The European debt crisis has reached the stage where delusional thinking has set in. The continent's leaders are akin to a cornered and outgunned general who thinks one final counterassault will spare his survivors from the meat grinder. The delusion is the belief that the launch of the enhanced bailout fund, endorsed by Germany's parliament this week, marks the turning point in the crisis because it comes equipped with enough financial and psychological ammunition to beat the market at its own cynical game.
Not everyone is buying the theory and some of the skeptics are proposing wacky ways to fix the debt crisis on the assumption the fund will come up short. My favourite is the "Eureca" proposal by Germany's Roland Berger, one of the world's biggest strategy consulting firms.
In essence, it suggests the world's biggest asset-stripping exercise. Roland Berger's idea is to bundle Greek state assets worth €125-billion ($175-billion), from real estate to utilities, into a holding company that would be flogged to the European Union. Greece would use the loot to reduce its debt to 88 per cent of gross domestic product from the current 145 per cent. The EU would then privatize the Greek assets over several years.
I know what I would do if this debt-crunching exercise were foisted upon me. I would start an international bidding war. Surely a consortium of Russian oligarchs would be willing to pay more than the clapped-out EU for Greece's national treasures, some of which come with docks for mega yachts. Or China. What would Beijing pay for ownership of a country that comes with deepwater ports in the middle of NATO's pond?
But you have to give Roland Berger credit for thinking outside the box. At least the idea is acknowledgment that there's no easy way out of the debt mess.
The new bailout fund is the European Financial Stability Facility, or EFSF (wags say the "S" should stand for "suicide"). It will be allowed to provide liquidity loans to troubled governments and buy their bonds when no one else wants them. It now has €440-billion of firepower, but allowing it to borrow – from whom? – should bump its value to €1-trillion, maybe €2-trillion, theoretically enough to shield Italy or Spain from the Greek contagion.
Nice idea, except the EFSF really is just another way of buying time. The fund may have its uses, but the overall theme – fighting debt with more debt – is hardly the solution. Nor is insisting on endless austerity, which, as Greece is learning, only deepens the recession while making anyone without Swiss bank accounts really angry. A recent study by the Centre for Economic Policy Research concluded that the trigger point for mass protests is government spending cuts in excess of 3 per cent. In that case, half the countries in the euro zone face crippling strikes and demonstrations.
What about euro bonds? They're touted as a great fix-it idea because they would allow the distressed euro zone countries to hitch a free ride on the triple-A credit ratings of the healthiest countries, reducing the funding costs of the former (though not the latter).
While euro bonds are no doubt in the euro zone's future, they would only make a bad situation worse were they were launched today. That's because they would reduce the pressure on the distressed countries to put their fiscal houses in order.
The euro zone debt problem is so enormous that only widespread debt restructurings, ones that go well beyond the inevitable one in Greece, have to be served up. A sobering new report by Boston Consulting Group calculates the euro zone's total debt, including household, corporate and government debt, at an eye-watering €6.1-trillion. This debt won't go away: GDP growth is flat, the population is aging and, try as they might, governments haven't been to able to pump up inflation to the point it whittles down the relative debt load. The debt trajectory goes in one direction – up – even with austerity programs in place in every euro zone country.
You can see where this is going. To fund debt restructurings in Greece, Spain, Portugal, Italy, Ireland, and perhaps France, governments will have to shake down the rich, who are the holders of the last largely intact store of money. The process has already started, but it will accelerate. There will be all manner of wealth and asset taxes, capital gains taxes on real estate, and financial transactions taxes, an idea promoted heavily this week by the European Commission.
If politicians don't want to see their houses burnt down, they would make sure the wealth taxes are temporary and that they don't wipe out the middle class or afflict the poor. Once the debt loads come down, the governments would have to offset their money-grab by dropping taxes.
The political appeal of whacking the rich, as Boston Consulting notes, is that you don't lose votes doing so. Selling the national treasures of an entire country, as Roland Berger suggests, would light up the streets with fire.
Eric Reguly