Linda Zeilina: Good Morning Sony, welcome to the first in our new series of 'Conversations with Re-Define'. So, market confidence seems to have returned and there is certain optimism in the air and ECB president Draghi has said that there are signs of ‘positive contagion’. Would you say that the Eurocrisis is finally over?
Sony Kapoor: I think that the optimism has gone too far. The Eurozone real economy is continuing to contract and the situation in Italy and Spain, both of which are amongst the biggest economies in the Eurozone, is particularly dire. France is not doing well either; the Greek economy is now 20% smaller than it was at the start of the Eurocrisis. Nor are Ireland and Portugal in great shape. These are just the countries that we already knew were in trouble. If you cast your net a bit broader, Austria, the Netherlands, Finland, which are supposed to be the stronger economies, are also in trouble and Germany is not immune when all economies around it are shrinking.
At the eve of what is now being unofficially billed as the summit to save the Euro, things are not looking good at all.
To put it mildly, no one is expecting miracles from this summit. It would be enough if they can avoid this being a disaster.
The political space is now much smaller and the size of the economic problem now much bigger than at the last such comprehensive summit in March 2011. Despite this, the summit will devote far too much time on a highly ambitious political integration agenda, much of which is unachievable in the near future and devote far too little time to tackling the growing economic problems, where action is urgently needed now.
Whenever the future of the European Union was considered in the past, at least in the last couple of decades or so, a crucial fault line that always limited progress towards an 'ever closer union' was the critical differences between the French and German approaches to the European Project.
Germany favoured a stronger institutional structure with more co-ordination and a centralized decision-making structure, France a more decentralized construction where groups of national leaders were the ultimate decision-making authority and the transfer of sovereignty to the centre was rather limited. This same fault line is now once at the heart of the discussions surrounding the Eurocrisis and the ability of the two countries to bridge this will determine the shape of Europe, in particular the Eurozone!
The Eurozone is stuck in a dumbbell trap where economies are socially, economically & politically diverging clustering on either side of a dumbbell. The longer this divergence continues, the more likely that the European construction, the bar that holds them together may collapse under the weight of contrasting and conflicting needs & perspectives.
The spreads between Spanish and Italian bonds and German bonds are once again on their way up. Even as the borrowing costs for Spain and Italy come dangerously close to Euro area records, the German government is able to fund itself at all-time record low interest rates with significantly negative yields.
Note: This is my Op-Ed response to Jeff Sach's suggestion that emerging markets should help the eurozone. It appeared in the FT's A-List.
The eurozone’s problems are entirely self-inflicted, and the solutions too must come from within.
However, the European Union may be ‘institutionally incapable’ of getting a handle on the crisis now. Its fragmented structure makes decision-making slow and difficult at the best of times. Petty parochial politics and procrastination has transformed a treatable birth-defect into a near-fatal malady.
The speed, scale and cross-border nature that characterise the crisis now, probably rule out solutions that come from the divided European Council, which is incapable of moving fast enough to restore confidence. The crisis that has already engulfed six of the seventeen euro member states limits their financial ability to act even if they could make quicker decisions. The European Commission, which can act faster, has no money to help.