Published in Business Spectator (Melbourne), 17 February 2010
There is something comical about current talk about a potential Greek bankruptcy. No, the state of Greece’s public finances is certainly no laughing matter. But it is funny how politicians and financial markets are getting excited about this as if it were news.
The truth is that for years, if not decades, everybody in Europe knew that you could not trust Greek economic statistics. That investment bank Goldman Sachs was complicit in fabricating favourable public borrowing figures for Athens has only added some colour to the scandal but it does not substantially change the big picture. Europe should have feared the Danaans even when they were bearing ‘A’ ratings.
That Brussels pushed ahead with monetary union regardless of any doubts about some eurozone members only shows that economic considerations always played second fiddle. From the start, the Euro had been a project meant to curb Germany’s economic dominance in Europe while aiming to create a new reserve currency to rival the US dollar. It was born out of political ambitions, not out of economic necessity.
Economists had long been worried about the construction of the euro. They had warned that the member states were far too different to have a common currency. They had pointed out that monetary unions had never worked without coordinated fiscal policy. They highlighted the lack of credible sanctions against member states that did not comply with the EU’s Growth and Stability Pact. They argued that Britain’s forced exit from the ERM mechanism in 1992 could foreshadow future speculative attacks against eurozone members.
Yet none of these concerns could deter Europe’s political leaders from entering into this grandest of economic adventures. Doubts, concerns and warnings were simply brushed aside by the political class.
As it turns out, European citizens were less convinced. In the only referenda on the euro so far, the Danes and the Swedes voted against it and there were good reasons never to put the question to, say, the Germans. Had you asked them whether they actually wanted to sacrifice their beloved Deutschmark for the euro the answer would have been a resounding ‘No’.
Looking at it from this angle, the Euro is not only an economic disaster but also a political failure. It encapsulates everything that is wrong with Europe. While European leaders indulge in grand visions of socio-economic leadership, they have consistently failed to deal with the continent’s real economic challenges. And there are many.
The current Greek crisis may turn out only to be a taste of future disasters for Europe. Even if the EU or, more likely, German taxpayers will manage to avoid an immediate Greek meltdown, it seems likely that in the medium term the problem will resurface, only then much worse.
You do not have to be as bearish as Societe Generale global strategist Albert Edwards who calculates that on and off balance sheet net liabilities for the EU already exceed 400 per cent of GDP. Just looking at Europe’s worsening demographic situation should be enough to rob any European of his sleep.
According to Eurostat, the EU’s statistical office, the average age of Europe’s population is currently 40.4 years. By 2030, this will go up to 45.4 years. A change of the average age of 5 years in 20 years’ time may not sound much, but it means enormous pressures for European welfare states. An older population does not only mean more pensioners but also rapidly increasing health costs. Given the already precarious state of public finances across Europe, it is quite clear that Europe will not be able to shoulder these burdens. The Greek crisis is just foreplay to the demographic catastrophe which will engulf all of Europe in the coming decades.
There would be some reason to be less pessimistic about Europe’s future if at least European politicians had understood the magnitude of their challenge. Sadly, this is not the case. Even in the face of an acute budgetary crisis, parts of the Greek population fight any reforms tooth and nail. In Portugal, parliament granted extra funding to regional governments the very day that international investors were pushing insurance rates against a Portuguese default. France is an all seriousness debating whether it can keep its retirement age at 60 – never mind that by the middle of the century one in three Frenchmen will be older than that. In Britain, neither the Labour government nor the Tory opposition are prepared to put forward plans to reduce their budget deficit of 13 per cent. And in Germany, the head of the Liberal party and federal vice chancellor Guido Westerwelle just got into trouble for suggesting that people with a job should always earn more than people on welfare. He was dutifully condemned by politicians of all parties, including his own.
In the European culture that shies away from necessary political and economic reforms, it will be impossible to come up with sensible recipes to stop, or at least slow down, Europe’s inevitable decline. Given this, the best Europe can hope for is a slow death. Let’s hope that it will be spared civil unrest or worse in the process.