Frank-Jürgen Richter gives his prognosis of the Euro Zone crisis
In an economically integrated world, upsets like the Euro crisis
usually have larger effects on the world which will come about soon.
The question is whether funds will be found in time to bail out the
defaulting member States of the Euro Zone. This will be challenging
because each member is a sovereign State and has to go back to its
Parliament to seek its vote on it. Unfortunately, there is no common
`pot of money´ to go around as the Euro Zone is not a cohesive fiscal
union, but only a monetary union. Even so, every country in the Union
will be impacted because of the crisis. For instance, UK is a State
inside the EU, but not in the Euro Zone, but while it maintains its
independence, because of the level of cross-indebtedness in Europe,
the Bank of England is not isolated from the affairs of the Euro Zone.
So, it too has to take prudent decisions. The Bank of England has all
the instruments to control the economy under its management control,
and whether it uses them, only time will tell. In an interview to
Jayadipta Chatterji for CFO Connect Dr Frank-Jürgen Richter, says
there is a great need to compromise some country specific objectives
for the good of the whole, and he is hopeful that this will happen
soon, and the Euro crisis will serve as a wake-up call. Dr Richter is
the former Director of the World Economic Forum and Founder and
Chairman of Horasis, a Zurich-based global business community.
What is the exact nature of the Euro sovereign debt problem?
To answer this I shall draw an analogy with a group of friends who are
on holiday, each has a separate spending budget, as the group has not
created a communal pot from which its members can take money to pay
their way. So, when one person runs out of money, who will lend him
the money over the rest of the holiday? The reason why they do not
have a communal pot of money is because of a repayment risk that they
fear, even between friends - and nothing kills friendship more than
arguments over money.
It was Margaret Thatcher, former UK Prime Minister from 1979-90, who
had drawn on her status as a wife and mother to construct a benign
image of the `housewife managing the nation´s budget´. This thinking
now pervades in each of the 27 states in the European Union: Like Ms
Thatcher´s housewife, each manages its own budget as there is no
fiscal union of the States.
Opinion is however, divided on the extent to which it is a Union. Take
again the UK, as an example - it is not in the Euro Zone, but is
geographically situated in the broader economic community which we can
loosely call `Europe´. UK´s geographic location confers on it some
advantages for trade, but it has felt that it has also had to cede
many control issues to Brussels (the de facto capital of the EU).
Eurosceptics in the UK have said that too many rules have been imposed
on the UK. More recently, at the Brussels meeting of heads of state
and Governments of the European Union, held in early December, where a
new European agreement was reached to solve the Euro Zone crisis, UK
PM David Cameron expressed his apprehension that the UK may be asked
for more money and more controls will be placed on his country. From a
general view point, in Europe, there is some control exercised by
Brussels, but individual nations have their own banks and fiscal
policy; they are not yet controlled by Brussels, but it can seem very
Was the crisis just waiting to happen? The Euro arrangement has been
criticised for ceding national monetary and economic sovereignty, but
lacking a central fiscal authority.
Yes, this seems to be the case. This is what Jacques Delores, a former
President of the European Commission, and one of the original
architects of the Euro, has recently confirmed in the media. He said
that he believed the Euro Zone is a weak concept if it does not embody
a stronger federalisation and centralisation of fiscal control. But,
"the individual European finance ministers did not want to see
anything disagreeable (in their own economies)...", which they would
be forced to deal with to allow for common fiscal and economic
policies, he said. He also said that he does not now believe it is
feasible to attempt to run a single currency, managed by one central
bank, spanning a single continent in which each participating country
manages its own fiscal affairs. The failure of member-nations to deal
with imbalances in their own economies has brought the currency to the
brink of collapse today.
When growth occurred with ease, the EU expanded and new nations found
it relatively easy to conform to the rules of the Union, as did
incumbent members. Banking too, was easy and the commercial side was
happy to loan to other banks; the bond yield was low; and in the
public sector, the banks could lend easily to many people who, like
the US sub-prime mortgage case, did not really possess good financial
guarantees. But now there is a crisis, and there is no central `pot of
money´ for all to use. However, Angela Merkel, Chancellor of Germany,
in particular, has hinted that a `pot of cash´ might have exacerbated
the profligacy of weaker Union members, increasing the cost for the
stronger members, since the weaker nations will have applied for a
loan from the central bank, which may have too easily, granted the
money without due consideration to the downside risk.
