Dark clouds in the horizon

The eurozone banks are borrowing heavily from the European Central Bank. Current borrowing amounts to €1,31 trillion. They take the money at negative interest rates, which means that they are paid to borrow. The negative rates are now around minus 1 per cent. By doing so, the ECB is telling us that the funding needs are enormous and that the crisis resulting from the pandemic is very deep.

The picture shows me three more things.

One, that we have too many private banks in the eurozone. Some countries, with small economies, have an incredible number of banking players. Tiny banks are particularly vulnerable to shocks. They represent an additional financial risk at a time of many hazards.

Two, most of the borrowing has been applied by the banks in the purchase of government bonds. That means the ECB is using the commercial houses – and paying them a fee – to finance exceptional and current government expenditures. Public debt is growing fast and in a non-productive way. Its growth goes hand in hand with the tremendous levels of debt of the enterprises and of the poorer segments of the population. Overall debt, in some countries of the zone, is reaching unsustainable levels.

Then, my third point. Conservatives and extreme right parties and movements in richer eurozone States are getting ready to challenge the policy options of the ECB, particularly their easy money funding programmes. These challenges will combine political activism with legal proceedings. As an example, the ultra-nationalist and extremist German party Alternative for Germany has announced today they will move a legal action against the ECB’s emergency programme. It would be a mistake to underestimate this decision. That goes along the recent ruling of the country’s Constitutional Court on a comparable matter. And it must be seen in conjunction with the position that The Netherlands, Finland, and a few others have taken, asking for conditionalities to be added to the Von der Leyen rescue plan.

As I see it, all this contains the seeds for further divisions in Europe. This time, the division might mean severe rupture. It is the future of the Union that is at stake.

A busy summer ahead of us

People in Europe are rapidly moving past the pandemic and looking forward to a normal summer. There are still a number of restrictions in place, in most of the countries, but everyone seems convinced that by the end of the month they will be lifted. Optimism is a good thing, particularly after a difficult and long period of deep constraints, not to mention death, sorrow and anxiety. It might be somehow unjustified, but as I think of it, I get convinced we need a good dose of hopefulness. It helps us to move forward.

Beyond the health dimensions, it is true that for a good number of people the prolonged crisis has meant a serious loss of income. For others, it dramatically means either unemployment or job insecurity. It also threatens the survival of many companies, with a serious impact on national wealth and public revenue, well beyond the employment dimensions. We must be aware of all this and promote the right social and economic policies that we believe are most appropriate to respond to the many forthcoming challenges. And as we write or speak about these things, we must find a way of mixing realism with optimism.

The decision the European Central Bank has just announced, adding another 600 billion euros to the pandemic-related bond purchasing mechanism, is at the same time very encouraging and a clear indication of the crisis we are in. Money in substantial amounts is critically important. But we must be very judicious about the priorities and wise, in terms of change. The money must be an instrument of recovery, I agree, but also, a powerful tool to promote change.

One of key priorities must be the reestablishment of the education system. I have seen how the primary and secondary school pupils are being affected by the closure of the schools. Their current virtual studies are little more than a lie or a joke. It is crucial to create all the conditions to re-open the next school year, in September, effectively. Not much is being talked about that, less still is happening in terms of action. Teachers and academic authorities must be assisted from now on to create the conditions for a rentrée that makes sense and brings everybody back to the reorganised classrooms.

In the end, as we approach the summer period, we realise that this should be a very intense period of work. We must recuperate what has been lost and look forward to a better horizon.

The judges and the economic crisis

The judgement issued by Germany’s Constitutional Court regarding the European Central Bank’s bond purchasing programme must be taken very seriously. It challenges the autonomy of the Bank, it gets the judges into monetary and fiscal matters, where the Court is not necessarily in familiar territory, and, above all undermines the authority and the mandate of the European Court of Justice. In the end, the judgement imperils the European Union itself.

But it came as no surprise. Many in Germany and elsewhere are still looking at some other European countries through the lenses of historical prejudice.

In any case, it must be responded to in a manner that is as comprehensive as possible. The ECB will take its part. It should be able to produce the justification the Constitutional Court requires. And key European politicians must state in clear terms the ultimate authority of the European Court of Justice. More concretely, Angela Merkel should come up with a statement that would underline the exceptionality of the current crisis and the need to go beyond the conventional approaches. It should add a word of respect for the Constitutional Court, of course, and, at the same time, remind everyone that the ECB’s plans and decisions are fundamental to overcome the calamity we are in.

