The Faults of the Creditors

Four years after the onset of the eurocrisis, we can say to have avoided collapse, but not have taken the road to recovery. For too long, a counterproductive therapy has been in effect: austerity. This was done because the diagnosis was wrong. The problem was thought to lie in public accounts. Today, we are finally correcting this misconception and are looking at foreign accounts imbalances instead.

Since the introduction of the euro, some countries have accumulated trade surpluses, while other countries have symmetrically accumulated trade deficits. Until the outburst of the crisis, these deficits were financed by private capital inflows: loans to the periphery by the center were encouraged by the very existence of the single currency, which eliminated exchange risk, and the by the growing liquidity of the European financial system. With crisis and uncertainty putting markets in turmoil, massive capital outflows abruptly occurred.

When foreign operators become reluctant to buy the debt of Southern European governments, bond spreads skyrocketed. The single currency now actually was no longer the same in Greece and Germany. Only the intervention of the BCE, via extraordinary refinancing operations, enabled the easing of credit tightening vis-à-vis the eurozone's periphery, causing a realigning in interest rates. However, the imbalance between surplus and deficit countries, in the absence of private capital, was financed by official channels, and is far from being solved. The money lent by the BCE to the periphery flows back to the center, and there, rather than being spent abroad (which would push the balance of payments toward equilibrium) or domestically (which would readjust real exchange rates), is deposited back at the BCE. So, from 2007 until today, deficit countries have accumulated an equivalent amount of debt, within a compensation system called Target2 (T2).

How can this disequilibrium be addressed? First of all, we must acknowledge that these are symmetrical imbalances which require symmetric adjustments. We can concede that a competitive country is virtuous, but there is no virtue in maintaining a surplus position indefinitely. To the contrary, a surplus country should feel obliged to cash in on its credit, in order to avoid that its obstinacy in selling without buying would lead to EU-wide deflation.

The principle of symmetric adjustment was proposed by Keynes in 1944, and implemented in the European Payments Union from 1950 to 1958. A possibility to make such principle operational today lies in the creation of a subset of T2, for instance called Target3 (T3), reserved to the registration of commercial operations between countries that are members of the monetary union. T3 would allow the BCE to stabilize the financing of trade between eurozone countries, by shielding it from uncertainty in capital markets. Also, in T3, just like in Keynes' Clearing Union, interest could be charged not only on debts, but on credits, too. This way, through a cooperative mechanism for the adjustment of disequilibria, there would be a decisive thrust to the effective circulation of money in the real economy, thus attenuating existing financial imbalances.