This is the third time in succession that this column presents opinions concerning money and finance which appear superficially plausible but only become firm truths when enough parrots repeat enough times what their masters in Brussels, Paris or at the International Monetary Fund (IMF) declare. The most recent occasion for the Parrot choir to hit fortissimo was the October 8-9 "last-chance" Brussels summit to end all summits and save the euro at least until the imperative need for another last-chance summit emerges in a few months' time.
Safety First, Dearly
Britain went into this summit moderately concerned about the future of the euro, the money of its largest trading partner, but also anxious about the regulatory zeal of Monsieur Barnier, the Commissioner for the internal market, and his distinctly non-liberal brains trust with its instinctive dislike of the City of London. Confronted at dawn with a complicated and in part puzzling draft agreement more or less accepted by 26 of the 27 drowsy government delegations, the British asked for exemption from certain regulatory aspects, a demand angrily refused by the French President. By the unanimity rule, the 26 willing governments are thus prevented from amending the Union's basic treaty as desired by Germany (an amendment that may have taken several years to ratify and survive referendums in several countries), and must be content with intergovernmental agreements. The former would hardly be stronger than the latter, but perfidious Albion is loudly blamed for vetoing it.
France is behaving like the jilted bride who becomes embittered, and Britain like a clumsy lout. Each side blames the other and claims that the other has dealt itself a losing hand. The bad blood may last a couple of years but not more, for France needs British friendship to counteract the overwhelming weight of Germany.
Meanwhile, the regulatory steamroller is advancing, flattening the international financial landscape at a cost that lays between the stratospheric and the astronomical. According to HSBC and Barclays, two of Europe's half-dozen giga-banks, "ring-fencing" their retail operations to insulate them from the hazards of the investment banking side, will cost them up to 2 billion euros per bank in extra information systems and lost synergies. The added safety is problematical. The Financial Times of December 9, 2011 reports that world-wide financial service companies are hit with an average of 60 regulatory changes every working day, a 16 per cent rise over last year and no let-up in sight. Regulators announced 14,215 changes in the 12 months to November 2011. Compliance departments have to cope with an annual increase of up to 20 per cent p.a. until at least 2013. The Dodd-Frank bank reform act in the United States and the Basel 3 rules in Europe are chiefly responsible. In addition to burgeoning compliance costs Basel 3's jerking up the required solvency ratio of the banks from 7 to 9 per cent in a matter of months is, despite protestations to the contrary, putting on a "credit crunch" in Europe that is turning the danger of a 2012 recession into a reality at a cost in needlessly lost output of the order of 150-200 billion in one year.
It is fair to say that if and when 7 per cent of own capital turned out to be insufficient for banking safety, 9 per cent would be no more sufficient. Fractional reserve banking depends on confidence first and last. No realistic solvency ratio can suffice if confidence is ceaselessly shaken by cries of alarm by the powers-that-be who are competing for media attention, and by their echo of shrill parrot talk. Regulatory houses of cards built by eager busybodies cost dear and instead of restoring confidence, make for shyness.
"Naughty, Naughty Child!"
The December 2011 agreement "to save the euro" is alleged to provide for a voluntary limitation of structural budget deficits to 0.5 per cent of GDP. This is to be the golden rule of every state. The key word of course, is structural, meaning roughly taking the good years with the bad. If the actual deficit is, say, 4 per cent, a state can always argue that it would be 0.5 if this were not a bad year. In a good year, the same policies would yield a surplus—and so on with jam, jam tomorrow, but never have a balanced budget today.
The really interesting part of the golden rule, however, is that it is supposed to incorporate automatic sanctions against the offender. Each state will have the golden rule in its constitution. If it offends against the golden rule, the European Court of Justice will nudge the country's constitutional court to act. It, or the Court of Justice (it is unclear which), will "sanction" the state. But what the sanction may be is a puzzle. The constitutional court will not unseat the government, and its verdict may be just shrugged off. The Court of Justice has no armoured column to send to occupy the capital. A fine looks a more feasible punishment. But for the fine to persuade a government to change its fiscal policy, its amount would have to be huge, probably no less than 1 per cent of GDP. For a government desperate to survive the next election, even that sum would not be a deterrent—the less so as it may just drag its feet and not pay it, or be unable to pay it for the very reason that forces it to run a budget deficit in the first place. In other words, for all the talk about automatic sanctions, the new golden rule looks just as unenforceable as the 1991 Maastricht treaty rule that both Germany and France had simply shrugged off.
The sole realistic alternative is to punish the offending state by the Court of Justice and the other European institutions shaking an index finger at the offending state and saying "naughty, naughty child"! For the time being, no parrot-master is admitting this and the parrots are happily repeating that there will be no deficits because there will be "automatic sanctions". The painful awakening could then serve as the subject of the third or fourth-next "last-chance" summit meeting to save the euro.
Funny Bonds, Eurobonds
There is now a wide consensus that a major weakness of the eurozone is to have 17 different states issuing 17 different sovereign bonds of different creditworthiness. "Speculators" (the common European word denoting financial institutions, pension funds and widows-and-orphans who try to put their assets in instruments they expect to fall least, or rise most, in value instead of passively awaiting whatever their destiny will bring them) then "attack" (i.e. refrain from buying, or sell, or even short-sell) the weakest-looking bonds; so that the weakest state will be unable to service its debt and will have to be "saved" by stronger eurozone states, while the "speculators" turn their attention to the next-weakest victim that requires the next bail-out—and so on. The remedy, all agrees except the German public, is to have euro-bonds not identified with any one state but guaranteed jointly by all. Obviously, weak states are not very convincing guarantors for other weak ones. The handful of strong ones, principally Germany, are not sure that they wish to be the guarantors for all the rest of the 17.
However, like funny money that has neither hard assets nor a government's taxing power to back it, bonds are funny ones if issued by a body that has no revenues with which to pay interest and to help refinance the principal when it falls due. In order for eurobonds not to be funny, the body that issues them would have to have the power to tax Europe's citizens in some very substantial form—a power that no sovereign European state looks like being ready to concede. In the last analysis, asking for eurobonds as the sole means of keeping the eurozone in being, is to ask for a federal eurozone government with monopoly power to tax but returning agreed parts of the revenue to member states to let them have some degree of autonomy. At present, governments and their electorates would angrily reject such a solution. It is more comfortable to ask for eurobonds without thinking through the grim reality they would have to bring with them. This, in any case, is the standard way in which European public opinion likes to imagine the options it wants to believe in.
* Anthony de Jasay is an Anglo-Hungarian economist living in France. He is the author, a.o., of The State (Oxford, 1985), Social Contract, Free Ride (Oxford 1989) and Against Politics (London,1997). His latest book, Justice and Its Surroundings, was published by Liberty Fund in the summer of 2002.
The State is also available online on this website.
For more articles by Anthony de Jasay, see the Archive.