Among investment bankers, there is renewed speculation about the possibility of a country leaving the European Monetary Union (EMU) — or being pushed out. Rating agencies have downgraded Portugal, Greece and Spain, owing to their poor prospects for economic growth and weak public finances. Ireland has been assigned a negative outlook and could soon suffer a downgrade as well.
With fears mounting that one or another euro-zone country may default, yield spreads on government bonds between EMU countries have reached record highs. For some time now, Greek 10-year government-bond yields have been about 300 basis points above German yields. This is a sign that investors now see a significant risk of a Greek default or of Greece exiting from the EMU and redenominating its government bonds.
But the panic that the EMU may disintegrate is overdone. Rather than a default and subsequent exit from the euro zone, the member states are more likely to overrule a fundamental principle of the EMU and bail out a fellow member state.
Leaving the EMU would be a costly option for weak-performing countries. Of course, regaining the exchange rate as an instrument for competitive devaluation could help overcome competitiveness losses because of soaring unit-labor costs.
As Argentina showed after its default and devaluation in the winter of 2001 to 2002, such a move can reignite exports and economic growth.
But Greece, Portugal, Italy and Ireland are not Argentina. The EU treaty does not provide for an exit from the EMU. As a default would demand a change in the currency involved in private contracts, business partners from other EU countries would surely sue, legal uncertainties would drag on and on, and an exiting country’s trade with its main trading partners would be impaired for years to come. So none of the countries at risk would seriously consider reintroducing a national currency.
It is possible that an EMU government will come close to insolvency or illiquidity.
But letting one member fail would create speculative pressure on other EMU governments with weak fiscal positions or shallow domestic bond markets. A widespread default of several countries in the EMU would lead to serious disruptions of trade within the EU and to new problems in the banking system, which would have to write down their holdings of government bonds. The large EU governments are well aware of this problem and would act accordingly.
With its loans to Hungary and Latvia, the European Commission has already revived a credit facility which was dormant since the European Monetary System crisis in 1992 — and for countries outside the EMU. The support is huge. Together with the IMF’s contribution, the EU loan to Latvia amounts to more than 33 percent of Latvian GDP.
By supporting to such a degree two new EU members that are not part of the EMU, the EU countries have demonstrated a much greater commitment to mutual aid than was thinkable only a few years ago. And more is expected to come: Last November, the Ecofin Council increased the ceiling for possible balance-of-payment loans to non-EMU countries to 25 billion euros (US$32.3 billion).
Against this background, it seems inconceivable that the EU should refuse to support an EMU member in a situation similar to that of Hungary and Latvia, especially as all the countries that are currently on market watch lists are long-time EU members. In case of real distress, the rest of the EU will offer a bailout package.
Indeed, the no-bailout clause in Article 103 of the EU Treaty — according to which neither the European Central Bank, the EU, nor national governments “shall […] be liable for or assume the commitments” for other national governments — has lost its credibility. The political and economic costs of letting a fellow member government fail are simply too high in the closely interconnected EMU.
Because there is no current blueprint for this move, one can only speculate about what it would look like. One option is for large EU countries to construct a bailout package. Alternatively, the EU could create a special facility through which it borrows money in the bond market to help the member in trouble — an arrangement similar to the bonds that the European Commission has already issued for the emergency facility from which Hungary and Latvia have been borrowing.
The EU is good at circumventing treaty obligations in times of real crisis. There is no reason to expect this skillfulness to desert it this time around.
Sebastian Dullien is professor of international economics at the Fachhochschule fur Technik und Wirtschaft (University of Applied Sciences) in Berlin. Daniela Schwarzer is head of the EU integration division at the German Institute for International and Security Affairs (SWP).
COPYRIGHT: PROJECT SYNDICATE
You wish every Taiwanese spoke English like I do. I was not born an anglophone, yet I am paid to write and speak in English. It is my working language and my primary idiom in private. I am more than bilingual: I think in English; it is my language now. Can you guess how many native English speakers I had as teachers in my entire life? Zero. I only lived in an English-speaking country, Australia, in my 30s, and it was because I was already fluent that I was able to live and pursue a career. English became my main language during adulthood
Somehow, US intelligence identified “the Houthis’ top missile guy” and pinpointed his exact location. At 1348 hours (Washington time), March 15, President Trump’s national security advisor Mike Waltz texted, “positive ID of him walking into his girlfriend’s building.” The unsuspecting Romeo entered. High above, the drone monitoring the building registered a flash. When the smoke cleared, Mr. Waltz texted, “…And it’s now collapsed.” RIP. The star-crossed “top missile guy” had been target number one in the now uproarious US Navy bombing campaign on that Sunday against the Yemeni rebels who have been holding the Red Sea hostage since October 19,
Taiwan on Monday celebrated Freedom of Speech Day. The commemoration is not an international day, and was first established in Tainan by President William Lai (賴清德) in 2012, when he was mayor of that city. The day was elevated to a national holiday in 2016 by then-president Tsai Ing-wen (蔡英文). Lai chose April 7, because it marks the anniversary of the death of democracy advocate Deng Nan-jung (鄭南榕), who started Freedom Era Weekly to promote freedom of expression. Thirty-six years ago, a warrant for Deng’s arrest had been issued after he refused to appear in court to answer charges of
The Opinion page has published several articles and editorials over the past few weeks addressing Taiwan’s efforts to leverage unique or strong aspects of its culture to increase international awareness of the nation. These have included submissions by foreign journalists and overseas students, highlighting how bubble milk tea, Guinness World Record attempts, the entertainment sectors, impressive scenery, world-class cuisine and important contributions to the high-tech supply chain can enhance Taiwan’s recognition overseas and therefore its soft power. That entails competing for attention in already crowded sectors. Other nations, after all, offer popular entertainment exports, beautiful scenic spots and great food.
RSS