Plus ça change, plus c’est la même chose could be the motto of the Eurozone crisis. Five years on from the start of the global financial crisis, Europe’s sovereign-debt problems and anaemic economic growth continue with little sign of relief.
On Tuesday, first estimates showed that the economies of the 17 countries that use the euro had contracted by 0.2 per cent for the second quarter of 2012. This suggests that the Eurozone economies have shrunk by 0.4 per cent in the past year. True, Germany’s 0.3 per cent growth and France’s zero growth were actually better than predicted, but Italy’s economy shrank by 0.7 per cent, Portugal’s by 1.2 per cent and Spain’s by 0.4 per cent. Also, industrial production in Germany fell in two of the past three months and business sentiment is looking distinctly pessimistic going forward.
Admittedly, you don’t need to be a member of the Eurozone to suffer such an economic malaise: the UK’s economy shrank by 0.7 per cent in the second quarter, too, according to the first official estimates, while GDP for the whole of the EU – including the 10 countries not in the euro – was also down 0.2 per cent. And we Brits don’t even have Italy’s excuse of being battered by the financial markets; our government bonds are in high demand.
Nonetheless, there is no doubt that the ongoing debt crisis is having a particularly damaging effect on the Eurozone. Every few months, things come to a head with another dramatic deal or another last-minute intervention. Since 2010, the PIIGS – Portugal, Ireland, Italy, Greece and Spain – have all needed emergency assistance from the EU and IMF, either for their governments or their banks.
The latest big statement came at the start of August from the boss of the European Central Bank (ECB), Mario Draghi, who announced that ‘the ECB is ready to do whatever it takes to preserve the euro’. The markets responded positively at the idea of decisive action before Draghi revealed that this meant that the ECB would provide extra assurance to countries that appeal for bailout assistance by buying bonds, but with so many strings attached and hurdles to overcome that it seems unlikely to happen any time soon.
The real question to be asked is this: why, after five years of crisis, are we still getting firefighting rather than long-term solutions? The answer lies in the fact that none of the fundamental problems has been addressed. Instead, what we have had is a short-termist outlook that has no greater ambition than surviving the next crisis with little sense that unpleasant decisions must be taken.
The fundamental problem is a long-term lack of dynamism in the major Western economies. Japan has had its ‘lost decade’, while America and Europe seem positively sclerotic. Faced with another recession in the early years of the new century, governments and central banks put off the problem by turning the taps on, allowing a sharp rise in public and private debt. However, the result has not been just to postpone the problem; it has actually made it worse. Now we have a recession and a debt crisis to deal with. Thanks, guys.
This problem has been compounded within the Eurozone by the terms on which the euro was created. Economic and monetary union has taken place without political union. In the short term, this seemed like great news for relatively undynamic economies like Greece, which could now borrow on the same terms as economic powerhouse Germany. But the economies of Greece, Spain and Portugal (and, to a lesser extent, Ireland and Italy) are nowhere near as productive as the German economy. This is not, as some have suggested, a moral judgement on whether Greek or Spanish people are more or less hardworking than Germans. Rather, it is about the general level of development of their economies as a whole.
Once the credit bubble burst, the PIIGS were on the hook for large debts in a currency – the euro – whose value they had little or no control over, while at the same time suffering from the general economic downturn. The result has been that austerity has been imposed from Brussels and, when elected politicians have not played ball, there has been the implementation of technocratic or national-unity governments.
The trouble is that the debt problem has never been resolved. In reality, these countries will probably never pay back their debts, and will lurch from crisis to crisis until the debts are paid, written off or some mixture of the two. Private debt has been nationalised (particularly in the case of Ireland) only for Europe to have to step in to keep making the payments. While the UK, which had similar problems, could continue to sell government bonds and cut interest rates, the more heavily indebted Eurozone countries have not had that option so long as they remained within the single currency.
You don’t have to go along with the increasingly mainstream view that Germany is to blame for the Eurozone crisis, or with the idea that Germany’s relative economic success is problematic in and of itself, to recognise that Germany might need to take the lead here and cut its losses. For as long as the relatively successful economies in Europe continue to act as if the matter can be resolved by imposing a self-defeating austerity on the poorer countries, the cycle of crises will simply continue. Of course, given Germany’s history of economic instability, biting the bullet will be a difficult sell to the German electorate. But since many of Germany’s markets are now the ones in crisis, there may be sense in trying to find a collective solution.
The contrast between the EU and the US is instructive. Transfers of wealth from richer states of the US to poorer ones have been fairly straightforward because there is political union. That doesn’t apply in Europe - the fundamental weakness of the Eurozone.
What is required now is not pleasant: allowing unproductive sectors to go to the wall, the writing off of bad debts and – quite probably – the end of the Eurozone itself in its current incarnation. But by asking the question ‘How can we restore the conditions for economic growth?’, there is at least the possibility of a solution.
But instead of all that, we are likely to see an authoritarian muddling through: no early resolution to the crisis, but the undemocratic imposition of further austerity and even of a kind of political union based not on popular will but on the say-so and arm-twisting of the unelected Brussels hierarchy.