Germany has to economise, and yet it’s supposed to pay for the wobblier countries in the euro club, which just happen to be our favourite vacation spots. Germans who understand why are few and far between. The point is that a national insolvency seldom remains confined to the over-indebted country itself. And the knock-on effects could spell the end of the euro, cause monetary chaos throughout Europe and jeopardise the political stability of the continent. It’s like dominoes. The first domino fell on 8 December in London. On that Tuesday, Brian Coulton handed down his verdict on Greece. Coulton is managing director of the so-called Sovereigns and Global Economics department at Fitch Ratings. His computer boils each country down to a bunch of tables: economic growth, rate of inflations, tax revenue. He compares all those figures to what he gleaned from conversations with each country’s government. The bottom line is a credit rating that’s worth its weight in gold. The top marks, “AAA”, which Germany boasts, ensure a country favourable terms when it borrows money on the loan market.
The news from Athens has been worrying Coulton for weeks. So he puts thumbs down on Greece. At 1.27 pm the news hits a monitor in the trading room at a major bank in Frankfurt: “Fitch Ratings cut Greece one step to BBB+ today.” And the same line pops up on every computer hooked into Bloomberg Financial News – thousands of them all over the globe. “BBB+” means: careful, could go bust! So big international investors immediately start selling off Greek government bonds. Deep debts need not necessarily culminate in collapse. Spain went bust eight times in the 19th century alone. What is dangerous is state bankruptcy, because the repercussions are virtually incalculable. Losses make the financial markets nervous, and nervous markets wreak no end of havoc. Investors then pull their money out of “innocent bystander” countries simply because they are deemed financially vulnerable. And isn’t half the world said to be treading on thin financial ice these days?
The nightmare of losing sovereignty
Greece, Italy, even Spain might be tempted to re-introduce the drachma, lira and peseta with a view to boosting their own exports with a devalued currency. Then, as in days of yore, speculators would bet against specific countries, thereby jeopardising the prosperity of all the EU nations. The Germans have always warned against precisely that scenario. Yet before any euro state goes belly-up – and this is now the consensus in the German chancellery –, the other EU countries would have to intervene. However, the question is not only whether the Germans want to rescue, say, the Greeks, but whether the latter will let themselves be rescued in the first place. After all, “rescue” also means a say in running the country. Rescued states forfeit their sovereignty to foreign governments. Gone is their power of the purse, parliament’s ultimate prerogative in any democracy. And the loss of budgetary sovereignty is anathema to any head of state. But that is exactly what many economists are clamouring for. After all, the financial crisis didn’t cause the difficulties in these states, it merely aggravated them. The Greek government doctored its economic data. The Italian and Portuguese governments allowed wage hikes that are double the European average. And the Spanish did nothing about the property market bubble. If the Greeks, Italians and Spanish really want to get out of the hole, they will have to trim wages to restore their competitiveness.
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But that isn’t likely to score popularity points for the government. We saw that happen in Germany. When in 2003 the Red/Green coalition government [under Gerhard Schröder] announced their Agenda 2010, the German economy was in dire straits. Corporate management then streamlined operations, the workforce accepted wage cuts. The upshot was a minor payload miracle. And Red/Green were voted out. But suddenly German companies could undercut their hitherto cheaper European rivals. So the first dominoes along the road to Greek, Italian and Spanish national insolvency did not fall at Fitch Ratings in London, but, if you will, in the payroll departments of German companies. The monetary union is in hot water because each country only looks after its own interests. Hence the European Commission’s calls for closer dovetailing of national economic policies. Every country needs to put up with some outside interference. The Spanish president even advocates sanctions against countries that won’t abide by such agreements. Then Athens might have an easier job of selling the loss of its sovereignty.
Getting tough on PIGS
“End of kid-glove treatment for Southern Europe," announces Warsaw daily Dziennik Gazeta Prawna in an analysis the on worsening economic situation in Portugal, Italy, Greece and Spain. Under the protective shield of the euro, this group of countries, frequently referred to under the PIGS acronym, have long indulged in irresponsible and short-sighted financial policies, while the rapid growth of the euro zone has allowed them to conceal structural problems. As a result, the current account deficit in Greece has reached 14% of GDP, and in Portugal 12%. Radical budget cuts and financial discipline appear to be the only solution. But this will prolong the period of emergence from recession, observes the daily. Spain seems to be facing a particularly difficult situation here, as the country’s public debt stands at 67% of GDP, and consumer debt amounts to 177% of the GDP. These grim results are topped by a high jobless rate: 45% of the Spaniards below 27 are unemployed. According to Hugo Brady, expert with London Centre for European Reform (CER), after years of prosperity, the struggling countries in Southern Europe may soon be outpaced by several new member states.