THE PIGS WON’T LIKE IT
Several
years ago a story briefly did the rounds of the European media. It was to the
effect that concerns in Germany regarding the stability of the EURO were
prompting some customers to demand “German” Euros from their banks while
rejecting Euros from other EU states, particularly those from southern Europe.
Euro notes and coins have identifiable national markings which made such an
exercise possible. The inference was that, in the event of a meltdown in the
Euro, Germany could withdraw from it and recognise only its “own” currency. The
story was quickly rubbished as totally unfounded and far-fetched.
The Euro,
in circulation since 2002, is now in use in 16 of the 27 EU members including
four of the world’s ten largest national economies. More importantly, it
replaced one of the four major world currencies, and the pivotal European one,
the German Deutschmark. German participation was an act of faith in the new
currency. This core reality is often overlooked. The Euro, from the beginning,
was invested with the strength, stability and reputation of the Deutschmark.
Anyone familiar with the development and launch of the US Dollar two
centuries ago will know how difficult it was to merge and replace the currencies
of thirteen disparate pre-industrial economies. How much greater the challenge,
then, of attempting the integration of most of the major currencies of Europe
(Britain remained outside), bearing with them their fiscal and budgetary
baggage. There were reservations at the time about the adequacy of the Euro’s
control mechanisms, including the 3% ceiling on budget deficits. These were
brushed aside in the euphoria of the occasion.
It has since become apparent
in the Euro era that, without political union, the scope for imposing budgetary
discipline among errant Euro members is limited. This is hardly surprising,
given that the countries concerned are functioning parliamentary democracies,
with regular elections and electorates increasingly impatient with politicians.
The path to re-election is one of making promises; keeping them costs money. The
path to defeat is to seek to raise that money by higher taxes. The end result,
across Europe, has been steady increases in borrowing by governments over
decades to pay for promises made. In an era of growth and low interest rates,
debt could be handled, or fudged.
Who, after all, would lie awake worrying
that the national debt was 50, 70 or even 100% of GDP? And who took seriously
complaints and warnings from the European Central Bank if a country’s borrowing
exceeded slightly the permitted annual ceiling? The excess could be corrected in
the next year, or be postponed further if an election loomed. 3% became
aspirational rather than mandatory. The Germans might grumble, some fines might
be imposed, but, as long as the Euro prospered, problems could be seen off.
Sticking plasters rather than radical treatment became the order of the
day.
The last year has seen reality dawn and the flaws and fault lines in the
Euro zone exposed. First came Ireland, as the air escaped at pace from the
Celtic Tiger. A country running substantial budget surpluses collapsed into
deficit – and how! It will take four years to sweat down Ireland’s current
double digit borrowing requirement to 3%. Ireland was lucky; overall government
debt had been low after the good years, so some massive borrowing was possible.
Ireland was also amenable to good advice once its leaders grasped how serious
the situation was; spending, including public sector pay, was slashed. Ireland,
so far, has taken her medicine.
Greece came next, and, on a Richter scale of
calamity, the Greek situation scored higher than the Irish one. A small economy,
with almost $400 billion in debts, no tax base to speak of and a feather-bedded
public sector and welfare state, held its hand up late last year and revealed
that the last government had lied about the extent of its economic mess. As the
weeks went by it became clear that Greece had no hope of tackling its debt
crisis unaided, and, critically, was unlikely to be able even to roll over the
portion of the debt due in 2010. Moreover, any default by Greece would expose
two other dominoes, the remaining PIGS, Portugal and Spain, both with serious
financial and fiscal problems. Were Spain, the ninth economic power in the
world, to go belly-up, the results would be catastrophic, certainly for the
Eurozone, possibly for the global economy
Saving Greece, therefore, has
become a combination of damage limitation and self preservation for the rest of
the Eurozone. A three year rescue plan was agreed in early May under which
Greece will be loaned up to $150 billion by other Eurozone countries and the
IMF. Inter alia, Ireland, currently borrowing $500 million per week just to keep
going, will borrow $1.7 billion more to lend to Greece, as her share! It remains
to be seen whether this plan will work, how the markets will react in the coming
months and in particular whether the Greek public will accept the severe
measures imposed as Greece’s part of the bargain.
Politicians and Eurocrats
are currently scrabbling to find more lasting solutions within the existing
rules. However, it is difficult to see the Euro survive unless the current
arrangements are overhauled. At the very least a new system of control over
national budget deficits will have to be worked out. The stakes are high.
Individual national sovereignties are at stake. A special Intergovernmental
Conference would be necessary, with treaty revisions to follow. Given how
jealously countries such as Ireland have defended their control over national
taxation there must be considerable doubt that this method of reform would
succeed, hence the sticking plaster approach. The issue is further complicated
by the fact that one major EU country and currency remains outside the Euro –
Britain and Sterling. All in all, an appalling vista.
In the short term the
Euro will probably stagger on. Critical is the attitude of Germany. German
public opinion is already seething at bailing out the Greeks ( the arguments are
along the lines of why should hard working thrifty Germans bail out a country
where people can retire on pension in their mid-50s) but the German government
is seized by the argument that it’s better to hang together than separately.
They may also calculate that a weak Euro will give a much needed boost to
Eurozone (and German, and indeed Irish) exports, aiding overall economic
recovery. They probably also shrink from the formidable task of reforming the
Euro.
What else could happen? Orthodoxy asserts that no country can be
expelled from the Euro, that no country could leave the Euro and that a two-tier
Euro (the Northern states and the PIGS, with Ireland and Italy disputing the
“I”) is unworkable. In short, there is a fixation with the status quo, if only
because of the appalling vista scenario and an unwillingness to think the
unthinkable. If the Euro goes down in flames there will be massive direct and
collateral damage. The coming months could be interesting times. Some at least
will start checking their Euro notes for the serial letter X – the code for
Germany.
pale outlaw 