Once again, citing the UK example, it has the freedom to act and it
did, by using its veto power and not signing the new European economic
agreement at Brussels. However, because of the cross-indebtedness in
Europe, being within the European area does not isolate the Bank of
England from the affairs of the Euro Zone. It too, has to take prudent
How do you see the crisis playing out over this year and the next?
you see an end in sight?
First, looking more widely, the global financial crisis which began in
the US in 2007 has not ended yet, and its waves come and go, affecting
all nations, though not in any sequence. When some recovery seems
evident, a lack of demand elsewhere causes an instant deflation in
euphoria. China, for instance, was weathering the storm quite well,
but now its exports are hit by the lack of purchasing power in Europe,
its largest market. America is seeing better employment figures, but
this alone will not rapidly boost its financial standing, especially
since too many in the US are defined as poor and cannot help growth by
spending real cash.
Now there is a crisis, and there is no central `pot of money´ for all
to use. However, Angela Merkel, Chancellor of Germany, in particular,
has hinted that a `pot of cash´ might have exacerbated the profligacy
of weaker Union members
How will it play out? If it is a business as usual scenario, then the
`calming of the waters´ will take a long time; but if the EU comes
quickly to a decision to strengthen its financial position, then the
many inter-dependent institutions will again become active and shorten
the recovery period. I do not see the latter scenario occurring soon,
since each State has its own decision timetable, and in some, there is
the `confusion´ of impending elections, during which Ministers
`grandstand´ to boost their popularity, but this does not really solve
the EU issues. Even after the elections, if a new minister is elected,
the permanent civil service packs away the old documents, clears its
desks, and begins afresh. Sometimes, this is a good idea to stifle
prejudices, but in this case, the recent history needs to be absorbed
by the new ministers to minimise the slow creep of several extensions
to the problem, without a solution.
Is the Euro crisis a part of the on-going global rebalancing, which is
likely to take several decades to complete?
Yes, as I said earlier, the financial obligations of debt and
borrowing and the real cash-flows due to international balances of
trade have grown vastly since the early 1900s. We have all benefited
from cheap Japanese, and Chinese (now Asian, in general) goods, and
those nations in turn, have increased their bank balances. It is quite
clear that we must come to terms with these dependencies as few can
compete with Asian manufacturing prowess, or with European, and
Anglo-Saxon financing instruments.
But the financial instruments have become complex and many financial
managers were not bright enough to pick through the complexity of the
new instruments. The same can be said of financial regulators who are
stuck with state-regulated salaries, and did not attract the `rocket
scientists´, who were paid astronomical salaries in the commercial
banks. They designed the new instruments and only they can understand
them, while we thought they looked okay, and we used them unwittingly.
We cannot however, go back to the very old days of the true gold
standard. That system is too slow and cumbersome in today´s digital
market. Therefore, we have to come to a common understanding of our
common goals - at the national, regional, and global levels; each
interacts with the others.
The weaker Euro will benefit many small manufacturers inside Europe
while the big firms continue to look to a sustained levelling of the
euro vs the USD, hoping to hit perhaps USD 1.25, while it is only
about USD 1.30 now. The recent changes following the new agreement
being signed, just give some breathing space, but the strategies are
not altered, just evaluated. The drop in the dollar rate might add 0.5
percentage points to the euro-zone growth if manufacturers can make
haste to remove themselves from the current problems of low
unemployment rates and find a way around the toxic mix of economic
stagnation, growth-draining austerity measures, and rising borrowing
Several reports point to the importance of the ECB buying more Euro
bonds to bail out defaulting governments, and this suggestion has been
rejected. Who will want to buy bad debt?
Oddly enough there is a market for `distressed debt´. Fund managers
will review the assets of a firm and come to some conclusion of what a
purchase may yield in salvage terms, or in renegotiation working rules
that could result in a reinvigorated working entity.
But buying a nation is a risk of a different magnitude. This is what
is keeping international players away for the moment - and just think,
what will you call the bought-out nation? Will a name change be in
accord with its people? Again, we might draw a comparison with buying
out a firm - asset-strippers are hated, but revitalisers revered.
However, usually the name change of the new firm is not a great event,
but old memories linger on and some resentment remains, even if the
new entity is a success.
The Belgian nation faces this problem at present. Its debt is large,
its credit rating is low, it did not have a truly elected government
for a record 535 days (it has just got one recently), and there is a
clear possibility of returning the country to its old heritages to its
north and its south. But that will off end its own 11 million people
who know themselves to be `Belgian´ - they were born and brought up
there, and their families have fought through two world wars as
What is the extent of the interconnectedness of European countries
with each other?
