It’s a bloody shame indeed!

In 2010, alweer drie jaar geleden (!), schreef ik in het kader van de Engelstalige introductie van ‘The Matheo Solution (TMS)’ het hier onderstaande:

Long before the introduction of the Euro many experts drew attention to several conceptual flaws in the way in which the ‘single currency’ was created. They signaled that the ‘single currency’ would, sooner or later, lead to economic and monetary complications, especially between participating countries with widely non-convergent economies. But their warnings were ignored or trivialized, and political leaders and governments forced the imperfect euro and EMU upon their citizens without telling them about the possible risks and consequences. The anticipated economical problems have now become reality: Because of the conceptual economic flaws of the EMU and the non-compliance with the Stability and Growth Pact (SGP) by many Euro countries the ‘Euro experiment’ has collapsed.

The political leaders are providing temporary aid for Portugal, Ireland, Greece and Spain (the PIGS countries). The full collapse of the ‘Euro experiment’ is not being prevented, but just being delayed. Incidentally: With this strategy the Euro zone has become a ‘Debt and Transfer Union’ and the Euro a potential ‘Weich Währung’ (weak currency). Politicians have conveniently ignored the fact that all these measures and their consequences are a flagrant violation of the Maastricht Treaty, which is the legal basis of the EMU and the highest written source of European Community Law. Politicians are now starting to realize that their ‘Euro experiment’ has many flaws. Their recent decisions have become a breeding ground for legitimate nationalist anti-European sentiments, even with anarchistic and terroristic tendencies, which can severely undermine European unity and stability.

It is up to the same European political leaders and the recently established Van Rompuy Task Force to reform and strengthen the Euro Pact. This must be done in a way in which the original structural failures are repaired, and confidence in the Euro is restored. It is crucial that financial markets and citizens regain trust in the ‘Euro experiment’ and the ‘European idea’. Politicians should consider whether the Euro, in its present form, will offer sufficient perspectives for the participating countries and their citizens.

The German-French initiative of 18 October 2010, known as the ‘Deauville deal’, and the subsequent Euro-Summit in Brussels of 28-29 October 2010 (....) the proposals at these two political meetings have several major flaws - again. In Deauville and Brussels politicians did not even discuss repairing (...) the principal structural error of the Maastricht Treaty. This concerns the lack of a flexible monetary mechanism with which developing macro-economic imbalances between participating Euro countries can be repaired at any given moment and in a simple way. Instead, the Euro-Summit resulted in a proposal to create a permanent crisis mechanism for the support of endangered Euro countries by the others. Such a decision would be a historic mistake which will be the start of the downfall of the Euro, the EMU and the political unity and stability in Europe.

Until now the media has given little attention to an interesting development since this spring: The PIGS countries issued new state bonds which are mostly bought by commercial banks in the same countries. These banks instantly give these state bonds (effectively inadequate collateral) to the ECB in exchange for ‘fresh’ Euro’s. Obviously the financial support for Greece should not be classified as ‘loans’. It is clear that Greece will never be able to fully repay these ‘loans’, unless Greece finds a way to instantly restore its competitive position. The only way to help Greece and others is to waive a substantial part of the national debt and to make the national economy competitive again. Otherwise these weaker Euro countries will fall into a permanent depression, and any financial aid will disappear in a ‘bottomless pit’.

The primary beneficiaries of the financial support were the commercial banks who had irresponsibly financed insolvent PIGS countries. So innocent taxpayers are now subsidizing the banks (and their share holders). The revelation of the incompetence of the European political establishment with regard to the monetary policy and the consequences for European tax payers is also a delicate issue. Unfortunately there has been little media attention to these controversial subjects. The temporary measures taken this year by politicians in reality offer no perspective of economic recovery in the PIGS countries. Even on the contrary!

The most logical and effective solution for a troubled Euro country is a ‘controlled default’ which signifies a ‘haircut’ for the creditors. In this way, the innocent tax paying citizens would not pay the bill. The ‘no bail-out’ clauses of the Maastricht Treaty would be respected, and there would be no negative effects for (the future of) the Euro. In somewhat similar previous cases (Mexico, Russia and Argentina) the remedy of a ‘controlled default’ (combined with a devaluation of the national currency to strengthen the comparative competitiveness) has been implemented successfully. In this way, the bill is paid only once and in a fair manner by the creditors who incorrectly permitted a country to live beyond its means.

Interestingly, French and German commercial banks appear to have been the largest creditors of the PIGS countries. A controlled default might have resulted in liquidity and insolvency problems for some of these banks. In severe cases, a financial safety net would only incidentally be needed to save these banks, in order to maintain the stability of the financial system and to protect the normal customers of these banks. In that case there would also have been a fine opportunity to stimulate or force the commercial banks to return to their basic tasks of providing a stable financial system that functions in the general interest of people, enterprises and governments. The present temporary support measures, literally and figuratively, have only bought time (at the cost of the people in all Euro countries) to postpone what really needs to be done: Create pan-European political support for a structural and effective change of the Euro Pact.

The Euro crisis is the result of countries with totally different economies participating in the ‘single currency’. The system of the single currency issued by the ECB has taken away the possibility of countries to influence the rate of exchange of their currency against other (leading) currencies. There is no flexible monetary mechanism in the present Euro Pact which can be used to repair developing macro-economic imbalances between the countries which participate in the Euro. That is also the reason why the United Kingdom decided not to participate in the EMU and the Euro!. Or as Spanish prime minister José Luis Rodríguez Zapatero remarked in the Wall Street Journal on September 22, 2010:

So now we know where to look for the solution to the problem: The economically weaker Euro countries should - via a flexible monetary mechanism - be able to improve their economic competitiveness at any given moment and in a simple way. The Euro Pact must be restructured in a way which satisfies two criteria:

In plaats van het noodzakelijke te doen voor de Europese burgers en bedrijven, gaan de Europese politieke elite en de ECB - na ruim drie jaar - echter nog steeds onverdroten voort op hun allesvernietigende weg. Inderdaad, zoals DDS hoofdredacteur Joshua Livestro op zondag 13 oktober jl. al schreef: It’s a bloody shame!

Voor degene die mijn inmiddels jarenlange pleidooi liever in het Nederlands willen lezen, verwijs ik hierbij graag naar mijn ‘gebundelde’ DFT-columns uit 2010 en 2011 in de Financiële Telegraaf.