Guest Comment: Making the leap
Patrick Artus, the chief economist at Natixis, explains why he thinks eurozone governments and institutions need to take drastic steps in order for confidence to return to the region.
Patrick Artus, Natixis Chief Economist
Unfortunately, these mutual ventures alone have not been enough to pull the eurozone out of crisis, which now resembles a depressive spiral.But, despite these actions, investor confidence in the eurozone is not improving, much to the distress of the governments affected. If the eurozone is to truly resolve the sovereign debt crisis, it is clear that confidence must be returned – which may require two key institutional ‘leaps’. First, the region should transition towards joint financing (i.e. the pooling of debt) and second, a sense of federalism in sharing the cost of policies that stimulate employment and investment is required.
The journey towards federalism
Eurozone countries have already begun the quiet transition to solidarity and federalism. Although not immediately apparent in the current economic climate, there is now common funding by the EFSF/ESM, a planned recapitalisation of Spanish banks, and common recapitalisation of the ECB in the event of losses on the portfolio of assets it has bought. In addition, the ECB has successfully implemented unconventional monetary policies, while eurozone governments are planning to use the ESM to drive down interest rates on their bonds.Unfortunately, these mutual ventures alone have not been enough to pull the eurozone out of crisis, which now resembles a depressive spiral. The interest rates paid by Spain and Italy are still very high, choking the two economies, and credit levels remain low. Along with Greece and Portugal, these countries are falling into a downward spiral where high interest rates, private sector deleveraging, restrictive fiscal policies and the distortion of income leads in turn to a collapse in domestic demand and an inability to reduce fiscal deficits.
It is therefore unsurprising that investors are increasingly sceptical about the troubled countries. And while interest rates on government bonds remain abnormally high, there is little possibility of jump-starting these economies.
The problem is, restoring investor confidence in these countries – to the point where they are willing to buy government bonds again – will require policies that are unattainable in the short term. That said, in the long run, they must be made a priority.
Eurobonds
One helpful change would be joint financing by eurozone countries. Pooling public debts (via so-called ‘Eurobonds’) would prevent a situation where investors can choose to finance some countries and not others, and provide an opportunity to take advantage of the quite solid financial situation of the eurozone as a whole. However, Eurobonds cannot be introduced without the loss of sovereignty of national parliaments in the budgetary domain – reason enough for the proposal to be rejected by almost all the eurozone countries.Although these changes are unlikely to be achieved in the short term, there is evidence that the first steps have already been taken.The second change needed is a shift from a union limited to reactions to financial crises, to a union aimed at restoring the real economies. The downward spiral into which Spain, Italy, Greece and Portugal have fallen cannot be reverted by these countries alone, as they have no fiscal leeway. Such a reversal would require a European policy to support companies establishing operations in these countries and to stimulate employment.
This would be real federalism, with some countries paying an additional tax to ensure that economic policies aimed at boosting job creation and investment are conducted in other countries. Unfortunately, this vision of federalism in the real economy is also rejected by most eurozone countries, with particular discomfort at the notion of a “transfer union”.
Although these changes are unlikely to be achieved in the short term, there is evidence that the first steps have already been taken. However, greater institutional leaps are needed if these economies are to pull out of the crisis. And to permanently solve the crisis, there needs to be a shift from reactionary to restorative policies and measures.
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Patrick Artus is chief economist of Natixis, a member of the council of economic advisors to French Prime Minister Jean-Marc Ayrault and Professor of Economics at University Paris I Panthéon-Sorbonne where he combines these responsibilities with his research work.
He is also a member of the Board at Total and Ipsos.
He is also a member of the Board at Total and Ipsos.
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