Across Europe, indeed the globe, most nations lend to each other
hoping they will be paid back. Some of this is a very understandable
`household business´ of borrowing in the short term to pay off a debt
that is about to be due, in the knowledge that in the longer term
there will be growth, and thus profit, and there will be money to pay
off the new debt. Right now there is little growth and thus little
lending. Private lenders are prudent and understand the risks they
bear, but governments are less prudent as they can print money to
carry themselves out of debt. The EU States could do this once, but
now, no one may do so as they are bound by common rules.
The EU over the years has worked hard on common goals. There is the
Schengen Agreement which allows passage across borders of all its
citizens, without the hindrance of Customs checks. This is a pleasure
for individual travellers, but it is also of great benefit to haulers
who do not now waste time in being checked, having their cargo opened,
and perhaps pilfered, and having also to fill in many different but
similar pieces of documentation. Of course, tax equalisation follows
the goods, but this happens later, as it can be done end-to-end,
What will be the role of the permanent European Stability Mechanism
(ESM) which will replace in 2013, the temporary European Finance
Stability Facility (EFSF), in arresting a financial contagion?
If there was normal fluidity, this would work well and the funds would
pass from lender countries to the ESM and from there to the affected
Euro States with no adverse effects. But at the present sticky time,
the funds´ flows are irregular; risks are hard to evaluate; and how
outsiders will lend to Europe is not well understood. The outsiders
are free to invest where they wish, but they understand that if they
do not support the new instruments and modalities in Europe, which
will, in turn, support individual States and their development, the
outsiders will be harming their own future. Contagion is a heightened
The real question is, "Will the outsiders be in time to invest?"
Members of the Euro Zone have repeatedly shown that since they are
sovereign states they must go back to their Parliaments to ask if
taking a step forward is okay. Inevitably, we come back to the
comparison with the UK - which, as earlier discussed, is a state
inside the EU, but not in the Euro Zone, so not completely controlled
by Brussels and its many off shoots. The Bank of England has all the
instruments to control the economy under its management control, and
whether it uses them well only time will tell, but it can react
quickly. The ESM is scheduled to come into being in 2013, but we will
have to hope that those who drafted the rules of the ESM had perfect
foresight, as the changes in the Euro Zone are taking place in days,
How easy will it be for donor countries and institutions to lend to
the IMF for Euro funding, which is now part of the new agreement?
It is very easy to lend to the IMF - if one has spare cash. The
difficulty is the moral hazard faced by Europeans if they themselves
give cash to the IMF to bale themselves out of their own mess. As they
have no pot of cash (like my aforementioned holiday group), they
cannot create a fictitious one; it is either a real central bank or it
The rules of the IMF have gradually changed over the years, from a
mode of rigid control to more of guidance now. But a loan is a loan,
some states do not like the idea of having to call on a loan - but
surely it is better to have prudent financial management in which a
gap is foreseen and a loan used to fill it, than calling for a
How has the new fiscal compact agreement changed the shape of the Euro?
It is too early to say. Some have likened the new EU agreement to,
"... it´s like the Loch Ness Monster. We all know about it, but we
have not yet seen it." The agreement is still being drafted in detail
and members of the Euro Zone and of the EU have yet to fully agree on
its content - this will be many months´ away. As the new agreement
will cut across a few legally binding rules, some States may have to
face a referendum in order to get the new text accepted locally. The
outcome therefore, remains uncertain.
Why did we need to have a whole new agreement instead of just carrying
out the changes in the existing Maastricht treaty?
There are legal difficulties in `adjusting´ a treaty, in fact this is
impossible - but in this case the `legal wizards´ have suggested
clauses that may be reinterpreted without breaking the sense of the
original: This has resulted in an accord, which is less than a treaty.
Even so, while the recent accord may not carry large changes, it cuts
through some of the existing agreements and requires new ratifications
of detail, but maybe not a full new treaty as per Maastricht. This is
why some states will have to seek a referendum as even the slightest
change has to be referred to the people.
The crisis is historic as it has resulted in the premature end of a
number of European national governments and impacted the outcomes of
many elections. Yet there is no solution to the crisis.
