Surprise — we haven’t escaped the crisis

After a period of relative truce and some optimism, the markets seem to be back in a mood to dish out more punishment to the shakiest countries in the euro zone, and social tensions are flaring up. Those who thought that the modest changes in policy would solve a structural crisis are gravely mistaken, says an economist.

Published on 27 September 2012 at 15:02

The coming of autumn, September 23, heralded the end of the summer not only for ordinary mortals, but for the financial markets too. From Tokyo to New York and across Europe, stock prices are beating a retreat almost everywhere.

What’s going on? International markets are paying the price for the end of three illusions that kept them company through the summer. The first, still childish but nonetheless rather widespread, could be called “the illusion of a magic wand”. This mental deformation suggests that governments and central banks are capable of reversing, in the span of a few weeks or months, negative trends that have taken root over years. They could do it, the belief goes, by adding a minor regulatory provision of just a few lines, by amending a few rather impractical laws – and everything would be as it was before: the garden of (financial) delights will go back to watching its marvellous fruit ripen.

In reality, the crisis we have been living with for five years is a much more serious phenomenon. Its bacilli have nested almost everywhere, in the economy and throughout society, and not only in share prices. And the sickness will take years to extirpate – if it even can be extirpated. The consolidation measures are no easy sprint downhill. Players on the financial markets who do not want to believe that risk ending up with burnt fingers.

Are Europeans really ready to accept these sacrifices?

The second illusion of the markets is related to the first and wants, magic wand or no magic wand, to believe that the remedy to heal the real economy has already been found – which ought to have an immediate and positive impact on the stock market. In reality, the remedies proposed are two in number, and so far, neither is any solution: the first is to inject liquidity on a massive scale, which is the solution held to by the Americans, which lets them somehow keep the U.S. economy afloat but turns out to be incapable of truly restarting it.

The second is the European blend of fiscal austerity (today) and measures to restart production through healthy public finances (tomorrow), which is a solution that, by definition, calls for plenty of time, plenty of patience and a few sacrifices. Provided, of course, that the results come in.

Are Europeans really ready to accept these sacrifices and exercise the needed patience? This question gets responses that are hesitant, to say the least. That takes us to the third illusion: that governments can choose any sort of measure taking into account solely its economic sustainability and disregarding its political sustainability – i.e, how the people will react to it.

The best example is of course furnished by Greece, where the emphasis is on the need for this or that new slash to the budget, without which the “hole” in the public finances cannot be filled in. However, each new turn of the screw seems to intensify the public pain – as made evident by the very serious protests of 26 September – and swell the ranks of those who are attracted by the idea of blowing it all sky-high and leaving the single currency. This would certainly do no good to the euro and even less to the Greeks who, given the state of their balance of payments, would undoubtedly not be able to pay for the wheat and oil they need to let them get through the winter.

Living on another planet

While the picture is not so bleak in Spain, the room for manoeuvre there is very tight. Italy seems to have more leeway, if we are to believe the declarations of characters known for their severity, like the president of the Bundesbank, on Italy’s ability to cope without help from outside the country. Italy is one of the few countries where most families have substantial savings and where the fall in consumption seems related not just to a fall in the incomes of certain sectors of the population hit especially hard by the crisis, but to a widespread fear for the future.

The problem of political viability arises not just in the allegedly weak countries. It’s evident in France, where news coming in almost simultaneously shows unemployment levels passing the three-million mark and a collapse in the popularity of President François Hollande, who has lost 11 points in a single month. There is also evidence, very clear today, of a slowdown in the German economy and a mood in the ranks of the ruling coalition in Berlin that is far from upbeat. There is virtually no European country that, no matter how sturdy it looks, is not worried about where its economy is headed.

That’s why the markets are falling or, at best, extremely wary. After all, even if the players on the financial markets often think they are living on another planet, the stock exchange mirrors the society, with its fears and uncertainties. The world is not confined to share prices but also includes the shopping lists of ever more worried housewives. And it is an illusion to believe that the markets will recover their health in the medium to long term if the housewives continue to fare badly.

ANALYSIS

Anger swollen by injustice

For Süddeutsche Zeitung, a sense of injustice is the cause of “the citizens’ anger” that has recently been expressed in Greece, Portugal and Spain —

Governments are on a state of alert, as the trend towards political extremism increases with every new demonstrator. This could be the demagogues moment of glory.

Two factors explain this anger, whether it be expressed by extremist parties in Greece, separatists in Spain, or a possible return of Silvio Berlusconi in Italy —

A society’s capacity for suffering is not solely determined by the price of bread or the value of unemployment benefit. It also depends on the strength of conviction and optimism that a government can generate. In Spain and Greece this leadership has been cruelly lacking. On the contrary, these countries have been marked by a growing sentiment that people are being treated unjustly because the rich remain sheltered and the banks have yet to be affected.

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