Stolzi's Blog

1. An on – going domino effect? Questioning on innovative management politics

Markets worldwide have tumbled on fears over global debt. The Euro zone crisis is rapidly approaching what could be significant tipping point as it threatens to spread to the heart of Europe. Jean –Claude Trichet, ex – President in charge of the European Central Bank (ECB), clearly insisted through a report published in The BBC, ‘ To state the obvious, the good times didn’t last. That period of calm was uneven. Some economies were growing robustly, notably the Republic of Ireland and Spain. Others, such as Italy and Portugal, were much weaker. Today that is familiar looking group of countries – all four have joined Greece on the Euro zone’s sick list’(7). Such a consideration perfectly highlights an on – going reality.

Concretely, in Spain, the budget deficit jumped from 3,8 per cent of GDP in 2008 to 9,7 per cent in 2010, making it vulnerable due to contagion. Spanish main risk consisted in a major market bust during the crisis that left its banking sector threatened. Also in Italy, the instability is not insignificant with a debt above 115 per cent of GDP. To put it in a nutshell, Greece’s deepening debt affected European, and meanwhile International countries. The Washington Post hardly testified of debt’s spread by quoting ‘Greece sneezed, and now most of Europe has a cold. The European debt crisis has already spread like a virus from Greece to Ireland and Portugal, and other countries are now at risk: Spain, and Italy are probable candidates for financial problems’(8) and ‘Contagion also has much to do with actual economic links among countries. Researchers have identified financial ties in particular as responsible for the ‘fast and furious’ spread of crisis from one country to another’(8). What’ more? IMF seriously alarmed France in its September 2011 Global Financial Stability Report. The warning deals with sovereign debt’s threat on European banking sector. In fact, French banks, heavily exposed to Italian and Greek bonds, cope with a potential liquidity crisis. Besides, The United States called for a recapitalization of its banks in order to tackle crisis. Furthermore, they gradually began to adopt measures for centralizing governance mechanisms and coordinating fiscal and economical policies. To make clear, Euro zone debt crisis currently extends worldwide by facing ‘domino effect’s’ birth. Indeed, The Wall Street Journal rises up China’s case: ‘There is now evidence that the euro zone debt crisis is not only spreading to banks, by undermining their ability to fund themselves, but to the major trading partners with the region. In this case, that is China’(9) but qualifying ‘that may be little bit of an exaggeration but not much’(9).

All in all, several European countries truly endure debt crisis as well as International ones. Fears of a global contagion hardly prove a private – sector debt turned into a public – sector debt. Euro zone crisis’ priority is to be resolved quickly in order to avoid more dispersal and disaster.

What are the main threats of a ‘domino effect’? Italy, Portugal and Spain debt could eventually lead to dissolution of the European Union because economies do not live in insulation. They are inter-connected since every country gives and borrows from another. As a consequence, current crisis could be transformed into real chaos with a predominant risk of Euro zone’s dissolution. It is not any more a taboo. If Italy will not be able to pay off its own debts, the Euro zone would have the worst difficulties by bursting through the bottom or the top. Or, fragile countries would be pushed out. Or, North of Europe as Germany would not be ready to pay for others. In this context, the Prime Minister, Mario Monti, decided to ensure a financial and economical stability in Italy thanks to a strong government of technocrats. Indeed, The Guardian clearly highlights Mario Monti’s decision ‘the former European commissioner, has been sworn in Italy’s prime minister along with the ministers of his new, technocratic government, charged with steering the eurozone’s most indebted nation out of danger’.(10)

Everything is planned to avoid a bad outcome because an end of Euro zone would also put the European Union in danger. But, what are solutions in order to guarantee agreement, cohesion and rescue of savings? According to the United States, France and financial markets, one of them could be the ECB’s commitment by re-acquiring without limitation Italy’s debt to protect the country. Or, that the European Financial Stability Facility (EFSF) borrows unlimitedly from its office in order to support Rome.

