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giovedì 13 gennaio 2011

What you need to do to prevent the crisis in Ireland.


The Irish, as in the joke, do not know if you prefer the shock or death. Mostly because I'm not sure what the shock and what is death, or if the shock is in fact a deadly shock. Two years ago, at the beginning of the crisis, they chose the shock: the State assumed the risk of banks not to let them fail, becoming the guarantor. But this meant to be dragged itself in the fall. Namely, the shock, they have not been released by a major shock, and has every chance of ending in death.
Because the problem, we must say it once again, is the source of the problem banks. The EU itself acknowledges that much of the bailout plan will be for them. Without this burden, the country would not be so bad. However, the help it has given its banks has left the country with a huge deficit, and above all chained to his fate, making the risk of bank risk in the country.
The bankruptcy of the country is not a good start, no doubt. But the proposed rescue Europe is not exactly painless, especially if the IMF is also participating, will mean more adjustments and reforms, citizens will suffer for a change. I know the Greeks, as well as provide for the Portuguese: "We are reducing salaries, freeze pensions, raising taxes," defended himself two days ago the Minister of Finance Luso, the assumption of "homework", and as repeated Once again our Minister of Economy.
In fact, these days on the occasion to remind us that perhaps we need more reforms and austerity, so do not get to the point where we will also have to decide between the shock or death.
The rescue package last week, Ireland was unable to stop the contagion on stock markets, which could thus be extended to stronger economies. What should I do to prevent the crisis extends further to determine the dramatic end of the entire euro area?
As was widely expected last week was launched rescue and support package for Ireland, with a 85 billion euro intervention aimed at stemming an internal situation of the country severely affected by a public debt continues to rise and a banking system for too long totally dependent on the liquidity of the European Central Bank. But it did not stop the contagion on stock markets, which has spread rapidly to other European countries such as Ireland, Portugal and Spain and has increased the differential (spread) of sovereign debt as never before during these first eleven years of the euro.
In a situation like the present there is no longer a clear dividing line between the economies in trouble and the others. Even countries like Italy and Belgium may be quickly and severely affected. The crisis is systemic and what effects become more concerned about the financial markets is the attempt confused euro area countries continue to intervene in each case, trying to transfer part of the governments of sovereign risk to investors.
The key question at this point is what can be done to prevent the spread of infection, and particularly to avoid the risk of an actual collapse of many European countries in difficulty, and with it a dramatic final crisis of the entire euro area .
On the one hand there is the strong response of some - and among these is the German Government - that blaming the current crisis to the excesses of economic policies implemented by individual member countries, particularly in the field of taxation, they want to pass on the burden adjustment on countries in need. Hence, the fiscal austerity imposed with particular intensity to the most indebted countries at risk, along with more inspections and sanctions - which are also largely focused on fiscal and budgetary policies of individual countries. But it is a wrong answer and largely unrealistic because the restoration of fiscal discipline and budget, as required, it will not be able to ensure adequate growth dynamics to ensure the very sustainability of sovereign debt in the euro area.
At the other extreme is the claim that it is necessary for the survival of the euro is a necessary step, which involves pooling the debt and fiscal policies of member countries, strengthening political union. This statement is correct, in this case, but that may represent only one target in the medium and long term, since that does not appear on the agenda for now of any major European country.
The way forward appears then another: a middle path between two extreme positions mentioned above, characterized by an adjustment process that is aimed at stopping the contagion in the short term and can be compatible - in the medium and long term - with the achievement fiscal union between the member countries, a key to the existence of European Monetary Union. In this perspective the crucial issues to be solved are mainly three.
You first need to address the crisis of sovereign debt restructuring with strict national plans but providing all the liquidity necessary for the rescheduling of the debt is not prevented from being stifled by processes and end deflation in the same countries. In this regard the intervention funds now available are considered insufficient by the markets and would therefore be important to increase it by one hand and the other that the European Central Bank continues to offer the necessary liquidity to the European economy, including through the purchase of securities State assumption - now almost taken for granted - that markets are not willing to provide the required liquid resources.
Second, it should be implemented the separation of banking crisis and crisis of public finances - now closely linked through the bank bail-operated with public money - set up mechanisms for consolidation of the banking systems of some countries, including front row Ireland, Portugal and Spain as well to isolate banks that failed - and closing - from the rest of the system may instead be renovated and restored.
Finally it proposed a permanent mechanism for crisis management sovereign - is intended to take the place of the EFSF - unlike that proposed by the German government is a sort of European Monetary Fund, able to balance financial assistance to countries difficulties with appropriate conditionality to stimulate the necessary reforms of individual countries. The resources could be found for it to work in part by the countries themselves with debts in excess, and partly from the issue of Eurobonds with different costs and participation of individual member countries. Interesting proposals in this direction there - see Junker and Tremonti recently proposed the creation of the European debt - and with the necessary mediations can be made operational.
The problem is that the proposals for reform of European economic governance being adopted in recent weeks only minimally respond to these needs. Provide important new in terms of prevention and correction of budgetary imbalances of the countries have strong but lack the level of coordination of macroeconomic policies and adjustment. More generally neglect the problem of growth in the EU as a whole. And there is no doubt that low growth will eventually make it much more cumbersome, if not impossible in some cases, fiscal consolidation to be implemented by individual countries in need. And between them is also on our country because of its high debt, its lack of competitiveness and its ability to modest growth.
To summarize, the euro area is at this stage before a crucial crossroads. Its financial and macroeconomic stability must be based of course on price stability and fiscal discipline, but also need a third pillar is that of integration and economic growth. Or the euro area finds ways to manage its integration and return to growth or the whole design of European integration in danger of bankruptcy.

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