& çâÌæÚUæð´ ·¤è ¥ôÚU Îð¹Ùæ ÁæÚUè ÚU¹ð´ ¥ÍæüÌ ¥ÂÙð ÜÿØ ÂÚU ŠØæÙ ÚU¹ð´Ð ãæÚU Ù ×æÙð´, €UØô´ç·¤ ·¤æ× ·¤ÚUÙð âð ¥æÂ·¤ô ©gðàØ ·¤è Âýæç# ãôÌè ãñ ¥õÚU ÁèßÙ ·¤æ ¹æÜèÂÙ ÎêÚU ãôÌæ ãñÐ ÖÜð ãè ÁèßÙ ×ð´ ç·¤ÌÙè Öè ·¤çÆÙæ§ü €UØô´ Ù ¥æ°, çÁ™ææâæ ¥õÚU ©ˆâæã ÕÙæ° ÚU¹ð´Ð ŠØæÙ ÚU¹ð´, ÜÿØ ã×ðàææ ¥æÂ·Ô¤ Âæâ ãôÌð ãñ´ çÁ‹ãð´ ÂæÙð ·Ô¤ çÜ° ÂýØæâ ¥æÂ ·¤Öè Öè àæéM¤ ·¤ÚU â·¤Ìð ãñ´Ð

LETTER FROM EUROPE

Survival of the Euro: Important for Germany too

The Germans must realise that their welfare is intrinsically linked to economic recovery in the rest of Europe and the survival of the euro. Somebody compared the euro with the Titanic. If it sinks, everybody will go down with it including its first class passengers like Germany.

Chaklader Mahboob-ulAlam
MARIO Draghi, the president of the European Central Bank (ECB) is a seasoned central banker and a highly respected professional. So when on July 25, the Spanish ten-year government bond yields shot up to 7.75% (the Italian bond yields were not far behind), he realised that something had to be done quickly to lower the borrowing costs of the fourth and third largest economies of the euro area. Otherwise, there would be no economic recovery in these countries. He also felt that the euro itself was in grave danger. Next day, he appeared at a press conference and pledged to "do whatever it takes to preserve the euro zone." That meant buying Spanish and Italian debts on a massive scale. No wonder, the financial markets rallied immediately.
Unfortunately, exactly one week after this official pronouncement, Mr. Draghi signaled something quite different. He made a highly qualified offer. At a news conference on August 3, he said that the ECB was still willing to buy government debts but the troubled countries must formally ask for help, i.e., a proper bailout which none has yet asked for because of the political stigma attached to it and also because it will entail further austerity measures and closer supervision by the authorities in Brussels. So, the inevitable question is: What forced the president of the ECB to change his mind?
The principal reason for this change is the German opposition to bond buying on a massive scale. Mr. Draghi acknowledged that the other 22 members of the ECB’s governing council including the heads of the central banks of countries like Finland, Holland and Luxembourg had earlier voted in favour of the proposal. The only exception was Mr. Wiedman, president of the German central bank, who voted against it. Why?
Many Germans think that the euro is a failed construction, therefore it is pointless throwing further sums of good money after a bad project. This is not entirely true. Germany has benefited greatly from the euro system. The Germans should also be reminded that their country is partly responsible for the current situation in the debtor countries and that if the euro implodes, not only the so-called southern peripheral countries but also Germany will suffer from the meltdown because of possible defaults and other reasons that 1 shall explain later.
But first, let us have a bit of history to help us understand how we got to this disastrous situation. All this began in the summer of 1992. The European Currency Mechanism for semi-fixed exchange rates was still functioning. Suddenly, to address the threat of inflation, Germany raised the benchmark interest rate for German marks. In order to take advantage of
this increase, the international investors diverted huge amounts of capital to Germany and as a result the German mark soon rose 20% against the US dollar. Since the other European currencies were aligned with the German mark (slight deviations were allowed), they also rose against the dollar, thus damaging their prospects in the export market. In order to maintain alignment with the German currency, they were forced to raise interest rates as well, which hurt their domestic markets.
In September, 1992, Italy and the UK left the European Currency Mechanism for alignment. As a result, their currencies depreciated rapidly. Soon
other European countries followed their example, thus putting an end to the European Currency Alignment system. Germany lowered the benchmark rate from 8.75% to 8.25%. The German Central Bank continued with its policy of lowering the benchmark rate (11 times) over the next few years until it reached 2.5% in 1999 when the euro came into being and the European Central Bank took over the responsibility of setting the benchmark rate.
In their rush to create the European single currency, the participating countries agreed on a fixed exchange rate among their currencies without taking into consideration the vast differences that existed in their labour, fiscal and banking legislations. They also ignored the fact that their productivity levels were completely different.
Although there were hopes for an early convergence in these areas, the results were very different. While the Germans, with their characteristic discipline and hard work, managed to keep their costs and expenses under control, invested in research and development, improved the economic infrastructure of the country, increased their exports and piled up huge surpluses in the current account, some of the so-called peripheral countries of Europe went just the other way piling up huge fiscal and current account deficits.
How were these deficits financed? Well, they were financed with a flood of easy money coming out of
countries like Germany and other northern countries. In theory, this capital inflow at low interest rates should have pushed these debtor countries to converge in productivity at the German level. Unfortunately, the results were completely different. Greece spent the money on superfluous items and neglected its tax collection system. Spain and Ireland created huge credit and real estate bubbles (the infamous sub-prime mortgages) through their banks. Spain in particular went on a spending spree on fancy projects and built up a huge patronage system under which increased significantly the number of public sector employees at central, regional and local government levels. What is amazing is that while all this was going on neither the debtor countries nor the creditor countries realised that one day the bubbles would burst and the consequences would be catastrophic. They would jeopardise not only the financial system of the debtor countries but also that of the creditor countries like Germany because of their huge exposure.
A few weeks ago, Moody's lowered the credit rating of several large banks in Germany. According to newspaper reports the rating of Germany's largest bank, the Deutsche Bank, is being reviewed. If the euro implodes, it is quite likely that Germany will be forced to recapitalise many of its banks. German mark will surge and most other European "currencies would plummet and the imbalances would create a global catastrophe." If Europe and the rest of the world enter into a deep recession, German exports will plummet, tax revenues will fall and unemployment will rise.
It is true that serious mistakes have been made in the construction and management of the euro. But now, at this stage of the game, Germany cannot simply walk away from the euro project. The Germans must realise that their welfare is intrinsically linked to economic recovery in the rest of Europe and the survival of the euro. Somebody compared the euro with the Titanic. If it sinks, everybody will go down with it including its first class passengers like Germany. So what is the solution?
Spain and Italy will have to swallow their pride and officially ask for help from the Central Bank. Further austerity measures will be counterproductive because they would lead to greater recession. But these countries must guarantee that they will not renege on reform commitments already made by allowing Brussels to audit their accounts on a regular basis. Germany must show its faith in the honesty and professional integrity of Mr. Draghi by removing all limitations to his bond -buying powers. Using Mr. Draghi's words, these measures should be "adequate to preserve the euro zone,” which includes Germany as well.
The writer Is an Officer of the Order of Queen Isabel la Catolica of Spain and a columnist for The Daily Star.