Published in Business Spectator (Melbourne), 17 March 2011
The scale of the Japanese catastrophe is so enormous it has temporarily sidelined any other news. Developments that would ordinarily attract great attention are being relegated to the inside pages of the newspapers.
This is true of Libya’s civil war, where Colonel Gaddafi shamelessly used the diversion to launch a new offensive against rebels. But it is also true of European leaders who, just hours after the destructive earthquake and tsunami, rushed through new measures to stabilise the eurozone at a meeting in Brussels.
You would think that the transformation of the European Union into a transfer union, the extension of the rescue facility for the continent’s fragile currency by a few hundred billion dollars, and new policy dictates to struggling economies like Greece would be of some interest to the wider public.
Indeed, in normal times, every single measure passed at Friday’s meeting would have triggered big debates. However, reports from Japan dominated the front pages of European newspapers and magazines over the weekend – and sadly will continue to do so for days to come.
To be clear, there is no conspiracy to bury bad news in the shadow of a natural disaster. On the other hand, European leaders certainly seized the opportunity to quickly pass a range of measures that otherwise would have had to be negotiated at an EU summit scheduled in two weeks.
The agreements reached last Friday were substantial. Greece will be forced to privatise assets worth €50 billion in return for lower interest rates on its emergency loans. It is not clear whether this sum is realistic and achievable, given the fragile state of the Greek economy.
The German government finally agreed to extend the operation of the stability mechanism. It will be enlarged in order to spend its full capacity of €500 billion, though it remains to be seen how this will be possible without endangering its AAA rating.
In return for Chancellor Angela Merkel’s wide-open purse, the Germans received assurances that assistance to struggling countries would only be granted under strict conditions. A new pact for competitiveness is also meant to increase economic convergence across Europe.
However, it does not take a great amount of scepticism to question the reliability of such declarations. One only needs to remember how little was achieved by the equally ambitious Lisbon Strategy more than a decade ago. At the time, the plan was to transform Europe into the world’s best-performing economy by 2010. As it turned out, the Lisbon agenda became a case study in the best laid plans of mice and men that often go awry. Instead of being the culmination of global leadership, 2010 became the year in which the world talked about Europe’s inevitable decline.
It is astonishing how little Europe has learnt from previous mistakes. The belief in grand strategies with ambitious targets is alive and well. As is the wish to solve economic problems by ignoring them.
After the Friday summit, the big issues facing the EU remain the same. Greece and Ireland both find themselves on a trajectory to sovereign default. All the celebrated emergency facilities only have the effect of prolonging their suffering. Saddling these over-indebted countries with more debt does not solve their underlying problems. It only postpones and aggravates the eventual and inevitable debt restructuring. In the meantime, the punitive measures will cripple their economies where unemployment, particularly among the youth, is endemic.
For the richer economies, on the other hand, the EU’s plans do not add up either. German, French, Dutch and Austrian taxpayers can look forward to guaranteeing an ever growing amount of loans to Greece and Ireland, and potentially to Portugal, Spain, Belgium and Italy in the future. It is only a matter of time until these guarantees will turn into actual liabilities. By then it will be too late for the richer economies to avoid paying for their leaders’ overgenerous commitments. Europe’s political class is guilty of infidelity to their taxpayers on a gargantuan scale.
While agreeing to pseudo-solutions for Europe’s problems, the real issues have once again been neglected. Many European banks still remain undercapitalised, particularly in Germany’s fragile banking sector. All the talk about including private bondholders in an eventual debt restructuring has not resulted in any concrete outcomes. Economies, whose core problem is a lack of competitiveness, will still not be allowed to leave the corset of monetary union.
The EU’s plans will burden the richer member states while failing to help the poorer ones. They are about subjugating struggling periphery economies to the dictate of Brussels and Berlin but the union will do nothing to aid their recovery.
In ordinary times, this political and economic disaster would have been identified by a vigilant public, or at least by professional observers. Only thanks to an unfortunate oversupply of global trouble spots could European leaders get away with their mind-boggling display of incompetence.
Natural disasters like the Japanese earthquake are as unpredictable as they are unavoidable. With Europe’s looming fiscal disaster, it is the other way around.