Problem: Germany refuses such a monetization of the debt by considering the ECB does not have to sustain budget of lax states. Besides, both EFSF and European Stability Mechanism (ESM) have been designed to address financing needs of Euro zone member states. Indeed, ‘Euro zone Crisis: What do clients need to know’ report highlights ‘involve strengthening of the European Financial Stability Facility (EFSF) in the short – term and the introduction of an enhanced European Stability Mechanism (ESM) as a more permanent support mechanism in the longer – term.’(11) However, is it truly possible to get on a common politic? Differences of cultures and values do not lead to divergent vision? How could we plan and hope a restructuration of Euro zone if each country acts as desired? Does a further deterioration in Euro zone will be likely to trigger institutional and legislative actions? Sure. Domino effect’ study lead to a questioning on a more psychological aspect about the on – going crisis.

2. Psychological dimension: Be pragmatic

Philosophy of current system highlights abnormalities, which could probably be one of the bases of Euro zone crisis.

Firstly, I hardly consider the principle of the purchase of a country’s debt by the ECB as an effective solution in a context of budgetary crisis and Euro zone’s saving. Nevertheless, it hardly raises an ethical problem. Indeed, such an offer of national debt’s guarantee and stability does not incite to fiscal discipline and consequently, virtuous countries can be weakened by being obligated to pay for others. A concrete example demonstrates it: Ireland. As the Organization for Economic Co-operation and Development (OECD) quoted in one of its statement: ‘The Irish economy faces tough challenges as the country exists from a deep recession and banking crisis’.(12) Indeed, the country knew a strong growth since the beginning of the 80’s but went trough a crisis related to the overheating of its economy. Irish banks faced insolvency’s problems and their private bonds were transformed into public ones. Ireland truly had to draw from the European Social Fund (ESF). Here is the interest of an important and regular intra – comminatory control so that states could avoid massive debts and propagation.

Secondly, I truly believe European Rescue Plan is entirely intended to reassure financial markets and cope with debt. For instance, the hypothesis Greece, surrounded by speculation on its debt, made non – payment would have been catastrophic for markets, which one more time would have testified of irresponsibility. All in all, I hardly define European Rescue Plan as a perfect illusion of current neoliberal vision for whom it is necessary to privatize profits but socialize losses. Concretely, France would have been truly threatened by a non – sufficient liquidity from Greece. Indeed, France has interest in the fact the European Economic Community (EEC) helps Greece because French banks are really committed towards loans and Greek debt.

What’s more? In order to prevent the crisis spreading all over the world, European leaders have concluded a recent agreement. The BBC raised ‘They said banks holding Greek debt accepted a 50 % loss, the Euro zone bailout fund will be boosted and banks will have to raise more capital’.(13) On the contrary, Germany fought to preserve most funds in a Euro zone’s crisis context since it had less given to Greece. Germany truly fears Greek crisis. Indeed, Germans refuses the EFSF can be used to bail out banks of countries, which are not under international assistance. Moreover, The Figaro (14), a well-known economical newspaper, explained the chancellor Angela Merkel refuses German gold reserves to be used to strengthen the EFSF, for fear of threatening the independence of the German Central Bank. All these abnormalities lead to one essential question: Towards what strategic policy should government has to turn to guarantee efficiency of European system?

To my mind, government truly has to lay down a system allying several additional goals. First of all, I truly consider a better management of states’ illiquidity is essential. Indeed, it refers to temporary difficulties of countries considered as reliable and caused by nervous markets. To face such a situation, BCE and FMI hardly have to guarantee states’ solvency. Then, an insurance of a renegotiation of countries debts’ conditions between state and its creditors is relevant. Besides, I am eager to insist on utility of rescue plans thanks to ESF’s injections in economies. After all, a European common policy could be an alternative to avoid disparities inters – states even though it is quite impossible. To put it in a nutshell, Euro zone truly has to take strategic decisions and faces new challenges. Innovation in management could be one of the keys of success.