Mending the euro's cracks

PUBLISHED : Tuesday, 08 November, 2011, 12:00am
UPDATED : Tuesday, 08 November, 2011, 12:00am

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The Greek tragedy continues with no easy end in sight, threatening to trigger a crisis in the euro, which could smash the European Union and deal a cruel blow to global growth, which in turn could spread a tsunami across the Atlantic and Pacific oceans to damage even the prosperous Asian economies.

There are a lot of maybes there. The sad saga has dragged on for so long that it is reaching a dangerous phase where the tectonic plates of economic incompetence and political careerism are in imminent danger of crashing against each other with who knows what disastrous effect.

The Group of 20 meeting in Cannes achieved little except overworked words and empty promises that will have the markets gyrating nervously trying to interpret whether Greece is going to leave the euro or be booted out. President Nicolas Sarkozy of France and Germany's Chancellor Dr Angela Merkel finally made their exasperated feelings known - that it is time for Greece finally to make up its mind and pay the price of the euro or get out.

Unfortunately, it is not so simple. What an indictment of the world's biggest trading bloc - as the European Union is - that a tiny country of 10 million people and gross domestic product of US$300 billion, a mere 2 per cent of the EU's GDP, should be able to threaten so much havoc.

Over the weekend fresh doubts were raised over the much trumpeted 50 per cent haircut that Greece's private creditors have supposedly accepted 'voluntarily'. This would still leave Greece to face massive job cuts, higher taxes, years of no growth and debts of a huge 120 per cent of GDP by 2020. With no details of participation ratios or coupons and maturities, cynical commentators claimed that the Greek deal is a tawdry publicity stunt.

Economists sympathetic to Greece say it should do what Argentina did a few years ago: default, return to the drachma and allow its economy to grow without being stuck to the painful trammels of the euro and EU. But Greece does not have the economic advantages that Argentina did and, starved of foreign funds, would still find growth tough, even if it could survive the rush to flee the new drachma and stop inflation undermining its competitive edge.

But the Europeans might also rue the day they kicked Greece out: one down, and how many more to go would be the obvious question. Italy is part of the European heartland, but on Friday Silvio Berlusconi was on the carpet. The prime minister claimed that he had turned down a low-interest loan from the International Monetary Fund, in response to which the markets pushed Italy's 10-year bonds to 6.4 per cent, far too high for Italy to be able to afford to refinance US$410 billion in borrowings next year. Berlusconi had to accept IMF inspections of Italy's books.

Italy is not a small fry like Greece and its debts are 120 per cent of GDP and 20 per cent of total EU debts of Euro9.3 trillion (HK$98.7 trillion). Berlusconi tried to laugh off any real crisis claiming that 'the restaurants are full, the planes are fully booked and the hotel resorts are fully booked as well'.

To some extent he is right. For all Berlusconi's personal shenanigans, Italy is not a bankrupt state. Its defenders say that in the half-baked world of the EU and especially the euro zone, Italy's real problem is that it effectively no longer has its lender of last resort, a central bank with the ability to print money.

Reputable economists and politicians too argue that now is the time for the euro zone to accept the full logic of its existence and move to a more complete fiscal union. But this is where political reality gets in the way. It is doubtful how many of even the strongest advocates of the euro zone would be prepared to surrender powers of taxation to eurocrats, always dreaming of new wheezes to enhance their own powers.

Jim O'Neill, chairman of Goldman Sachs Asset Management, told Britain's Sunday Telegraph that German-led fiscal integration moves for the euro zone would make it unattractive to countries as diverse as Portugal, Ireland, Finland and Greece, to stay.

One of the stranger sights in Cannes was of Sarkozy trying to tap China, Brazil, India and other developing countries to help fund the European bailout facility. Why should they when there is so much uncertainty over the future of the euro and when Germany is evidently reluctant to allow the European Stability Fund to be turned into something bigger or stronger with its own money?

The economic mess is also compounded by tectonic crashes on the political front. It is not merely that some of the leaders will not be around next year. Greek Prime Minister George Papandreou has gone. Berlusconi must go. Sarkozy faces his own election as does Merkel. British Prime Minister David Cameron heads a precarious coalition, while his own right wing wishes the EU to hell. But Britain cannot run from Europe, not least because more than half its trade is locked up there and the euro-zone crisis is hurting the country badly.

In the wider G20, President Hu Jintao will not face another summit, and his body language said he didn't want to be at this one. India's Prime Minister Dr Manmohan Singh will bow out soon.

And Barack Obama, one of the truly disappointing US presidents - 'All mouth and no trousers', said a European who had hoped for much from Obama - will face a challenge from a Republican who, frankly, could not give a damn about Europe.

But there is personal animosity between leaders. Berlusconi is widely regarded as a buffoon. Sarkozy claims that Cameron is in the pockets of bankers, while many other leaders regard the French president as a jumped up egoist, who is about the same height as Napoleon. Merkel is feared rather than loved because of Germany's economic firepower and her own schoolmarmish manner that she is right.

Former German chancellor Helmut Schmidt, now in his 90s, made a spirited defence of the virtues of Europe and the euro, pointing out that the EU helped heal deep wounds of war, and that France and Germany breached the stability and growth pact long before Greece did.

He is surely right when he says that 'allowing the current state of affairs to continue, with psychosis-prone traders in the global financial markets making politicians hostages of the financial class, is a violation of the fundamental articles of the European treaties'. But does anyone have the vision and the guts to put Europe together again?

12.7%

The Greek government's revised estimate for its 2009 deficit from an earlier 6 per cent of gross domestic product, setting the crisis in motion