Well this must be a part of the European crisis. I mentioned Margaret
Thatcher. She was a formidable leader in her cabinet and across the
UK´s private and state-owned businesses. She attacked economic
orthodoxy and won, and history is thus kind to her. Had she been
weaker, or allowed her advisors to create conflicting edicts, the UK
would not have grown as it did during her period in office. A similar
strength was not seen in some of the past European leaders or in some
of the global leaders at present. It is sad to see leaders being
goaled for infractions, yet it is good to see that the rule of law
works fairly for the common man as well as top officials.
At the risk of being too extended, the crisis is also one of
procrastination. We see this time and again when managers - even
family members - hesitate to act as they feel it will somehow `upset
the apple cart´. But inside themselves they know that the delay was
wrong and they have missed an opportune time of change. We put off to
another day something we could do today - but tomorrow never comes. I
have written on this elsewhere, where I said that we all know what
putting off something we ought to do means to us. There is even a day
set aside for this task - Frenchman David d'Equainville has proclaimed
that March 26th, 2011, should be called the International
Procrastination Day, but he also said that he did not mind if it were
What effect will the falling euro have on small developing nations,
and on the larger India?
Many developing country economies are still growing strongly, but
their forecasts have been downgraded substantially in the space of a
few months. Meanwhile, East Asia still grows, as does Sub-Sahara
Africa, while the OECD nations´ growth has fallen off . That this is a
`normal´ consequence of growing up and becoming a developed nation is
no real pleasure to those within, who are struck with changing
work-styles (off-shoring, etc), but now also suffer a real recession
and the fall of output, as well as a rapid rise in unemployment
numbers. There are also signs of a slowdown in Asia, which has been
the engine of world growth: First Japan, then Korea, and now China.
During the last two months, the Asian Development Bank (ADB) has
revised its growth forecast for Asian countries downwards by 1-2
The global flux of economic immigrants will also slow down. All
nations need a much more open policy towards immigration, as the
global population growth will slow after 2035 (says the UN). But, as
this is way beyond the politicians´ next elections, they maintain a
harsh barrier against immigrants. The barriers become even stronger
when an electorate faces high indigenous unemployment rates. There
will be fewer economic migrants coming to developed countries when
they are in a recession, resulting in fewer remittances, with the
possibility of lower volumes of remittances per migrant, decimating
the small nations´ GDP figures, their borrowing capacity, and so on.
Aid volumes are under pressure in the developed nations who now are
much less wealthy; but there may also be implications for the
composition of aid. Should aid be provided to countries with high
risks, and how should it be channelled? Are existing IMF and World
Bank schemes sufficient for this, as they already need to address
balance of payment problems in countries due to high food and oil
prices? And who will give to the IMF, as we have discussed earlier.
What will it mean for India? Economically India is at risk from the
falling euro, as is the whole globe - we all trade together and pass
debt across borders. India is becoming quite like China in offering a
market of cheap, high-quality (physical) goods that have to be made
and transported to its main markets - the US and the EU - which are
both buying less day-by- day. India also exports intellectual
(digital) capital and this will continue. However, for many firms it
is time to expand and acquire overseas´ operations through buy-outs,
or green-field development so as to reduce their costs in terms of
time and money, of their managers doing jobs both at home and abroad -
on a plane. Even if it is the most modern, there are limits to the
range of office operations that may be carried out.
What is your prognosis on the Euro crisis?
I am hopeful. We are, I hope, not on the film sets of a James Bond
movie, where the villain (usually always a man), remains supreme and
is on the point of maiming the world for his selfish gain. Equally, I
do not spy James Bond arriving in the nick of time to urbanely save
the world from this fate.
There is a great need to compromise some local wishes for the good of
the whole. I hope to see this happening in the near future as global
upsets like the Euro crisis, usually mask really large effects that
will come about soon - fuel starvation (it has to be true that fossil
fuels will be depleted, and before that time, their price will rise
vastly); tied to this will be global starvation (due to a lack of
present-day transportation); and these will occur well before (a) the
global population plummets (after 2050 according to the UN), or (b)
catastrophic sea level rises (due to global warming after 2100
onwards). These effects lie beyond the political vision of the present
incumbents of governments: Sadly they only seem to look to their next
My vision may seem gloomy, but it is positive - I feel we will see
sense before it is too late. And the Euro issue will be seen as a
Horasis is a global visions community committed to enact visions for a sustainable future. (http://www.horasis.org)
For more information, please contact:
|Communications and Public Affairs
|Horasis. The Global Visions Community
||+41 79 305 3110
||+41 44 214 6502