management framework: consequences and institutionalfollow-ups

The current instruments in the EU dealing with debt and liquidity crises include among others the European Financial Stability Facility (EFSF) and the European Financial Stabilisation Mechanism (EFSM). Both are temporary in nature (3 years). However, a long lingering question has been the one concerning the efficient future crisis management framework, i.e. what follows after the EFSF and the EFSM expire in 3 years time? What are the respective political and economic medium- to long-term consequences? What needs to be done using this window of opportunity of the coming 3 years? Which institutions need to be formalized, into what format, in order to achieve coherent whole structure (Belke, 2010)?

Which have been the alternatives as regards the on-going debate on establishing permanent instruments to support the stability of the euro? Should we confine ourselves to the enhancement of the effectiveness of Stability and Growth Pact (SGP) in combination with a “European semester” and macroeconomic surveillance and a crisis mechanism? Or would it be better to stick to fiscal limits to be hard-coded into each country’s legislation as automatic, binding and unchangeable rules (Annunziata, 2010, Belke, 2010). Or finally, just to anticipate the solution preferred by the author: a European Monetary Fund.

Seen on the whole, thus, the status quo has not been an effective solution for insolvent debtors; it merely frontloaded the day of final reckoning to some day in the future. In addition, it makes debtor countries hooked on it. Since access to the ECB’s ordinary monetary policy operations is the cheapest way of refinancing, the distressed banks will even steadily increase their dependence from this source (Gros, 2010a). This process will finally lead to a concentration of bad risks on the ECB balance sheet as described in detail in Belke (2010b). And even questions like “Can central banks go bankrupt?” may come on the agenda.


The ECB and the EFSF have assumed the allocation function of capital markets, since they decide in a completely discretionary manner which countries and which banks are granted access to (re-) financing at which costs. ECB lending to Greece and Ireland amounts to a subsidy worth more than the transfer from the EU Structural Funds. Are the inflation tax and seigniorage the final way out (Belke and Polleit, 2011)? Let us now turn to the impact the troublesome status quo and the lack of an institutional plan B in the euro area might have also on the Balkan countries.

Implications for the Balkans: trouble for the Balkan EU perspective

The Euro crisis is far from over despite – or perhaps because of – the set-up an emergency fund to protect euro area countries from going bankrupt. Economic outlook in periphery grim: profound political consequences likely, not least on EU’s enlargement policy. The Balkan countries, which are currently striving to get into the EU and (until recently also) the euro area as full members, should take noteT 4. German voters are no longer feeling generous which becomes PF FPT obvious in the current debate about the second Greek rescue package. As a consequence of designing ever larger credit packages instead of a hard debt restructuring the public debate in Germany is turning increasingly Germanocentric and sometimes becomes even anti-EU. Chancellor Merkel was punished for standing up for Europe in 2010 regional elections. Her party, the Christian Democrats, lost to opposition in Northrhine-Westphalia which is one of Germany’s key states. The developments in Germany cannot be considered to be an isolated case on the European political sceneT 5. PF FPT How much the Balkan countries can expect from Europe in terms of money and political support is a question with no longer any clear answer. Some analysts feel that “European solidarity is under attack across Europe” (Grgic, 2010) Today, as Greece is struggling to keep its finances above water, and the group of troubled economies becomes numerous, enlargement skeptics also in Brussels may feel slightly vindicated. Is this the end of enlargement of the euro area after Estonia’s late entry as foreseen by some (Belke 2010c)? Ending European enlargement now could bring about new instability in the Balkans, and would probably stop the process of political and economic transformation in EU’s eastern neighborhood (Grgic, 2010).

For the benefits of the EMU anchor in candidate and potential candidate countries see EU Commission TP PT (2008). For the impacts of the recent financial crisis on the Central and Eastern European countries with their strong ties and spillovers to the Balkans see ECB (2010a).

Simply look at the strengthening of the National Front in France and similar tendencies in the TP PT Netherlands and Finland.

EAST-WEST Journal of ECONOMICS AND BUSINESS The Balkans are also suffering economically from the recent financial and economic crisis. Since credits are drying up across Europe, less and less of them are directed towards the Balkans in terms of direct bank loans and private investments. At the same time, unemployment is rising, social benefits are cut, and governments are struggling to meet their debt obligation (Darvas, 2010). If the perspective of a European future becomes unrealistic, Balkan politics does after all experience have the potential to quickly revert to nationalism and radicalism to draw the minds of the voters away from the economic wows facing the region. A typical question in this context runs as follows: “Why should Balkan leaders choose to pay the political price associated with difficult economic reforms when their counterparts in the EU are wrapping themselves with national flags and abandoning pan-European solutions?” (Grgic, 2010).

What needs to be done?

A stronger framework for budgetary and macroeconomic stability to prevent the build-up of unsustainable private debt will reduce the likelihood of future crises, but even the strongest framework will occasionally fail and the present crisis is likely to drag on for quite some time. EU thus needs a framework for dealing with a crisis in a member state that may threaten the stability of the euro and may take the rest of the euro area as a hostage. The key to making crisis manageable is a strong financial system that is able to withstand systemic shocks. (Amato et al., 2010).

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