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Thursday, Sep. 6, 2012

Eurolalaland's global threat


Special to The Japan Times

HONG KONG — The grouping of 17 countries that use the euro as their common currency are sometimes called the eurozone or euroland. I am tempted to suggest that the name of the group should be eurolalaland because of the shenanigans and silly political games that the leaders are playing.

But it is no laughing matter: The bigger, wider, more dangerous issue is that while the eurolalaland leaders play their children's games of bluff, they are putting the global economy in danger and threatening the lives and livelihoods of billions of people from America to Africa and Asia. Last week both the U.S. authorities and the People's Daily warned of problems ahead, possible recession in the United States, "tough times" in China.

Equally — although you might say that it is their own funeral, though it will have grave global consequences — the failure of Europe's politicians and bureaucrats to act responsibly and their growing penchant for blaming and name-calling threatens not merely the eurozone but the whole European Union and the claim of Europe to be a global economic player.

Europe's problems were illustrated when Greek Prime Minister Antonis Samaras visited the two euro powers Germany and France to plead for "breathing space" for his economy. In spite of the handshakes and the smiles with German Chancellor Angela Merkel and French President Francois Hollande were confused as to whether Samaras, facing recession, rising unemployment and the risk of unrest would be given any grace period.

The Financial Times accentuated the positive, sort of, reporting "Greece not written off, says Merkel," who was also quoted as saying that, "I want Greece to remain part of the eurozone" and that Germany would "remain as helpful as possible." The Guardian was downbeat, reporting that, "France refuses to back Greece's call for more time to enact reforms," a line echoing Bloomberg's, "Hollande tells Samaras to show Greek commitment to get support."

Confusion was compounded with reports from Berlin claiming that Germany is actively preparing for Greece to leave the euro, or "Grexit." There was also a bizarre report from the German capital, citing finance ministry sources, that the favored option was a "temporary exit" by Greece from the eurozone, though how that would be accomplished and how they would handle the chaos that would undoubtedly ensue was not explained.

Adding to a late summer of uncertainty is the impending verdict of the German Constitutional Court, expected on Sept. 12, on whether the European permanent bailout fund is legal. The Netherlands goes to the polls on the same day as the German court is expected to rule. The caretaker Liberal government faces an uphill struggle against parties from left and from right opposed to European austerity policies or to the whole idea of Europe.

Supporters of Merkel continue to argue that she has always been consistent and should be believed when she says that she wants Greece to stay in the single currency. However, far from being "the most powerful woman in the world", as portrayed in popular magazines, she faces intense political battles at home, within her own coalition government and from opposition parties responding to an electorate whose insistent cry is that Germany must not foot the bill for the folly and laziness of other countries.

The fact that Germany benefited greatly in the European good times and the responsibility of German (and French) banks in loading the so-called profligate European countries with debt has been largely ignored in the popular German debate. But there is a profusion of different voices trying to shape the debate, not all of them politicians.

Jens Weidmann, the head of the Bundesbank, is keeping up the pressure to try to prevent Merkel making concessions, claiming that European Central Bank plans to increase lending to eurozone countries facing high rates in the commercial markets could become "addictive like a drug." Printing money and offering Euros at low interest rates would undermine the resolve of the struggling countries to cut public expenditure and keep taking the austerity medicine, he told Der Spiegel.

Meanwhile bad news from Portugal continues, with tax revenues falling, making it difficult for the country to meet the budget deficit target of its bailout package and sparking suggestions that Portugal might need fresh funds.

It was another indication that austerity alone will not rescue ailing indebted economies, and will not even pay the bills since lower growth leads to lower tax revenues, less growth, more unemployment and demands for more cuts in a vicious cycle. Meanwhile the tough bottom line is that all the uncertainty and squabbling and failure to reach agreement is pushing Europe into recession and damaging the economies of the rest of the world.

An interesting paper from Anders Aslund for Vox EU meanwhile argues that breakup of the eurozone should be avoided "at almost any cost." He examines the collapse of three European multination currency zones in the past century, the Hapsburg Empire, the Soviet Union and Yugoslavia. Aslund asserts: "They all ended in major disasters with hyperinflation." In the eurozone today, he writes, "Large imbalances have accumulated between southern debtor countries and northern creditor countries.

Any capping of these balances would disrupt the payments mechanism between the eurozone economies and impede all economic activity."

He estimates that the average output fall in the former Soviet Union was 52 percent and in the Baltics it was 42 percent. "The causes of these large output falls were multiple: systemic change, competitive monetary emission leading to hyperinflation, collapse of the payments system, exclusion from international finance, trade disruption and wars."

So not a nice walk in the park, then, or a gentle devaluation, as some economists have argued Grexit would be.

It is certainly difficult to understand the suggestion of a "temporary exit." If German officials are really suggesting it, they must have had a touch too much of the summer sun. It would have all the issues of a permanent exit with none of the advantages.

How many of the ongoing arguments are political theater? After all, even those who are skeptical whether austerity will work would not want to give Greece or any of the struggling PIIGS (Portugal, Ireland, Italy, Greece and Spain) a free or a soft pass. However, the risk is that the dangerous political and nationalist edges to the comments may set the rules.

Leading "Eureaucrats" are not helping with their suggestions that things would be better with a pan-European budget and banking system, organized by them of course. Supporters say that this is how founding father Jean Monnet envisaged that the new Europe would work, with sensible centralized control run by the wise men without interference from mischief-making stupid national politicians.

It is doubtful if it would have worked in 1950, and it will not work now. Euroland already has too much of a democratic deficit.

But it has to be admitted that politicians in all countries by playing to the lowest common elements are not helping their countries, Europe or the world, or even themselves once they have got into office.

Of course, Europeans are not alone. American political leaders facing imminent elections are dancing on a fiscal cliff edge, as are Japan's so-called leaders. Not to be outdone, leaders in China are masking economic problems caused by the slowdown in the U.S. and Europe by nationalistic assertions of territorial claims in the surrounding seas.

May you live in interesting times — it is a curse, not a blessing.

Kevin Rafferty is editor in chief of PlainWords Media.


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