Nikos Chrysoloras is the opinion pages editor of the Greek daily newspaper Kathimerini and a columnist at the business news website Reporter.gr.
"The ongoing debate regarding financial regulation in Europe has exposed a series of paradoxes in the structure of our economic system, which partly explain why our responses to the crisis so far have led to poor results.
Indeed, it may well be the case that the very fabric of globalisation is itself a paradox. As the World Economic Forum’s 2011 Global Risks Report has put it, "the conditions that make improved global governance so crucial – divergent interests, conflicting incentives and differing norms and values – are also the ones that make its realisation so difficult, complex and messy." Hence, we find ourselves into the impossible position of trying to address global problems through the limited resources available in the arsenal of institutions largely confined by the structures of Westphalian nation-states and their interests.
The EU is no exception. In a seminar for journalists which was held in Berlin under the auspices of EurActiv and the Robert Bosch Stiftung, Sven Gielgold, an MEP who sits in the European Parliament’s Economic and Monetary Affairs Committee, could not hide his frustration about the fact that the 'Community Method' for solving issues of paramount importance, including the regulation of insurance companies, banks, and stock markets, is undermined by narrow-minded national considerations. More often than not, MEPs tend to prioritise the interests of their 'national champion' industries and lobbyists, over the European public good, even in an institution, which, unlike the Council, is not usually accused of falling into the traps of petty national politics.
The paradoxes multiply as the complexity of issues at hand increases. Most of us would accept, for instance, that the over-leveraging of funds by financial institutions was one of the major reasons for the current crisis. De-leveraging is hence rightly considered as a necessary safeguard against systemic risk. At the same time, however, an increase in capital requirements from banks will reduce the money available for channelling into the real economy, thus having adverse effects on growth. At a time of tight liquidity, this side effect of de-leveraging cannot be ignored.
Similarly, low interest rates and quantitative easing–like measures by the European Central Bank are indeed instrumental in avoiding another credit crunch, while helping bring down the spreads on European periphery sovereign bonds. However, pumping virtually unlimited sums of money into a clearly dysfunctional financial system and the use of monetary means to achieve fiscal targets can – and eventually will - lead into the creation of bubble effects, both in the stock markets and the real estate sector.
What these paradoxes mean is that, in a sense, we have not managed to eliminate systemic risk so far, just shifted it around, said Klaus G. Deutsch, an economist of Deutsche Bank, during the EurActiv seminar:
"In the beginning, there was a real estate bubble, which got banks into trouble. Then expansionary policies were followed to fix these problems, which got states into trouble. And, then, at the end of the day, neither real estate, nor bank, nor sovereign troubles were really fixed."
The paradox turns into an oxymoron when citizens understandably wonder who is going to pay for all this mess. Besides, when capitalist bankers ask taxpayers to bail out their institutions, they basically contravene the most basic principle of free market economics: that those who do business enjoy the fruits of their success, but when they mess up, they should be liable for their losses. Likewise, it is also oxymoron that politicians who bear the responsibility for the fiscal catastrophe of their countries now ask others to pick up the bill, in a monumental breach of the social contract.
So, how do we solve the paradoxes? How do we restore the principle of liability without endangering systemic stability? How can we detox from cheap credit, while living in a credit based monetary system? How do we convince people to pay for financial crimes they themselves are innocent of? How do we reconcile the need for price stability, with liquidity and growth?
The answers to those questions are still debated. But one thing is for certain: there can be no national solutions to pan-European and global problems. Coordinated action is a condition sine qua non for overcoming the crisis. But coordinated action will require mutual compromises and possibly even mutual sacrifices. Indebted countries will have to restore their competitiveness and reduce public and private consumption. What this basically means is that their living standards will be lowered, probably for many years to come.
Export-oriented countries like Germany will have to abandon their precious model of growth and augment domestic consumption by increasing wages, since it is clear by now that trade imbalances are at the heart of the problem. The alternative (that is, turning all economies into export powerhouses) would require the invention of consumers in other planets. Moreover, a workable European regulatory framework, which will protect us from future crises, will require from MEPs and political leaders alike to disregard vested interests and profitable industries in their home countries. And, most importantly, the survival of the European unification project necessitates further political and economic integration, meaning further concessions on national sovereignty, in sectors like tax and social policy.
Perhaps most of the stakeholders are not ready for these compromises. Those who are still reluctant should realise that none of the European states, including Germany, can compete on equal terms with the US and the rising giants of the East. Alone, even the richest European countries will relegate to the 'second division' of world powers in a decade at most. United, Europe will remain a first order power for years to come. The paradoxes are obvious. The choices are clear…."