A new EU leadership team

The challenge the EU leaders have in front of them is to make the right decisions regarding the key positions in Brussels and at the European Central Bank. The period ahead of us is most critical for the European Union. The only real choice we have is to consolidate the project. To make it stronger and better understood by the citizens, that’s what it means. Sensible people understand why we need a more united Europe. They know what is going on in some big countries and how those countries can be a major threat to us, if we do not have a collective response.

EU is big enough to be able to weather the storm we see in the horizon. It must count on itself. At the same time, it should look for alliances and balances of interests, with a clear and consistent policy line. That includes stronger relations with Canada, in the Americas, with key African countries, with India and Japan, among others.

But above all, it must win the support of the European citizens.

European politics are changing fast, both in terms of the issues and the actors. The heads of State and government cannot ignore those changes. When selecting the new institutional heads, they must take that into account. We need people that have the courage to face the new issues, know how to communicate, project confidence and empathy, and represent the different regions of our Continent.

Let’s hope the right decisions will be taken.

Greece´s poker game

The Greek government is playing hard ball. They are convinced, I guess, that in the end the EU creditors will do whatever it takes to keep Greece within the Eurozone. And their poker hand is based on that assumption.

It´s a risky position. Athens might know more than we know about the concessions the other Europeans could possibly be ready to accept. But I am not sure they know. They just take the chance and hope to be right, that´s what I believe.

At this stage it is difficult to forecast the events of next week or so. We are certainly close to a clarification. And that moment of truth might be a difficult one for the Greek people. 

Greece is now against a tough rock

Greece´s financial situation is now reaching a breaking point. We might have a surprise in the coming week or so as it is abundantly clear that the public coffers are more or less dry. The State´s engine is now running on fumes, no longer on real fuel. The chances of agreement with its European creditors have become pretty remote. They still exist, it is true. But they seem very unlikely. 

If there is an agreement it will be in response to the surprise I anticipate, to a major default crisis, a precipitated reaction to tears and shouts. Drama first, spur-of-the-moment repairs afterwards.

Supporting Draghi´s decision

In the political sphere, as in life, each one has to be brave and take his or her responsibilities. One cannot blame others if one has not taken action first and tried to do the best within means and capabilities.

That´s what Mario Draghi, the president of the European Central Bank, did today. He played his role to the full. Notwithstanding serious opposition coming from very powerful people. The decision taken on Quantitative Easing is a daring one. It matches the complex and vast challenges the Euro countries are confronted with.

Now, it is up to the politicians and the key economic players to do their part. With full commitment and the same type of vision Draghi has shown. 

Draghi´s measures should have a positive impact

I fully support the measures taken today by the European Central Bank president Mario Draghi. It´s far too early to talk about their impact, even less about the results. But they are bold decisions. They are a very serious attempt to revive the EU economies, to facilitate access to productive credit and also put a stop to the strengthening of the euro currency. The only problem is that the financial markets are very volatile, they have their own logic, and, in many cases, they are only interested in the short term. And they move trillions of resources on a daily basis. However, there is money out there that is looking for a more predicable economic environment and that is ready to invest long term. Let´s see if they get additional incentives to invest on productive and job generating activities now that Draghi has adopted a more proactive approach. 

EU Commission should be more daring

You ask EU Economic Affairs Commissioner Olli Rehn and his team what is the solution for country A or B or C to return to growth and you always get the same prescription. They seem to know only one mantra. It has three lines: augment your exports; lower your labour costs; cut your public debt.

I wonder.

If every EU should boost its exports, where are the import markets?

How far should one lower the labour costs to be competitive with China or Bangladesh?

Why should we cut public debt so dramatically at a time of recession? Why can’t we get the European Central Bank’s statutes changed in order for it to be able to do some quantitative easing? Is Rehn afraid of saying that because he does not wish to offend Berlin?

The point here is very simple. We expect the EU Commission to tell the citizens of Europe what should be done effectively, together and on a country by country basis. They at the Commission are paid to produce an independent advice.

Then, Berlin, The Hague, and other capitals and their national politicians will respond if, yes or no, they want to do it.

A Commission that only recommends what the EU political masters want to hear is useless.  

