Sigrún Davíðsdóttir's Icelog

No one in his/her right mind would try to make a one-size pair of jeans – human beings are too varied in size and shape. It is the same for debt-ridden Eurozone countries: debt is the apparition of their problems that do however come in different sizes and shapes, making it impossible to look for any Eurozone template. As Mario Draghi emphasised, a lot of political capital is invested in the euro – and it is not a sliding door.

A good central banker never says anything that shakes the markets. Governor of the European Central Bank Mario Draghi was on central banker’s form at the ECB press conference last Thursday, April 4 with measured words, on interest rates, inflation and on Cyprus.

However, Draghi did throw in some interesting observation on two things that are a fixture in the euro debate. One is the dominance of politics vs economics in solving the Eurozone debt problems, crucial to the understanding of the Greek conundrum.  The other, brought to the surface by the Cypriot crisis, is the search for a Eurozone crisis-solution “template.”

What does ultimately decide actions in the Eurozone debt problems?

Since it took about two years (and more might be to come) to find a Greek solution that vaguely resembled a sustainable solution the coverage partly turned into febrile forecasting if Greece would leave the euro or not. Citigroup’s chief economist Willem Buiter and his Citi colleague Ebrahim Rahbari coined the word encapsulating a Greek exit – Grexit – in a research note in Februar 2012, estimating the Grexit likelihood to be 50%.

So far, the Grexit-league has not been right. But why was it that so many learned men – in spite of careful calculations, graphs and historical parallels – have, so far, been wrong on the Grexit? The simple answer is that they focused on the economics, not on the politics, of the euro.

At his April 4 press conference Draghi touched upon this topic. Showing a bit of his Italian animated character towards the end, Draghi made an interesting observation. It came as an answer to some very hypothetical questions: assume that the situation in Greece and Spain would deteriorate; is there or isn’t there some safety net in place, especially regarding derivatives?

Possibly because the question came from viewers on Zero Hedge, Draghi felt these possibly non-European viewers needed a lecture on the meaning of the euro. Saying first he had no answer to such hypothetical questions he added he might actually have a partial answer:

“These questions are formulated by people who vastly underestimate what the euro means for the Europeans and for the euro area. They vastly underestimate the amount of political capital that has been invested in the euro. And so, they keep on asking questions like “if the euro breaks down” and “if a country leaves the euro area tomorrow”. The euro is not like a sliding door, it is a very important thing; it is a project in the European Union. So, that is why you will have a very hard time asking people like me “what would happen if?” There is no plan B.”

Draghi is not the first senior European official to point this out – but his observation is succinct and strikes a few clear points. Yes, it can be difficult for non-Europeans – and indeed for economists of all nationalities – to understand the political importance of the euro and consequently the political capital invested in this political project over more than twenty years. But understanding this is necessary so as to understand that no, there is no plan B.

In the Eurozone, the Euro is the alfa and omega. There is no other option – and therefore no plan B. All solutions are about mending and fixing, not shrinking the Eurozone, even though bright economists suggest various solutions to the Eurozone woes by calculating certain countries out.

Unfortunately for the euro and the Eurozone, more and more Europeans have lost sight of the euro’s political importance. Practicing politics is partly about waking up every morning, assuming that everything said yesterday is now totally forgotten and therefore needs to be repeated.

Too little is been heard about the gains brought by the euro in countries like Germany where cost of bailing out others is indeed dwarfed by years of euro-gains. And politicians in debt-stricken countries are too often been too focused on saving their own reputation after years of bad policies by blaming the euro for the situation.

Will any country every leave the Eurozone?

The pondus of Draghi’s words is a good reference when it comes to gauging and forecasting measures in debt-stricken countries. Of course, the economics matter in concrete terms – and after all, the IMF and the ECB both are part of the troika, forming the solutions – but the policies do follow the over-arching Real-Politik of the Eurozone, which is to hold onto the Eurozone, no matter what.

From this logic it follows that the answer to the question above has to be “no.” If any one country leaves – no matter for what reason – the euro spell will be broken and the endlessly and chronic nagging doubt will be hanging over all other countries, which might be seen, according to some calculations, likely to leave. As Draghi said: “The euro is not like a sliding door…”

That said, the last few years have seen the doubt festering, partly because, as mentioned above, politicians have not always given the euro a good support. But the ECB, now under a very determined Draghi, the EU and the IMF (so far, always led by a European though that might to change one day), have shown a dogged grit and resolve to stick to the one and only euro-plan.

