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Europe's economist-statesmen cannot fire a silver bullet
By Sun Lijian |
December 6, 2011, Tuesday
|
Print Edition
Print Edition
THERE have been a series of high-profile personnel reshuffles in the governments of some indebted eurozone countries.
In Italy, for example, Mario Monti, renowned economist and ex-EU commissioner for competition, was appointed by President Giorgio Napolitano as Italy's new prime minister on November 13.
Three days earlier, Greek economist and former deputy director of European Central Bank (ECB) Lucas Papademos was sworn in as the prime minister of Greece to form a coalition government.
And in Portugal, finance minister Vitor Gaspar was at certain points of his career a chief adviser to EU policy making circles, a key drafter of EU economic policy and ECB's head researcher.
Why are the indebted EU members so keen on assigning economists to clean up the debt mess? I think the reasons are threefold.
First, economists are relatively aloof from politicking. Their neutrality is conducive to cooling off rising tension between debtor and creditor nations.
Increasingly skeptical about the PIIGS (Portugal, Italy, Ireland, Greece and Spain) club's ability and willingness to pay off debts, domestic voters of creditor nations openly object to a bailout package, accusing their politicians of wasting taxpayers' money on people who expect someone else to watch their back, instead of undertaking the necessary austerity measures that compromise their well-being.
By contrast, people in debtor nations think their better-off neighbors are exploiting their weakness with harsh demands on fiscal discipline and public spending. In this rancorous atmosphere of finger-pointing, how to heal the rift between EU members becomes key to resolving the debt crisis.
Second, the economists-turned-politicians in PIIGS nations share a similar background. They have worked for international organizations and have wide connections.
professional talent
Third, their professional expertise on the debt issue is welcomed by creditor nations. For instance, Italian prime minister Monti said at a press briefing shortly after he assumed office that Italy is both a founding member and core member of EU, and because of this, it ought to drive EU's growth, not slow it down.
Monti's Greek counterpart Papademos, meanwhile, pledged that he would lead the coalition government to seek rescue funds, prevent a debt default and take on the intractable fiscal restructuring - all of which were precisely what Greece's creditors had anticipated.
Portuguese finance minister Gaspar, for his part, stressed the need to strengthen budget oversight and reduce Portugal's reliance on the outside world. His statement urging more independence provided some consolation for German, French and British creditors. However, since the sovereign debt crisis is unlikely to be defused anytime soon, we would be disappointed quickly if we pinned high hopes on these economist-statesmen.
There are many reasons for not being too sanguine about sending economists to the rescue.
First, at a time when Western banks are raising their standards of prudential regulation, it will be ever more costly for PIIGS nations to secure credit on the capital market. In the next six to nine months, the PIIGS' debts will come due, raising the question of their solvency.
Will the market spin out of control on fears of defaults, as it had when Lehman Brothers went bust in 2008 and sparked widespread panic? Will British, German and French financial institutions go bankrupt one after another and victimize the global financial system?
Currently it is widely understood that core EU members will not consider letting the PIIGS leave the eurozone. But if EU's resources are stretched too thin, if it is forced to give up rescuing the PIIGS, then even the scenario of only Greece going under would, in my opinion, trigger a cascade effect throughout the eurozone.
Free ride
Second, even if EU's prosperous members reach a consensus with PIIGS' economist politicians and implement the rescue plan immediately, will its financial scale and scope fall short of expectations? If so, will speculators take a free ride and jeopardize the long-term effect of the plan? After all, the speculative run staged by hedge funds like George Soros' Quantum Fund in 1992 gave most of today's eurozone members a harrowing time.
Last but not least, will the ECB shift away from the common monetary policy targeting inflation? Will it exercise the role of "lender of last resort" like the Bank of England and US Federal Reserve and worry less about its impact on the euro's global position at a time of crisis and market upheavals? Will fiscal overhaul and deeper integration of fiscal policy in the eurozone be bogged down over conflicting interests between big and small nations? Will such rows send dangerous signals that the eurozone is volatile? We do not have easy answers to these questions since there are many uncertainties.
Easy credit and fiscal tightening both will bring about undesirable consequences. The newly anointed PIIGS' leaders have their work cut out for them. They are bound to face enormous domestic pressure. Should they bend to pressure and adopt measures that promise instant benefits, the situation and their ability to manage it will only get worse.
Moreover, economists make decisions based on reason. Politicians rule by appeasing a fickle public. Hence I am skeptical that those economist-statesmen can adapt to their new roles quickly enough.
At the end of the day, it will take more than a few economists to ride out the debt fiasco. Eurozone governments and their people need to agree that only by developing the real economy can growth be created to service debts.