Strong, capable and accepted leadership is critical

The Portuguese Constitutional Court has reviewed the 2013 national budget law and declared four revenue generating measures invalid because they violate the spirit of the country’s Constitution. The cancellation of these fiscal initiatives has an impact on the overall budget deficit, as they increase it by 0.8% to reach a deficit of around 6.3% of GDP this year. This is way above the amount agreed with Portugal’s external creditors. It projects a negative international image that contradicts the very serious stabilisation efforts the country has implemented so far.

The Court’s decision has created a major political crisis. The Prime-Minister met the President this evening to review possible options. But there aren't many, in the short term. The stabilisation process requires a long time horizon. The country has to be able to convince its external partners that as it pleads for more time and flexibility it also stays the reform course. It has also to show that it has a strong, capable and accepted leadership at the rudder…  

The cluster bomb

The EU decision on Cyprus has had the same effect as a cluster bomb. It has hurt the little credit and confidence that the European citizens still placed on the Union’s leaders. It has hurt Germany’s relations with the South of Europe a lot more. It has hurt further the trust on the banking system. It destroyed value in the all the stock markets. It undermined potential capital investments in Portugal, Spain, Greece and Italy. And it has shown, now that there seems to be some backtracking, that the EU takes critical decisions without looking at all the dimensions and implications of the matters under review. And so on.

A very effective cluster idiocy indeed.

Jeroen Dijsselbloem’s name will remain associated to this inept decision. Besides being the Finance Minister of the Netherlands, he is the President of the Eurogroup, the platform that brings together the EU Finance Ministers. Dijsselbloem took over from Jean-Claude Juncker in January 2013. Juncker, notwithstanding the fact that he comes from a very small country –Luxembourg – managed to demonstrate a strong sense of independence and objectivity. He was his own man and also a firm believer in the common project. The new fellow seems to be biased towards Northern European positions, very close to Angela Merkel’s views and be inspired by a moralistic approach to the issue of public deficits. He believes that the citizens in the crisis countries should be punished for the many years of incautious spending. This is exactly the kind of approach that can make the on-going EU cohesion crisis much worse. 

Portugal on the street

Large crowds marched today in the key cities and towns of Portugal against the austerity measures the government is implementing. The key feature of these manifestations was their peaceful nature. People have shown, once more, that they can be on the streets and behave responsibly.

Many of the protesters could be defined as middle class families that are going through a process of impoverishment. For many of them and for many years their living standards were based on a fiction: that the country could afford a level of public expenditures that was well beyond the means of the economy. With the international financial crisis this fiction could no longer be sustained. The state could no longer borrow in the international markets at low rates of interest. To be able to finance the public sector and adjust spending to the real possibilities of the economy over a short period of time, the state had to look for funds coming from the IMF, the ECB and the European Commission. These monies came with strings attached, as expected. And that hurts. It hurts even further because the government has realised – but cannot explain it properly and clearly, for reasons that are beyond my understanding – that the long term sustainability of public expenditures calls for further cuts, particularly if one takes into account the fragility of the economy and the very low rate of productive investment that has been recorded so far.

In a country where the state was the true engine of the economy – unfortunately the private sector had not been able during the last two decades to take off and expand; it remained too dependent of state projects and orders and largely linked to political patronage – if public expenditure goes significantly down most of the economy tends to collapse.

The point is to get as many investments from outside as possible. My hope is that today’s popular civism be perceived by those potentially interested in investing in Portugal as an encouragement to do so. 

Riding on the Italian elections

Some opinion makers here in Brussels and in some other European capitals are taking advantage of the Italian election results to openly express their dislike for the German political elite. It is amazing to see important people coming out of hiding and placing the blame on the Germans for the anti-EU feelings some voters are expressing left and right. 

Today I got a mail from the Executive Director of a leading Think Tank that keeps its doors open because of generous funding received from the European Commission. The man was calling my attention to an interview that a French TV had broadcast early in the morning. In his opinion, the interviewee – a prominent Parisian  economist – had been able to explain that all this popular opposition to the EU had gained strength because the German government had imposed austerity all over the place in Europe.

I watched the interview and was not convinced. Then I read a few media pieces here and there attacking austerity. It is now very fashionable as a theme. I looked for alternative suggestions but found no credible answer to the question. The only avenue that made some sense was about a different policy approach to public financing by the European Central Bank (ECB). The Bank should be more forthcoming with resources. But then one key question remained unanswered: how to get the necessary consensus among the member states about the ECB change of policy?