Post 06/05 reality check - If we only had time
Have we witnessed a kind of decisive paradigm shift in Europe over the weekend ? It might still be too soon to conclude this but in political terms, some important events indeed took place. In order of importance :
1) Greek chaotic election result and not workable in the short term. Already after a couple of hours, leading party ND abstained from its coalition formation prerogative, handing it over to the Syriza party. This is important because there is a lot at stake here and with not a lot of enthusiasm to negotiate yet another 10bio EUR+ austerity package across the board. So a Greek exit out of the euro-zone is still very much on the table. And with some delay and bearing these political developments in mind, markets are putting the single currency under pressure as we speak.
2) France and the cry for establishing a growth pact complementing the fiscal pact (and a desire to renegotiate the fiscal growth pact). Some scenarios circulate, mainly involving supra-national vehicles such as the European Investment Bank being handed over extra firing power in order to lend money for "strategic sustainable green infrastructure projects". Once again, who will pay for all of this ? It didn't take much long for Frau Merkel to react : Nein, pacta sunt servanda and already signed in a majority of EU members. Nevertheless, Merkel's CDU realized a poor election result in Schleswig Holstein and a big one in Nord Rhein Westphalen is coming up. But in addition, various quality media sources are more and more putting the prolongation of a single currency zone with German participation into question.
3) Spain. Again banks and the need for extra capital buffers. One possible solution would be to copy some kind of bad bank model (cfr NAMA Ireland 2009 or Sweden 1992) in which toxic assets are parked. On the practicality of this, the Spanish government will provide further details near the end of this week but it seems that we could be talking here of about 100 bio EUR+ of required provisions. Could the EFSF be involved in this state guaranteed operation ? Whatever the outcome, it will take time to resolve this looking at the experience from abroad. Sweden for example managed to dissolve its bad bank (Securum) after 5 year. In the case of Ireland, the price tag is already higher than foreseen and the outlook is that it will take an entire decade to clean up the mess.
So the crucial element in all these story lines remains "time" and who to blame. It really shouldn't come as a surprise that politicians - going into the fifth year of this financial crisis - are showing signs of austerity fatigue. And that rank and file on a lower echalon don't quite grasp the need for structural reform when there are no signs yet of economic improvement. Briefly, impatience - and the lack of visibility on short/medium term results of all these efforts - make us ordinary people demoralized. And it won't get better when having a look at the simulations the IMF made in Autumn 2010. It briefly tries to work out a trajectory for debt normalization of the developed world struck by the financial crisis. In terms of persistent budgetary efforts and time-frame, you arrive at something like this :
The above simulation already takes a structural lower growth path post-crisis into consideration. It briefly states that for yet another couple of years, various developed nations have to considerably step up efforts in order to obtain a structural primary budget surplus. And that in addition it will take yet another decade to come to more acceptable debt levels, comparable to the pre-2007 situation. And so the the following question should be raised : Suppose you are a politician in the West, faced with these charts and the Herculaneum task over the next 2 decades to secure some extra 5 to 7% of GDP of permanent austerity in your budget, fully aware you have no manouvring space in order to deliver some goodies over the next 15 to 20 years , what would you do ? My guess you bury your ambitions or make a best shot for 1 term, knowing the odds are not really favorable of becoming re-elected. And so far based upon some empirical evidence, it seems that those politicians in Europe who have pushed the austerity button have not been politically rewarded.
So what could be the game plan going forward ? Postponing the inevitable ? Are we really going to pay off all these debts in a classic way with a 20 year horizon in the back of our minds ? I have my doubts.