The euro? Who knows …

Yesterday I sat in on a discussion between two distinguished European economists – one had recently served in the Dutch cabinet, the other in the Greek cabinet. The small audience included some of Europe’s leading business people, many of them from Germany; as well as policy experts from Asia and Africa. In the ballroom of a smart London hotel a deathly hush fell as we all surveyed the wreckage of the world’s largest trading bloc.

The Greek was cautiously optimistic – as he had to be, he had no alternative. He asked for the audience to believe in Greece’s new austerity drive; he observed that there were structural differences between Europe’s north and south; he regretted the policy failures that had prevented a rapid response to Greece’s sovereign debt crisis. And he insisted the right response was more, not less, European integration: political and economic union must catch up with monetary union. All would be well if European countries collectively tackled their underlying weakness: a lack of competitiveness in the face of fast growing emerging markets (translation: we have had it too good for too long, and we are very reluctant to change).

The Dutchman was less hopeful that a solution was possible. From the perspective of the northern (and solvent) Eurozone states, he explained, there were two options. The first is what the Greek government is praying for: Germany and the rest of the Eurozone bail-out Greece, stand behind wobbly Spain and Italy, and centralise tough economic and fiscal policies, thus permanently addressing what caused this crisis – the ability of national governments to act independently (and irresponsibly). But for this to work, seventeen Eurozone governments need to act quickly, against the wishes of the majority of their voters, and go far enough to persuade the markets that this solution is watertight.

The Dutchman described this as the “least worst option” which nonetheless carried grave economic and political consequences. Keeping the Eurozone together will require its struggling member states to underwrite a bail-out fund of trillions of euros (the exotic and unimaginable figures at stake prompted wry laughter in the room – one audience member remarked that the figure was so large it was meaningless); they would also have to give up more control of their economies and finances. It was not implausible to imagine irate French replacing Nicolas Sarkozy with Marine le Pen’s (anti-euro / EU) Front National; other extreme parties in Scandinavia, the Netherlands and central Europe might also benefit.

The second option was for the Eurzone to let Greece default, and force it out of the Eurozone. This option is referred to as “taking a haircut”. In the short term, this was a politically less risky route, said the Dutchman, as it would align Eurozone governments with their voters; but it was likely be economically disastrous. Eurozone banks, which carry large amounts of Greek debt, would have to be re-financed. Minus Greece, the euro’s value would increase significantly, pricing German and other Eurozone exports out of world markets. A Greek default would also bring renewed market pressure on Italy and Spain. If they were to default too the Eurozone may well collapse; the global consequences were almost unimaginable.

The Dutchamn explained that his preference was – on balance – for a bail-out and “more Europe”, but his body language was tortured. He explained that several factors made him pessimistic that this was possible:

  • This situation is unprecedented. There are no rules to follow. Everything was new and unknown.
  • Politicians in the Eurozone weren’t telling voters the truth: how much money was at stake, what a bail-out would actually mean. As a result, their solutions so far had amounted to sticking plasters. The markets were suspicious that politicians would never summon the courage to take the (economically and politically) costly decisions needed to hold the Eurozone together.
  •  In essence, this was a political crisis – it had been caused by politicians ignoring the euro’s rules in order to please their voters. Now politicians weren’t telling voters the truth for fear that they would lose their support. The Dutchman saw it as natural that the Eurozone leaders should remain self-interested and anxious to be re-elected, even at a moment of crisis. He thought it was unreasonable to expect them to behave differently. This seemed a coolly realistic, but nonetheless surprising insight into the mindset of politicians.
  • He wasn’t sure that Germany – the hinge player – had the flexibility, leadership or willingness needed to save the situation.
  • Even if a consensus was reached among Eurozone governments to do what was necessary to bail-out Greece and protect the Eurozone’s other weak spots, he doubted whether the German and Eurozone institutions could move quickly enough.

By now you will understand the deathly hush. The Germans were particularly stony-faced. The moderator asked the audience for a show of hands on whether the Eurozone in 2012 would include all the current membership. The audience was split, but all the Germans thought it wouldn’t. The Brits in the room, most of whom I suspect supported the British campaign to join the euro, maintained a restrained silence. “We must accept that we will have austerity for a long, long time” said a Spanish Chief Executive. A Chinese banker over from Beijing used one word to describe how he saw the situation in Europe: chaos.

No one explicitly mentioned the tens of millions of young people whose lives and plans had now been interrupted, whatever deal can be achieved in the next few months. The old men of Continental Europe who scripted ‘ever closer union’ – statesmen and dreamers with their boots stuck in the bog of twentieth century warfare; the French and German politicians who joined hands to rush this project through, impatiently and with high rhetoric, were not singled out. Nor was passing reference made to hubris – remember the circulation of notes and coins in 2002; the balloons and the bold talk about reserve currencies; the vilification of doubters as nationalists and stick-in-the-muds?

The Greek, black-eyed and frowning, uttered one last burst of optimism. By 2021, he predicted, the EU would have achieved full political union. The Germans paled. “We must remember that these circumstances were never, ever expected” explained the Dutchman, his arms held tight across his body. At last, there was nothing left to say. We had scraped away the topsoil and we had exposed the bare rock. There was no time to go down any further, even though we knew little; even though we knew the situation was moving quickly and that things were likely to turn out very badly.

There was a round of applause, and everyone wandered into an ante room for lunch.

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