The author is executive vice dean of the School of Economics at Fudan University. Shanghai Daily staff writer Ni Tao translated and edited his article from Chinese.
In Italy, for example, Mario Monti, renowned economist and ex-EU commissioner for competition, was appointed by President Giorgio Napolitano as Italy's new prime minister on November 13.
Three days earlier, Greek economist and former deputy director of European Central Bank (ECB) Lucas Papademos was sworn in as the prime minister of Greece to form a coalition government.
And in Portugal, finance minister Vitor Gaspar was at certain points of his career a chief adviser to EU policy making circles, a key drafter of EU economic policy and ECB's head researcher.
Why are the indebted EU members so keen on assigning economists to clean up the debt mess? I think the reasons are threefold.
First, economists are relatively aloof from politicking. Their neutrality is conducive to cooling off rising tension between debtor and creditor nations.
Increasingly skeptical about the PIIGS (Portugal, Italy, Ireland, Greece and Spain) club's ability and willingness to pay off debts, domestic voters of creditor nations openly object to a bailout package, accusing their politicians of wasting taxpayers' money on people who expect someone else to watch their back, instead of undertaking the necessary austerity measures that compromise their well-being.
By contrast, people in debtor nations think their better-off neighbors are exploiting their weakness with harsh demands on fiscal discipline and public spending. In this rancorous atmosphere of finger-pointing, how to heal the rift between EU members becomes key to resolving the debt crisis.
Second, the economists-turned-politicians in PIIGS nations share a similar background. They have worked for international organizations and have wide connections.
professional talent
Third, their professional expertise on the debt issue is welcomed by creditor nations. For instance, Italian prime minister Monti said at a press briefing shortly after he assumed office that Italy is both a founding member and core member of EU, and because of this, it ought to drive EU's growth, not slow it down.
Monti's Greek counterpart Papademos, meanwhile, pledged that he would lead the coalition government to seek rescue funds, prevent a debt default and take on the intractable fiscal restructuring - all of which were precisely what Greece's creditors had anticipated.
Portuguese finance minister Gaspar, for his part, stressed the need to strengthen budget oversight and reduce Portugal's reliance on the outside world. His statement urging more independence provided some consolation for German, French and British creditors. However, since the sovereign debt crisis is unlikely to be defused anytime soon, we would be disappointed quickly if we pinned high hopes on these economist-statesmen.
There are many reasons for not being too sanguine about sending economists to the rescue.
First, at a time when Western banks are raising their standards of prudential regulation, it will be ever more costly for PIIGS nations to secure credit on the capital market. In the next six to nine months, the PIIGS' debts will come due, raising the question of their solvency.
Will the market spin out of control on fears of defaults, as it had when Lehman Brothers went bust in 2008 and sparked widespread panic? Will British, German and French financial institutions go bankrupt one after another and victimize the global financial system?
Currently it is widely understood that core EU members will not consider letting the PIIGS leave the eurozone. But if EU's resources are stretched too thin, if it is forced to give up rescuing the PIIGS, then even the scenario of only Greece going under would, in my opinion, trigger a cascade effect throughout the eurozone.
Free ride
Second, even if EU's prosperous members reach a consensus with PIIGS' economist politicians and implement the rescue plan immediately, will its financial scale and scope fall short of expectations? If so, will speculators take a free ride and jeopardize the long-term effect of the plan? After all, the speculative run staged by hedge funds like George Soros' Quantum Fund in 1992 gave most of today's eurozone members a harrowing time.
Last but not least, will the ECB shift away from the common monetary policy targeting inflation? Will it exercise the role of "lender of last resort" like the Bank of England and US Federal Reserve and worry less about its impact on the euro's global position at a time of crisis and market upheavals? Will fiscal overhaul and deeper integration of fiscal policy in the eurozone be bogged down over conflicting interests between big and small nations? Will such rows send dangerous signals that the eurozone is volatile? We do not have easy answers to these questions since there are many uncertainties.
Easy credit and fiscal tightening both will bring about undesirable consequences. The newly anointed PIIGS' leaders have their work cut out for them. They are bound to face enormous domestic pressure. Should they bend to pressure and adopt measures that promise instant benefits, the situation and their ability to manage it will only get worse.
Moreover, economists make decisions based on reason. Politicians rule by appeasing a fickle public. Hence I am skeptical that those economist-statesmen can adapt to their new roles quickly enough.
At the end of the day, it will take more than a few economists to ride out the debt fiasco. Eurozone governments and their people need to agree that only by developing the real economy can growth be created to service debts.
The author is executive vice dean of the School of Economics at Fudan University. Shanghai Daily staff writer Ni Tao translated and edited his article from Chinese.
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