The Euro Crisis and Its Aftermath by Pisani-Ferry Jean

Author:Pisani-Ferry, Jean [Неизвестный]
Language: eng
Format: epub
Publisher: Oxford University Press
Published: 2014-03-31T21:00:00+00:00

CHAPTER 14

Redemption Through Austerity?

At Tordesillas on June 7, 1494, the kings of Spain and Portugal agreed on a simple method to divide up the New World: everything to the west of the 46°37’ meridian would belong to Spain and everything to the east to Portugal. It was not a particularly subtle division principle, but it worked. It is what made Brazil a Portuguese-speaking country.

This was perhaps a precedent Mario Draghi had in mind when taking office on November 1, 2011. A few days later, in his first speech as ECB president, he lashed out at the euro area’s serial failure to implement decisions after having announced them.1 On December 1, on the occasion of his first appearance before the European Parliament, he called for what he named a “fiscal compact” that “would enshrine the essence of fiscal rules and the government commitments taken so far, and ensure that the latter become fully credible, individually and collectively.” Such a compact, he said, “would be the most important signal from euro-area governments for embarking on a path of comprehensive deepening of economic integration,” adding that other elements might follow, but that the sequencing mattered.2 The further elements quickly followed: meeting on December 8–9, the heads of state and government of 25 EU countries—all except the UK and the Czech Republic—announced their intention to adopt a new fiscal treaty. Even before this summit concluded, on December 8, Mario Draghi announced that the ECB would launch a new longer-term refinancing operation (LTRO) for banks, aimed at providing them a fixed rate with unlimited amounts of funding for a period of up to three years.

Coming after months of procrastination, the sequence was astonishing. There was, at last, a plan, and one that looked as simple as the treaty of Tordesillas: The states would take care of themselves and of each other; the ECB would take care of the banks. There would be no more discussions of lenders of last resort for sovereigns or leverage. Each side would do its job. The fiscal treaty would reassure markets by compelling states to abide by the fiscal rules and the ECB would provide, on cheap terms, as much liquidity as banks needed. Banks would no doubt use some of the liquidity to buy government paper and help bring sovereign spreads down—what became known as the “Sarkozy carry trade” after the French president suggested it—but this would be their own choice, not that of the central bank.

Germany could not agree more with the idea. It involved two key ingredients that Berlin was fully behind. The first was the strengthening of fiscal discipline. Chancellor Merkel had pushed for tighter and more credible rules, but she was not convinced that the legislation proposed by the European Commission and under discussion in parliament—the soon-to-be-adopted “six-pack”—was tight enough. In Deauville at the end of 2010, Nicolas Sarkozy had obtained from her a concession that sanctions for infringements would not be automatic; she regretted having given in to this demand. A new treaty was

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