‘Fault, Not Solidarity’ to Save the Eurozone? Apparently It’s ‘Neither’

Prof. Peter Lindseth

 Just a brief update on one of my earlier posts that explored whether the idea of ‘fault, not solidarity’ could serve as a normative argument to support the sort of wealth transfers (‘burden-sharing’) that will no doubt be required in order to resolve the Eurozone crisis.

 One way in which such ‘burden-sharing’ might manifest itself would be in the recapitalisation of banks in peripheral countries like Spain, via the ESM.  The precarious state of bank balance sheets throughout the Eurozone, including Spain, is without doubt one of the ‘legacy problems’ that my ‘Fault, Not Solidarity’ post highlighted, drawing on an idea set out in a report by the INET Council on the Eurozone Crisis.  This is precisely the sort of problem that derives from ‘the original flawed design/perverse incentives of the EMU’ for which all members of the Eurozone should bear some responsibility. Addressing this problem via the ESM was certainly one of the implications, if not explicit agreements, of the Eurozone Summit in June.  Eurozone leaders recognized in the very first sentence of their summit statement that it was ‘imperative to break the vicious circle between banks and sovereigns’.  As Ambrose Evans-Pritchard wrote yesterday in The Telegraph: ‘The document said the ESM must be allowed to “recapitalise banks directly”, clearly referring to Spain’.

 It seems, however, that the finance ministers of Germany, the Netherlands, and Finland apparently don’t see it that way.  As a joint statement of September 25 made clear, in their view ‘the ESM can take direct responsibility of problems that occur’ only after a country has relinquished fiscal control under an ESM bailout and supervision memorandum. Otherwise, ‘legacy assets should be under the responsibility of national authorities’.

 So much for recognizing shared ‘fault’ as a basis for dealing with this key portion of the ‘legacy problem’ that my prior post highlighted.  As Evans-Pritchard concludes, the September 25 joint statement would seem to prevent the ESM ‘from recapitalising Spain’s crippled banks directly under a €100bn (£79bn) loan package agreed with Madrid in June. The burden will fall entirely on the Spanish state’.  And he further elaborates: ‘The extra debt burden is likely to be around €60bn or 6pc of GDP, depending on bank stress tests to be unveiled on Friday. Pessimists fear it could rise to 15pc of GDP once full losses from the property crash are crystallised’.

 I suppose we could call the proposed German-Dutch-Finnish approach to bank recapitalisation as ‘Neither Fault Nor Solidarity’.

2 thoughts on “‘Fault, Not Solidarity’ to Save the Eurozone? Apparently It’s ‘Neither’

  1. Update: Jens Weidmann, President of the Bundesbank, has in effect confirmed that, in his view at least, Germany must recognize ‘neither fault nor solidarity’ in the effort to resolve the Eurozone crisis: http://www.bloomberg.com/news/2012-09-27/ecb-s-weidmann-says-banking-union-can-t-cover-bad-debts.html. As FT’s Wolfgang Munchau harshly but perhaps fairly concluded in his Daily Morning Newsbriefing of September 28 (sub. req.): “Weidmann seeks to sabotage [the] banking union” http://www.eurointelligence.com/eurointelligence-news/news.html.

  2. Another Update: Both Ambrose Evans-Pritchard and Jeremy Warner have recently written pieces in The Telegraph that are worth the read. They provide the economic background supporting the normative claim that the surplus countries in the Eurozone (notably Germany) should recognize, if not ‘solidarity’, then at least ‘fault’, as the basis to support burden-sharing in the EZ crisis. AEP’s contribution is here (http://blogs.telegraph.co.uk/finance/ambroseevans-pritchard/100020401/europes-betrayal-of-spain/) and Warner’s is here (http://www.telegraph.co.uk/finance/comment/jeremy-warner/9572359/Spain-must-leave-the-euro.html). I will try to expand on their arguments in a future post, but for now, this passage from AEP captures the essence of the argument: ‘The Spanish bubble was after all a joint venture. Spain was flooded with cheap capital from Germany and Holland that it could not prevent or control under the EMU system. Did the German and Dutch regulators recognise the danger, or try to stop the excesses? Not really. They were complicit’. In short, Spain should stop seeking ‘solidarity’ and start demanding justice for shared ‘fault’. Not until the surplus countries break from their preferred narrative, that the crisis is a consequence of fiscal profligacy and indiscipline in the debtor countries alone, will the Eurozone find the normative basis to share the burdens necessary to solve the crisis.

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