Saving Europe?

By Claus Vistesen Copenhagen

It appears that many of us have had quite a bit of a weekend these past days. Sitting here in Barcelona’s airport I can look back at some very nice dinners and conversations in the company of friends and colleagues as well as the odd stroll down La Rambla. I can also look back at some nice cultural experiences in the form of trips to the Museum of Contemporary Art to see the exhibitions of Thomas Bayrle, Joan Rabascall, and Cildo Meireles and a visit to the National Museum of Catalonia where I only managed to see but a small bit of its extremely well endowed selection of Catalonian painters not to mention their fascinating display of church frescos and artifacts.

All in all, a most satisfying and enriching weekend for me.

However, perhaps not all would be able to say that I’d imagine; at least not with a straight face. I am of course thinking about the big EU summit on Sunday where the lot of European leaders met to discuss the economic situation, how to deal with it, and ultimately how to avoid the whole thing collapsing under their feet.

One of the many interesting conversations I had here in Barcelona was with a very able economist at one of the universities who, as the first thing, asked me what a credible answer from the European leaders would be in the context of the unfolding mess. After pondering for a minute or two, I answered that; above and beyond everything else I would like to see a common answer to the Eastern European situation and in terms of concrete measures I would call for a de-facto entry of the four currency board economies in the Eurozone (the Baltics and Bulgaria). Then of course and to be picky, a common statement towards the issuance of Eurobonds would not be bad either.

Looking at the various reports from the summit it is difficult to say whether the glass is half full or half empty. In fact, one has to wonder what in fact the grand leaders of our nations decided on, if anything at all?

One the one hand the pre-summit meeting by the Eastern European countries that resulted in a call for a common response to the woes of Eastern Europe was thoroughly thwarted yesterday, but then again on the other hand it does seem that the ERM-2 mechanism and thus potential way into the Eurozone will be eased; at least for some member countries. As the FT reports, the rather bold Hungarian proposal for a €180b aid package to recapitalise the banking systems of the CEE economies as well as to reschedule their foreign debt was rejected. However, what was committed to was a firm grip on the Eastern European crisis on a country by country basis;

“The fragility of the financial systems in several eastern European countries dominated an emergency summit in Brussels. Leaders of the 27-nation bloc committed themselves to “getting the real economy back on track by making the maximum possible use of the single market, which is the engine for recovery”, according to a communiqué.

The summit was called to reaffirm core EU principles, such as avoidance of protectionism and solidarity among richer and less well-off member-states, in the face of a crisis that is putting the bloc’s unity under severe pressure.

(...)

“More, of course, will be done, but on a case-by-case basis, not as a single category. In the new member states there are different situations,” José Manuel Barroso, European Commission president, told reporters after the summit.

(...)

“We help countries in need and we will do so further, particularly through international institutions,” Angela Merkel, Germany’s chancellor, told reporters.

“But I see a very different situation in different countries. We cannot compare Slovakia and Slovenia with Hungary,” she said, referring to two countries to some extent sheltered from the financial crisis by being members of the eurozone.”

Together with last week’s pledge by the World Bank and the European Investment Bank to lend up 24.5 billion Euros to troubled banks in Eastern Europe we are definitely moving somewhere. Yet, to play the role as scrooge for a minute I am note completely happy. In particular, I am not so fond about the narrative on heterogeneity among Eastern European economies and the need to discriminate between CE economies. Lately, this has emerged as the main discourse surrounding the measures taken to shore up the economies of Eastern Europe. Both the Economist’s leader and subsequent briefing highlighted this view as well as did the FT’s Thursday in depth analysis of the Eastern European malice. Far be it from me to disagree with the principle in this, but I cannot help but feel that pointing towards heterogeneity amongst the CEE is rather like pointing towards heterogeneity in the context of critical patients on an intensive ward. Surely, one patient may be closer to the brink than another but common to all of them is that they are in pretty bad shape. I would especially push this point in relation to macroeconomics where we know how contagion, much unlike the situation for patients in intensive care [1], can easily spread from one patient to another. In this vein, I agree with the remarks from the Polish envoy that the Eastern European problem, as a whole, should worry the EU. Oddly enough, German chancellor Angela Merkel was the European leader most ardently pushing the argument that a case-by-case orientation is the best solution. I find this odd because this was, presumably, the same Merkel quoted in Thursday's FT saying that she favored a global initiative on bonds to answer the growing need for many governments to issue more debt that normal. Clearly, there seems to be room for Euro bonds in this narrative and one would think that this kind of grand vision would exclude the kind of short sightetness shown in the context of Eastern Europe.

