On the edge of calamity

As the antics in euro la-la land continue, the region's leaders are putting the global economy and the livelihoods of billions under threat

PUBLISHED : Wednesday, 29 August, 2012, 12:00am
UPDATED : Wednesday, 29 August, 2012, 4:11am

The shenanigans and political games of Euroland are likely to roil markets for weeks if not months to come, especially given last week's meetings between Greek Prime Minister Antonis Samaras and European leaders.

But the bigger, wider, more dangerous issue is that while the Euroland leaders play their children's games of bluff, they are putting the global economy in danger and threatening the lives and livelihoods of billions of people from America to Africa and Asia. Last week, both the US authorities and the People's Daily warned of problems ahead - possible recession in the US and "tough times" in China.

Equally - although you might say it is their own funeral, though it will have grave global consequences - the failure of Europe's politicians and bureaucrats to act responsibly and their growing penchant for blaming and name-calling threaten not merely the euro zone but the whole European Union and the claim of Europe to be a global economic player.

The messages coming out after Samaras pleaded for "breathing space" for his economy with Germany's Dr Angela Merkel and France's Francois Hollande were contradictory. The Financial Times accentuated the positive, sort of, reporting "Greece not written off, says Merkel," who was also quoted as saying: "I want Greece to remain part of the euro zone" and that Germany would "remain as helpful as possible".

But The Guardian was downbeat. It reported that "France refused to back Greece's call for more time to enact reforms", echoing Bloomberg's "Hollande tells Samaras to show Greek commitment to get support".

The picture became more confused with reports from Berlin claiming that Germany was actively preparing for Greece to leave the euro, or Grexit. There was also a bizarre report from the German capital, citing finance ministry sources, that the favoured option was a "temporary exit" by Greece from the euro zone, though how that would be accomplished and how they would handle the chaos that would undoubtedly ensue was not explained.

Adding to a late summer of uncertainty is the impending verdict of the German Constitutional Court, expected on September 12, on whether the European permanent bailout fund is legal.

The Netherlands goes to the polls on the same day that the German court is expected to give its ruling. The caretaker Liberal government faces an uphill struggle against parties from both the left and the right opposed to European austerity policies or to the whole idea of Europe itself.

Supporters of Merkel continue to argue that she has always been consistent and should be believed when she says she wants Greece to stay in the single currency.

However, far from being "the most powerful woman in the world", as portrayed in popular magazines, she faces intense political battles at home, within her own coalition government and from opposition parties responding to an electorate whose insistent cry is that Germany must not foot the bill for the folly and laziness of other countries.

Politicians are not the only people trying to shape the debate. Jens Weidmann, head of the Bundesbank, kept up the pressure to try to prevent Merkel making concessions, claiming that European Central Bank plans to increase lending to euro-zone countries facing high rates in the commercial markets could become "addictive like a drug".

Printing money and offering euros at low interest rates would undermine the resolve of the struggling countries to cut public expenditure and keep taking the austerity medicine, he told Der Spiegel.

Meanwhile bad news from Portugal continues, with tax revenues falling, making it difficult for the country to meet the budget deficit target of its bailout package and sparking suggestions that it might need fresh funds.

It was another indication that austerity alone would not rescue ailing indebted economies, and would not even pay the bills since lower growth led to lower tax revenues, less growth, more unemployment and demands for more cuts in a vicious cycle.

An interesting paper from Anders Aslund for Vox EU, meanwhile, argues that the break-up of the euro zone should be avoided "at almost any cost". He examines the collapse of three European multination currency zones in the past century - the Hapsburg Empire, the Soviet Union and Yugoslavia.

Aslund asserts: "They all ended in major disasters with hyperinflation."

In the euro zone today, he writes, "large imbalances have accumulated between southern debtor countries and northern creditor countries. Any capping of these balances would disrupt the payments mechanism between the euro-zone economies and impede all economic activity."

He estimates that the average output fall in the former Soviet Union was 52 per cent and in the Baltics it was 42 per cent.

business-article-page