Published in Business Spectator (Melbourne), 7 March 2013
Back in December last year, there was a growing sentiment that the worst of the European crisis could be behind us. I did not believe these claims then, and few would believe them now.
The events of the past few weeks, in which I took a break from this column, have only confirmed my earlier fears. The unclear result of the Italian election and its popular rejection of EU-sanctioned reforms is the most visible sign that Europe has re-entered its familiar crisis mode (Four reasons the euro crisis isn’t over, December 20). But it is not the only sign.
To be clear, the euro crisis is not back but it has never been away. There were four reasons why I was certain in December that the euro crisis had not been solved:
1) The cyclical nature of the crisis.
2) The on-going deterioration of the ‘real’ economy.
3) The presence of complicating political factors.
4) Doubts about the European Central Bank’s resolve to do ‘whatever it takes’.
Looking back over the past three months, which in European policy terms can sometimes seem like an eternity, it is clear that these four factors were all at play in the seeming revival of the euro crisis. It is depressingly predictable to watch European policymakers sleepwalk from debacle to debacle.
Looking back, it was already obvious in December, and it is certainly obvious now, that the euro crisis is like a simmering volcano. It erupts, calms down, and then erupts again. That in itself is very familiar by now. What nevertheless remains surprising is how Europe’s political elite responds to these cycles – again and again.
You would think that when market panic has somewhat subsided, yields on government bonds have come down, and the crisis no longer makes the front pages every day, it would be an ideal opportunity to get on with dealing to the root causes of Europe’s problems. In actual fact, this has not happened.
As soon as an immediate crisis has slipped from policymakers’ minds, they are jumping onto other, completely unrelated topics. Thus France spent weeks on an acrimonious debate about gay marriage. Meanwhile, Germany allowed itself the luxury of a debate on sexism and chauvinism. And all of Europe suddenly got excited over the discovery of horse meat in deep-frozen lasagne.
Lucky the continent that is able to devote itself to such existential issues.
One thing is clear: the euro crisis is as cyclical as the attention it receives. It takes an imminent fear of danger to spur Europe’s politicians to action. Otherwise nothing happens.
The lack of political action is all the more surprising given that the constant flow of economic data did not, at any point, suggest that the crisis was indeed over. While a false calm had spread around the continent, indicators continued to point in the same critical direction.
In February, Italian unemployment climbed to a record high of 11.7 per cent. Industrial production in Italy decreased for the 19th month in a row. Spain reported missing its own budget deficit target and reported a deficit of 6.7 per cent for 2012 – never mind it had promised the European Commission to limit the deficit to 6.3 per cent. Youth unemployment in France went past the 25 per cent mark; and, to round off the bad news, the European Commission lowered its economic growth forecast for the eurozone.
Well, actually it was an economic contraction forecast. This year, the eurozone economy will shrink by 0.3 per cent – with disastrous consequences for employment across Europe.
There are many reasons to be concerned about the European economy. At the risk of repeating myself, all of these developments were visible at the end of last year when some commentators seriously believed the worst was over. You could only be surprised by the bad economic data coming out of Europe over the past weeks if you hadn’t kept up with events – or worse, if you had listened to and believed European politicians.
The complicating political factors such as the Italian elections were also entirely predictable. It was clear from the very beginning that the technocratic government of Prime Minister Mario Monti was only a temporary arrangement and that sooner or later Italian-style politics would return. On the very day that Monti was sworn in, there were already speculations about an eventual return of his scandal-prone predecessor Silvio Berlusconi.
At the very latest, Berlusconi’s public announcement in December to re-enter politics had made it clear that Italy’s election would become a referendum on the euro and the EU’s austerity dictate (Berlusconi battles towards an Italian liberation, December 13). That’s precisely what has happened. Who could really be surprised that the Italians, going through a severe recession, have lost faith in Monti’s recipes? Is anyone astonished to see that the main result of the election is an open confrontation between the European institutions and the Italian people?
Finally, I predicted in December that the European Central Bank would not be prepared to save the euro at all costs. The divisions within the bank were noticeable, and there were doubts whether its mandate would even allow it to act as the final guarantor of monetary union.
If yesterday’s media reports are to be believed, there are now factions within the ECB wishing to remove the bank from the so-called troika for fear of the central bank becoming too politicised. This would leave only the International Monetary Fund and the European Union to deal with Europe’s countries in crisis. It underlines that doubts about the ECB’s resolve were justified.
All the years of muddling through the European crisis have only produced sticky-tape solutions. They can hold the edifice of monetary union together for a while, but it is entirely foreseeable that it won’t last.
What nobody can predict, however, is the precise timing of the next crisis eruption. But again, that is a lesson we had to learn.
It’s annoying how predictable the euro crisis has become.
