The euro – after the crisis, the pact
Even though the euro crisis has been snowballing for far too many months, like all crises it does have a silver lining: it is only through crises that institutions and mankind make progress. Crises have the constructive effect of forcing people to face up to the necessity of change. 20 years after the EU states agreed on a single currency in the Maastricht Treaty, they are now confronted with the uncomfortable truth that things are not quite working out as originally planned. A limited liability company and a simple ‘no bail out’ clause are (unsurprisingly) not enough. We will not get far without a rather more binding form for the euro club.
The systematic response to a crisis of confidence and, by extension, credibility is always to create more institutions. Historically, every single financial market crisis – the very embodiment of a credibility crisis – has been superseded by the creation of new supervisory bodies, greater integration and better intermeshing: the Bank for International Settlements owes its very existence to the payments crisis of the 1920s. In Switzerland, the banking act – which provided for the creation of the Swiss Federal Banking Commission (now part of the new regulatory authority FINMA) – was adopted in response to the major banking crisis of 1931. And the still virulent financial crisis has resulted in the Swiss National Bank now assuming a new de facto supervisory function as well.
With the mention of the ‘primacy over politics over markets’, an anti-capitalist undertone crept into the debate. And yet, nobody is questioning the primacy of politics. The states were not lured into the debt trap by the markets or by investors, and certainly not by hedge fund managers with a short-term outlook. Nor is this fate by any means the dubious privilege of Greece, Ireland or any other European country with uncertain prospects. The reality is that the European states walked unaided into their own trap. They were led by two generations of politicians whose vote-buying machinations were unprecedented in the history of democracy. Such vote-buying, glaringly apparent in the inordinate excesses of the welfare state and the subsidy economy, is so brazen that it outstrips all the excesses of Ancient Rome as recounted by Juvenal (“It is difficult not to write satire”).
This is an excerpt of a publication Julius Baer came up with to answer the highly justified question that has been asked lately: What happens with the Euro? Switzerland’s geographic location right in the heart of the continent calls for a watchful eye on the developments regarding the Euro and their background.
The publication is available in English, German, French and Italian. It can be downloaded or ordered using the link on the right-hand side.