Not Yet at "Buy Bottled Water and Ammunition": Brad Plumer Interviews Barry Eichengreen on the Euromess
It was the fall of… 1983? when Barry first taught me about the Austrian sovereign debt crisis of 1931 and the slide of Europe into the depths of the Great Depression.
80 years later:
Eichengreen: ‘This is first and foremost a banking crisis’ #Euromess:
The idea that this period of high uncertainty is over is naive. We’re in for a couple more months of volatility at least….
[S]omebody has to take major losses on Greek bonds, and the holders don’t want to do that…. Weak banks don’t like to acknowledge that they’re weak; they don’t like the prospect of diluting their existing shareholders by raising more capital. There is also a reluctance in German political circles about supersizing the EFSF, about leveraging it and enabling it to provide guarantees so that large-scale purchases of Italian and Spanish bonds can be undertaken to stabilize their bond markets and limit contagion. Germany fears that there may be losses on those purchases, which will end up on the doorstep of the German taxpayer. And there’s mixed feelings in Greece itself….
Everything has gotten worse over the summer, leading to an acknowledgment by almost everyone that Plan A, what was agreed to on July 21, will not fly. And that they have to move to a Plan B. That’s the positive answer. The negative answer is that there’s not yet a consensus about what Plan B is…
Would abandoning the euro be better or worse for Greece? And the answer is debatable. You could argue that in the medium term, Greece would be better off. It could devalue its new drachma and become more competitive (although that would depend on how wages and prices respond as they start printing drachmas). But you have to balance that against the short-term costs: a full-on bank run, the need to close down financial markets, to close down Greece’s border. So it’s not clear how short-term costs and long-run benefits balance out. But from the point of view of the rest of the euro zone, Greece leaving would be a disaster…
I think European leaders and politicians are being reminded that the costs of allowing or forcing a member state to exit the euro area would be very, very high. Now, the costs of keeping it in are also very, very high. But you’ve got to choose. And European leaders seem to have finally forced themselves to acknowledge that there’s not a third low-cost alternative on the table.
This is first and foremost a banking crisis. Somebody lent Greece all this money, and the name of that someone begins with a “b”: banks. And now, the constraint on solving the crisis is that those banks are in a weak financial position. So they need to fix the way supervision and regulation of banks is done. Europe has a single currency, a single financial market and yet 17 separate national bank regulators. That’s madness…
I think they do need to deal with sovereign over-borrowing where it’s a problem. But it’s important to be clear: up until the crisis spread to Europe, this was a problem in Greece and nowhere else…
They need to have an adequately funded emergency financial facility. When a country does get into trouble in the future, through no fault of its own, there needs to be a way of providing emergency liquidity. The Europeans don’t have an adequate facility at moment; that’s why there’s debate about supersizing the EFSF…
Notice I haven’t uttered the words “fiscal union” yet. I think fiscal union is a bridge too far. The important steps are centralized bank regulation, E.U. requirements about national fiscal rules and procedures, and a mechanism for providing emergency liquidity.