19 december 2011
No more taboos

Early in November, Georges Papandreou thwarted an attempt to agree a multilateral bailout at the last G20 meeting of the year by announcing plans for a referendum. All of a sudden, the hitherto excluded scenario of a country deciding to leave the eurozone became a distinct possibility. A further taboo was broken in Cannes: leaders meddling directly in the domestic politics of other European countries. Soon after, Italy acquired a technocratic government with backing from Berlin. The spectacular acceleration of the European crisis since the summer is now forcing European leaders, and perhaps soon the European Central Bank, to start thinking the unthinkable. This could be good news.

The experience of European interdependency

Through its announcement on 28 November that the financial crisis was now threatening the ratings of all eurozone countries, Moody’s served a reminder that Europe’s distress is the result of systemic problems, which cannot be rectified with national remedies. Europe as a whole is now facing exceptionally serious financial risks, which require treatment on a similar scale. It is clear for all to see that higher public debt refinancing costs in Spain and Italy mean that with each passing day there is even less hope of these countries’ reducing their debt in the midst of a recession. France may find itself in a similar situation (in mid- November, the risk premium it has to pay to refinance is public debt stood at the level Italy reached six months ago). Germany itself is now experiencing interdependency: manufacturing orders were down 4.3% in September, with a 12% drop in orders from the eurozone. And having stocked up on German government bonds to take shelter from the crisis, investors are now asking for slightly higher returns before they buy any more.

If the eurozone is to avoid a break-up, previously taboo solutions will have to be considered to stem this fatal contagion. In particular, the European Central Bank must now be given a mandate to act decisively (zero interest rates, lender of last resort, direct or indirect financing of the EFSF... the possibilities go on) to ensure the stability of the financial system, like any other central bank – especially as long-standing distrust of ill-disciplined governments in Athens and Rome is no longer acceptable. The proposal to create a common European bond within the eurozone cannot be barred from discussions. The suicidal effects of excessive austerity policies will also have to be acknowledged. Lastly, closer fiscal integration will require a concrete plan. The call to arms, directed at the ECB in particular, is becoming deafening and cannot be ignored for much longer. We believe that the receding risk of a systemic crisis will justify our decision to slightly lower our guard against equity markets as the year draws to a close.