In relation to the nitty gritty details of potential measures and, as it were, things I actually agree with Eurogroup chairman Jean-Claude Juncker noted how entry requirements into the ERM-2 might be loosened. As clockwork, Bulgaria opted to enter the ERM-2 subject to a shorter time span than the traditional 2 years.

In my opinion this is an important initial step and what I would subsequently like to see is a swift entry of the four currency board economies into ERM-2.

Back to the Drawing Board then?

Despite the good intentions which it seems there were aplenty I still think the concreteness of the measures was too timid. Basically, there is a big difference between arranging a summit to quibble over the Czech Republic’s criticism of France’s proposed bailout package for auto makers and a full scale rescue plan for the European periphery. Now, that it seems that the former is taken care off, I hope that the latter will get the full and deserved attention.

Markets seem to agree somewhat with this sentiment.

Both Eastern European currencies and stocks have tumbled in trading today on the back of what has to be considered as anything but new measures (except for the ERM-2 initiative). From all analysts with eyes fixed on the issues the message is that markets are disappointed with the initial stab at dealing with the situation.

“The forint weakened 2.7 percent after EU leaders yesterday vetoed an appeal by Hungary for 180 billion euros ($228 billion) of loans for eastern European countries. Their currencies have tumbled this year as worries about the region’s economic region amid the global financial crisis have spread.

“Markets are somewhat disappointed, taking the lack of news from the EU as an indication that the EU may not have grasped the magnitude of the problem yet,” said Christian Keller, a foreign- exchange strategist in London at Barclays Capital. “We cautioned our investors on Friday not to position for a sustained recovery” in the region’s currencies even if a package had been approved.

(...)

Eastern European stocks dropped to the lowest in 5 1/2 years and Hungary’s forint fell the most in a month after European Union leaders rejected pleas for a region-wide aid package.

OTP Bank Nyrt., Hungary’s biggest bank, lost 5.4 percent to the lowest since 2001 after Morgan Stanley lowered its price estimate. Komercni Banka AS, Societe Generale SA’s Czech unit, slid 4.4 percent. The forint dropped as much as 2.6 percent, the most since Jan. 30, leading currency declines.

EU leaders vetoed an appeal by Hungary for 180 billion euros ($228 billion) of loans for eastern European countries, bowing to German concerns that it would put too much pressure on budget deficits in western Europe as the economy slumps. Hungary, Ukraine, Belarus, Latvia and Serbia have already been allocated more $35 billion from the International Monetary Fund to stave off defaults and prop up ailing banks.

“The failure of yesterday’s summit to provide any fresh thinking about Eastern Europe’s crisis means that investors are faced this week with the prospect of ‘more of the same’,” David Lubin, chief emerging-market economist at Citigroup Inc. in London.

Investors are exiting eastern Europe on concern that companies and consumers will be unable to repay foreign-currency debt as plunging exchange rates increase borrowing costs. East Europe has six of the 10 worst-performing currencies against the dollar this year. Equity benchmarks in Romania, Ukraine, the Czech Republic and Bulgaria are among the world’s 10 biggest losers, according to major stock indexes tracked by Bloomberg. “

Ultimately, a much more systemic perspective is needed here and we need to realize that a case by case approach does not work. This does not mean that the CE economies are not different; it merely means that the EU and the Eurozone need to see this as an integral part of the fight to keep the economic edifice from crumbling entirely. In his daily column, Macro Man opinions that EU leaders have pooh-poohed a blanket bailout for Eastern European economies; (with the USD subsequently sucking up all the safe-haven flows). I agree, but they will get another chance to save Europe and let us hope that they will come to realize the severity of the situation. In my last post I asked whether we are moving closer to a common European answer. This weekend brought the initial first steps, but or now, it is back to the drawing board.

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[1] – One would certainly hope so at least.