'Spain’s situation is very different to Greece’s'
Regulating market speculation is very complicated, says Philippe D'Arvisenet, chief economist at BNP Paribas, who advocates the establishment of a common European budget as an alternative.
Fearing the spread of a Greek-style debt crisis, speculators sent European stock markets tumbling on Tuesday. Stocks in Madrid fell 2.27% and markets in Athens fell almost 4% at the close on Wednesday. The euro itself reached its lowest level since April 2009, at 1.29 dollars. If Europe does not solve its fundamental institutional problems, “the future of the euro may be limited”, Nobel Laureate Joseph Stiglitz said Tuesday.
But the end of the euro is nowhere near, says Philippe D'Arvisenet, chief economist at BNP Paribas. He hopes the Greek crisis will prompt consideration of how to plug the institutional and systemic holes in the euro zone.
There were rumblings Tuesday that the Greek crisis could spread to Spain, causing panic in the markets. Where did this come from?
According to one rumour, Spain has asked the IMF for a loan of 280 billion euros, which corresponds to half of its total debt. But this does not make any sense! The Spanish Prime Minister denies this, the IMF denies it... But the damage is done. Markets always move on fear.
Rumours are always provoked: they aren’t born from nowhere, they’re created for someone to profit from. Who started this rumour? It may be someone in a trading room or the work of hedge funds; we'll never know. The role of rating agencies may also be called into question... There are many stakeholders. What is worrying is that investor expectations manufacture reality. There’s a crisis of confidence in euro markets that feeds off itself.
What impact might this have on the Spanish economy?
Spain’s situation is very different to Greece’s. Its debt is less than half and there has been no such level of falsification of accounts. But it’s certain that in the coming years, many European countries - Spain, but also Portugal and Ireland - will have to have much tighter budgets. It’s the only way to reassure the markets in the short-term. The austerity budget will slow economic activity further in these countries, but also further widen the gap in the euro area.
In a way, Germany, Holland and France are benefiting from this situation. When interest rates rise on Greek bonds - because these securities are not safe, and therefore not attractive - those of other countries fall. For example, Germany’s are less than 3%.
The euro hit its lowest level in a year. Do you believe in the "end of the euro," as evoked by Nobel Prize winning economist Joseph Stiglitz?
First, one shouldn’t necessarily complain about the decline of the euro. A few months ago, it was considered too high. A strong euro is a barrier to exports, and since November it has been noted that export orders are up. So this decline is not entirely negative.
Moreover, the Anglo-Saxons have been predicting the end of the euro for 15 years. The single currency has never pleased them, they dream of an end to the euro.
But in reality, it would be very complicated. We must consider the consequences, both for those who come out and for those who remain in the euro zone.
If you are Greek, and you have some money in the bank, you do not want to devalue your currency by half. In Argentina, the devaluation of the peso resulted in very significant social tension. Moving Greece out of the euro zone would have been a much more violent solution, and full of uncertainties. The Germans also have no interest in this. Like others, they export half their production to the euro zone members. It would be very hard to sell if neighbouring countries had a devalued currency.
What are the possible solutions?
If the situation continues to deteriorate, the euro zone countries will have to do something. Otherwise, we'll go straight to the wall. We must find answers to the flaws in the euro system. We have known since the beginning that there is no federalism; on one side there is the European Central Bank (ECB), and on the other a multitude of governments. We also know that the outcome of a crisis is uncertain.
Faced with this situation, we must implement a common European budget. California, for example, has a disastrous budget situation, but no one is talking about making California leave the United States! Either everyone tightens their belts, or we go towards this form of federalism.
There are plenty of holes in the euro system; it takes a crisis to get everyone to start thinking about them.
On the other hand, regulating market speculation internationally is very complicated. But the debate is open, especially on the role of ratings agencies.