The political underpinnings of the effort to hold the European monetary union together are eroding.
By PINCHAS LANDAUEuropean Union flags in Brussels 311(photo credit: Thinkstock/Imagebank)
Probably the only area of economic activity in which Europe can feel sure of overcoming Asian competition is in its ability to both create an economic crisis and to complete mismanage it once it strikes.It s difficult to believe that, only a week ago, the dominant sentiment in Europe and around the world was that the measures decided upon in December at yet another summit meeting of European leaders, and implemented over the following weeks and months, would achieve a period of stability in the markets stretching for at least several months.This time would be used to draft the reforms demanded by the stronger nations of the European Union (as well as by the International Monetary Fund and, behind the scenes, by the United States, China and others) and acquiesced to by the weaker nations. These reforms, once legislated and implemented, would trigger a virtuous cycle in which confidence would gradually return, allowing interest rates to decline and thereby spurring an expansion of employment, all of which would swing the blighted countries from recession to economic growth.But the final week of March saw this hopeful scenario dashed on the rocks of cruel reality. The most obvious expression of the change was the switch in direction of European stock markets from up to down. Underlying this reversal, however, were some disappointing economic data that combined with some critical political developments to end the latest lapse into “hopium”-induced make-believe.For those still focused on Greece, the interplay of economic contraction and political dissatisfaction is plainly visible: The endless austerity measures imposed by Greece’s creditors provide the Greek public with no hope for a better future, despite the empty assurances of political leaders in Athens, Brussels and elsewhere. The result is that opinion polls tracking voting intentions in the general election due in April or May show that support for all the mainstream parties is collapsing, while the extremist parties on the Right and Left are set for strong gains.The implication is that the political Establishment, which is committed to keeping Greece in the euro framework and in the European Union – and, by extension, committed to taking more and larger doses of the austerity medicine – will be swept aside by radical parties and politicians. The government that the victorious parties form will renege on its predecessors’ promises and take Greece out of the euro (or be thrown out by irate Germany, Holland and other creditor countries) to make its own way as best it can. Whether the very fragile and tenuous Greek democracy can survive that shock is an open question.But Greece is no longer the center of attention in Europe. As far as market participants are concerned, Greece is “toast,” and Portugal’s bankruptcy is also considered an inevitability. What really matters, however, is Spain, which has moved to the top of the list of problem countries not merely because of its very real and growing economic problems, but because its new prime minister – who actually won an election to gain his job, unlike the current premiers of Greece and Italy, who were installed or imposed by the EU, European Central Bank or the IMF – refused to comply with the instructions from Brussels, Frankfurt and Berlin to reduce Spain’s budget deficit to 4.4 percent of gross domestic product this year. Instead, he informed his partners and/or masters, Spain would aim for a deficit of 5.8%. In plain language, Mr. Rajoy told Brussels where to go and what to do.Meanwhile, on the other side of the North-South divide in Europe, Holland – once a pillar of pro-European identity and support – is also causing problems. After hectoring the Club Med ingrates on how they must cut their budget deficits, Holland has gone over to the dark side by refusing to make cuts large enough to get its deficit down to 3% by next year. To make matters worse, Geert Wilders, the leader of a right-wing party within the ruling coalition, has openly questioned the wisdom and desirability of participating in the bailing-out of countries such as Greece.In short, the political underpinnings of the effort to hold the monetary union together are eroding. From the perspective of economists and financial markets players, and given the intractability of the financial and economic problems of the PIIGS countries, that was always going to happen – sooner or later.But that it is happening so soon after the latest bailout package that supposedly “saved” Greece – and after the ECB lent banks 1 trillion euros to European financial institutions to relieve the liquidity crisis they were suffering in late 2011 – is disappointing for the optimists, to say the least. To the realists, it simply confirms their assessment of the severity of the underlying problems – and how inadequate and even damaging the attempted response to them has been.
