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Monday, Oct. 31, 2011
Deciphering eurozone: financial stability quest a study in surrealism
By NORIKO HAMA
Special to The Japan Times
EFSF stands for European Financial Stability Facility. Or so they say. I can only see it as standing for European Financial Science Fiction. How can it be anything else given the nature of the arrangement?
EFSF is basically a scheme whereby euro-area governments get together to bail out partners facing sovereign default. For this purpose, it issues bonds like any other organization in need of funding. Those bond issues are backed up by guarantees provided by participating governments. This is where the thing starts to look fictitious.
It is essentially an idea that aims to make things worse in order to make them better — for the guarantees that participating governments pledge themselves mean an additional burden on their already amply stretched public finances. The situation becomes even more surreal when one takes into account the fact that potential bailout targets are listed among the governments promising the guarantees. Thus we find ourselves in the realm of people eating themselves to keep themselves alive. This is highly fictional if not terribly scientific.
Indeed I am reminded of a short story by the master of horrors Stephen King, in which the protagonist, having been stranded on a desert island, decides to eat himself in bits and pieces in order to keep starvation at bay. The strategy works for a while. But it is so obviously self-defeating over the longer term. The longer term comes to an end a lot earlier than the guy thinks, at which point he can no longer tell how long he has been up to his horrific survival antics.
Europe's self-cannibalistic science fiction is about to roll on with extended powers now that EU members have reached agreement on its upgraded framework. Yet this is after all just a time-limited plan to help out those who are currently in trouble or look set to go down the same route. Come 2013 and it will be redesigned into a more permanent framework, presumably with wider coverage. That permanent scheme is to be called ESM, that is to say the European Stability Mechanism. Again the letters acquire a different meaning in the eyes of this beholder. To me they stand for Economic and Social Meltdown. How can it possibly be good for stability to make the self-eating approach a permanent fixture? It sounds quite suicidal to me.
The more such suicidal arrangements kick in, the greater the burden on the European Central Bank. ECB's delicate balancing act is very interesting to watch as it tries to keep its distance from the science fiction and attempts to retain its relevance at the same time in this tension-ridden moment in eurozone history. It needs to beware thought. For if it becomes too greatly involved in the scheme, it will find itself stuck with another name. At that point, the ECB will no longer be the European Central Bank. It will have become the European Catastrophe Bank instead.
It was ever thus in the process of European integration. The same name can come to mean different things under different circumstances. Once upon a time we used to talk about EMU, standing for Economic and Monetary Union. Naysayers renamed it as Even More Unemployment. Or it may have been Ever More Unemployment. I forget which. But when EMU is rewritten as emu it turns into a bird. A big bird. And a bird that cannot fly. Like an ostrich. This particular emu decided to take off, however. That was back in 1999. Its flight has been a very wobbly one thus far. It looks set to become even more wobbly as science fiction turns into meltdown and catastrophe ensues. Fingers need to be very firmly crossed by all concerned.
Noriko Hama is an economist and professor at Doshisha University Graduate School of Business.