The future of the euro appears to be in jeopardy as the various leaders of its 17 member countries fail to reach an agreement on how to resolve the sovereign debt crisis.
Last Monday, the Organisation for Economic Co-operation and Development (OECD) warned that a collapse of the euro could cause a deep recession among the world’s advanced economies.
The OECD think tank’s chief economist, Pier Carlo Padoan, told The Guardian newspaper last week that the “recent contagion to countries thought to have relatively solid public finances could massively escalate economic disruption if not addressed.” He also stated that the failure of European leaders to reach a decision on resolving the debt crisis could have very serious repercussions for the 34 worldwide OECD member countries. The 17 members of the eurozone are at serious risk of facing a deeper crisis if one or more of them default on their debt. Padoan described how there is risk of an unforeseen event known as a black swan event that could cause “highly devastating outcomes.”
Higher unemployment and a credit crunch of even greater severity than in 2008 and 2009 are real dangers if the euro crisis is not resolved, according to the OECD think tank. The OECD has thus advised European leaders to opt for a big bailout of about 1 trillion euros of liquidity to try and jumpstart the markets. However, at the time of writing, there appear to be no plans for such a large bailout. A piece entitled “Is this really the end?” published Nov. 26 in The Economist magazine painted a bleak picture of a catastrophic eurozone collapse. Visions of an even worse global credit crunch than the one in 2008 are depicted and quite vivid language was employed, such as “ripped apart,” “shatter” and “fragmented.” The eurozone may not completely collapse but end up considerably smaller and possibly more integrated. Volatile exchange rates and other currency dynamics between a new core and periphery of the eurozone could even threaten the integrity of the EU, as what happens to the euro affects various trade agreements inside Europe and even further afield.
The economically weaker countries such as Greece, Spain and Italy are currently the victims of asset-flight and austerity projects in a bid to try to pay down debts. The borrowing costs of Spain and Italy have not gone down since their debt crises recently reached the pages of global newspapers; however, they are not alone. Belgium and France are also finding their borrowing costs on the rise. The situation is compounded by the continuing low activity in interbank lending across Europe, with many acting very conservatively as a result of fears of incurring high debts in a market that many perceive to be wrought with high-risk trade.
The European Central Bank (ECB) is not regarded as the official lender of last resort for the EU like the Federal Reserve was mandated to be in the US. The bank is reluctant to get involved in pumping large amounts of liquidity into debt-ridden financial institutions and government coffers. Where will this money be spent? Will it go towards purchasing more government bonds and debt instruments? Or will it go towards infrastructure programs and the creation of new capital as a means of generating growth?
There is growing pressure on the ECB to act, particularly if the leaders of the eurozone do not act with sufficient decisiveness to imbue more confidence in investors. The ECB has probably been reluctant to act out of fears that it will create a moral hazard, i.e. the printing of new money in the form of a big bailout could cause complacency in member countries where pushing for fundamental reforms in their fiscal policies is concerned. The Economist is regarded as a respectable publication and their article did not mince words about the possible repercussions if the ECB and European leaders do not reach a solid deal to resolve the serious escalation of debt. The publication warned that there is a possibility the “single currency could break up within weeks,” with a risk of default even in Italy as that country faces refinancing more than $40 billion in bonds (government debt instruments).
In Britain, the Chancellor of the Exchequer told the press last week that the government is preparing emergency plans for the collapse or breakup of the eurozone. The Daily Mail reported that billions of pounds of UK tax money could be used to prop up countries in the eurozone even though Britain is clearly not part of the single currency zone. This could happen as part of an International Monetary Fund (IMF) rescue package proposed for Italy that some have estimated could potentially reach 600 billion euros. Britain is a major shareholder in the IMF, and thus such a package could cost taxpayers quite a bit.
There have also been recent squabbles between Britain, France and Germany over how to amend the EU treaty in order to enact tighter budgetary controls over countries in the eurozone. These disagreements have been interpreted by some euroskeptic politicians as a growing power struggle among countries rather than a reflection of a European project designed for unity and cooperation. In a short speech given on Nov. 16 at the European Parliament in Strasbourg, the leader of the UK Independence Party, Nigel Farage, made quite a damning criticism of the whole situation. He regards the situation as being on the edge of “financial and social disaster” brought about by four men who were not even elected by the people of Europe. He not only described the situation as a “German-dominated Europe” because of the perceived growing influence of the German economy in the eurozone, he also criticized European leaders for apparently pushing George Papandreou of Greece and Silvio Berlusconi of Italy to resign. He likened the president of the European Commission and the president’s colleagues to “a pack of hyenas” who have apparently pushed for puppet-governments to replace unpopular leaders who try to stay in the eurozone. For example, he referred to how Herman Van Rompuy, the president of the European Council, went to Italy and said, “This is not the time for elections but the time for actions.” Berlusconi then resigned and was replaced by Mario Monti — a man who is clearly interested in staying part of the eurozone, a currency project which Farage clearly dislikes. While it is obvious that Nigel Farage’s language is often colorful and sometimes he is prone to exaggeration, he is not alone in his criticism.
Sir Bernard Ingham, who was Margaret Thatcher’s chief press secretary during her time as the British prime minister, wrote a piece in the Yorkshire Post on Nov. 10 criticizing both the single currency and the EU as a whole. He described how Prime Minister David Cameron has not stayed true to his promise to hold a referendum over how the British people form ties with Europe, with him suggesting that pressure from within his party is influencing his reluctance to live up to his promise.
Ingham has described the EU as an unelected government with a high level of unnecessary bureaucracy and powers to legislate without a satisfactory democratic process. The EU, to Bernard Ingham, is an attempt at too much integration (in comparison to the previous Common Market) by a small group of elite who desire the erosion of national sovereignty. He stated: “In short, the EU has a yawning democratic deficit. That is both a blessing and a liability. If it were a real democracy, it would be a federal United States of Europe with its own elected Parliament, government, policies, currency, judiciary and army.”
Clearly such words are to be expected from a euroskeptic conservative like Ingham, and there are others. Former Chancellor Norman Lamont, who served under both Margaret Thatcher and John Major, has told various media outlets over the last few months that both the euro currency system and the EU are deeply flawed and need rethinking. Perhaps he and his fellow euroskeptics are right, but who is going to do the rethinking and with what should they replace this ailing system? After all, it is euroskeptics such as Nigel Farage, Sir Bernard Ingham and Norman Lamont (among others) who predicted the downfall of the currency and are now being given more of a voice than ever. When highly influential global investors such as George Soros (who was interviewed in August by Der Spiegel) are saying that “the future of the euro depends on Germany,” you can perhaps understand why many people are feeling uneasy at the prospect of the currency continuing for much longer.
04 December 2011, Sunday / HOSSEIN TURNER, SUNDAY’S ZAMAN