STEPHEN KING: Blame the creditors, too
The creditors in the eurozone need to face up to their own blame, otherwise the breakdown of trust cannot be mended, says Stephen King
The rift between eurozone countries that borrowed too much before the crisis and their creditors continues to widen, but not enough emphasis is being placed on the role of the creditors themselves the current account surplus countries in creating these imbalances. The problem here is that, prior to the eurozone crisis, there were huge claims built up by northern European savers on the income of southern European borrowers. Before the financial crisis, countries that borrowed too much were arguably forced to do so because of the generosity of those who lent too much. If the borrowers had wanted to borrow more than the lenders wanted to lend, you would have expected interest rates continually to rise. But that didnt happen; interest rates came down dramatically in southern Europe because actually it was the generosity of the lenders that was directing the flow of funds, not the desperation of the borrowers.
Before the financial crisis, the Germans were lending heavily to southern Europe through the purchase, directly or indirectly, of southern European governments bonds, which caused the interest rates on those bonds to come down dramatically. Thats fine, until you get to the point where economic activity proves to be far weaker than had been expected. If income is then much lower than expected, it becomes a political question as to exactly who pays for the failure of income to pick up, and for the fact that the debtors cannot easily pay the creditors.
The creditors argue that it should be the debtors who pay the bill, because they are the ones who borrowed too much in the first place, therefore they should be confined to years of austerity. The debtors on the another hand might say you, creditors, were lending to us on a foolish basis in the first place, and we cannot deliver austerity year after year; eventually our political institutions will collapse and, actually, you the creditors also have to take a share of the cost of this adjustment. But because in the eurozone there is no political process to decide how that cost of adjustment should be shared out, there is now a breakdown of trust between different countries, a huge increase in financial uncertainty and the recurrence of problems year after year. It is time for the surplus countries to take their share of the blame for the imbalances.
|More from Emergingmarkets.org|
|Read the latest news stories here|
|Click here to read the latest features|
|Register for free to receive the weekly newsletter|
As far as the global economy is concerned, the idea of default by stealth by depreciating the exchange rate has been used time and again, but the eurozone does not have that option. The lesson here is that monetary unions tend to work only if there is an accompanying political and fiscal union as well. Throughout the crisis there has been a view that the monetary authority can resolve all the issues. But we know from the Cypriot example that even with an OMT programme which would allow the European Central Bank to buy bonds waiting in the wings, it is still quite feasible to have a big dispute over who picks up the cost of some kind of economic or financial failure. In the eurozone, the situation should probably be resolved by a combination of three things: moves towards fiscal and banking union; moves towards a political union; and some kind of one-off restructuring of debt which basically accepts the principle that both creditors and debtors stand to lose out because theyre two sides of the same coin.
- Stephen King is Chief Economist at HSBC. His new book 'When the money runs out: the end of western affluence' is due to be published in June. Interview by Antonia Oprita
- Follow us on twitter @emrgingmarkets