This is not to say the troika is blameless but the troika is only called – like the fire brigade – when the fire rages and all other solutions fail. The fire brigade may choose the wrong strategy but it would not be there if it weren’t for the fire.

A template – or tailored solutions?

The debate in every debt-stricken country always seems to centre on specific words. In Ireland it was the “Promissory Notes,” in Greece the “Grexit” – and in Cyprus the word is “template.” For some reason, and suddenly now, everyone is asking if the measures used in Cyprus will be a “template” for other countries.

It is not clear why the Cypriot measures are seen to be more of a possible template than measures in other countries. Four Eurozone countries have needed help to overcome debt problems and the troika-prescriptions have all been different, according to circumstances and the most pressing problems.

Here, Draghi also made a relevant observation. “Cyprus is not a template,” he said. “Cyprus is not a turning point in euro area policy. We have said many times that our resolution… is to resolve banks without using taxpayers’ money and without disrupting the payment system. That is why we have to have a resolution framework in place. So, it is not a turning point. That is exactly the resolution framework that all other countries have and the euro area will have.”

Draghi makes it clear that there is no template as how to do things – but there is a clear goal: “to resolve banks without using taxpayers’ money and without disrupting the payment system.”

This goal was not clearly formed when the Irish Government felt compelled to pass a legislation issuing a blanket guarantee to safeguard the Irish banks. Quite interesting to read minister for finance the late Brian Lenihan’s speech and the following debate in the Irish Dáil September 30 2008 where the word “taxpayer” figures 46 times. As Lenihan said:

“This legislation is not about protecting the interests of the banks; it is about the safeguarding of the economy and everyone who lives and works in this country… The guarantee provided by the State is not intended to insulate the shareholders of these financial institutions from the risks attached to the investments they have made, as much as they may have benefited from significant rewards over the years… The guarantee is not free and the taxpayer who ultimately underwrites this support will be remunerated for the value of the support provided. The terms and conditions on which the guarantee is provided will ensure the taxpayer gets value for money.”

Unfortunately, the taxpayer got more burden than value in January 2009 when the Irish Government had to shoulder the bank debt it had guaranteed. Thus began the crippling Irish debt saga. The goal – to avoid using public money – springs from avoiding the repetition of the Irish saga, to avoid transforming bank debt into sovereign debt. It is still too early to tell if Cyprus will be a success – the situation there doesn’t quite look like a success for the moment (but neither did the situation in Iceland in October 2008 resemble a successful beginning).

Although repeatedly asked, Draghi did not give any clear answers regarding the unfortunate intention to collect necessary Cypriot funds by putting a levy on insured depositors. He could only be drawn on admitting that it “was not smart, to say the least, and it was quickly corrected in a Eurogroup teleconference on the next day. But that is what is past.” – Not quite the past since this has now become part of a perceived template for fixing a debt crisis. And although it seems that the idea came from the Cypriot government it is still inexplicable – and unexplained so far – that no one in that room on March 16 saw what Draghi admits “was not smart, to say the least…” – and prevented that idea from being let out in the open.

Politics, not economics, ultimately govern the euro

In spite of all the talk about “Super Mario,” Draghi will know better than most that neither the ECB nor the IMF will save the euro. It is a political task – which is probably one of the reasons why Draghi’s refrain is “within our mandate,” meaning the ECB. And as one-size jeans will never fit all, so one template cannot solve the present crisis in various Eurozone countries.

The banking union in spe is set to provide the much-needed framework to prevent the present situation where debt migrates from the private to the public sector. It will take some resourcefulness to survive the present debt debacle until the nirvana of the integrated approach that “will oversee the safety and stability of the financial system as a whole,” as described in a recent IMF report, is reached.

Maybe it is the general dominance of markets on government policy, which lead so many to conclude that the most likely solutions to the problems, caused by the deadly debt in some Eurozone countries, could be found through clever calculations leading to euro exit. Draghi’s words are a clear reminder that ultimately, the euro is governed more by politics than economics.

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