As the latest phase of the Euro-crisis intensifies, it seems increasingly clear that Europe is at a difficult and historic crossroads in its long, slow transition from horrific warfare (and economic depression) during the first half of the 20th century, to a peaceful, mutually beneficial and economically strong “European community.”
As the NYT reported earlier this week:
As European leaders grapple with how to preserve their monetary union, Greece is rapidly running out of money. Government coffers could be empty as soon as July, shortly after this month’s pivotal elections. In the worst case, Athens might have to temporarily stop paying for salaries and pensions, along with imports of fuel, food and pharmaceuticals.
On the same day, Ambrose Evans-Pritchard, the Telegraph’s International Business Editor reported that:
Treasury minister Cristobal Montoro confessed that Spain can no longer raise money. “The market is no longer open. The risk premium is telling us that Spain as a state has a problem accessing the market when we need to refinance our debt.”…
In words that sent shivers through chancelleries across Europe, he said that Spain’s economy is too big for the EU bail-out machinery. “Technically, we can’t really be rescued,” he said…
Evans-Pritchard also pointed out that:
There was fresh evidence on Tuesday that Europe’s austerity policies are pushing the region deeper into slump. Retail sales dropped 2.5pc in April from a year earlier, crashing 9.6pc in Spain and 9.3pc in Portugal. The Markit PMI services index for the eurozone fell to its lowest level since mid-2009 in May. “The economy is contracting at the fastest pace for around three years,” said Markit’s Chris Williamson.
And today the Telegraph reported that:
Spain has been downgraded to two notches above “junk” by Fitch. The country was cut to “BBB,” from “A”.
It seems that the increasingly dire situation (unemployment is 20-25% in Greece and Spain, and roughly 50% or higher among the youth in these countries), is driving participants and observers to one of two views–either the Eurozone should be split up in some fashion or, as Spanish premier Mariano Rajoy recently said, ” Europe needs fiscal integration with a fiscal authority,” to accompany its current monetary union (as is the case in the U.S.).
The big risk seems to be that Europe’s existing political and economic institutions (and its leaders) are not strong, flexible and proactive enough manage either of these scenarios without triggering something akin to the Lehman-bankruptcy-induced financial meltdown the world experienced in 2008 (or worse).
The fact that the rest of the global economy (including the U.S. and China) is in a weakened state doesn’t make their job any easier. Nor does the human tendency to seek scapegoats and blame others for problems, especially ones that, like today’s, are complex and difficult to understand, and whose resolution is likely to threaten the status-quo and must bridge multiple cultural divides, all at a time of great stress and hardship.
Here’s Martin Wolf, chief economics commentator at the Financial Times:
Before now, I had never really understood how the 1930s could happen. Now I do. All one needs are fragile economies, a rigid monetary regime, intense debate over what must be done, widespread belief that suffering is good, myopic politicians, an inability to co-operate and failure to stay ahead of events…
…the west is in a contained depression; worse, forces for another downswing are building, above all in the eurozone. Meanwhile, policy makers are making huge errors…
How much pain can the countries under stress endure? Nobody knows. What would happen if a country left the eurozone? Nobody knows. Might even Germany consider exit? Nobody knows. What is the long-run strategy for exit from the crises? Nobody knows. Given such uncertainty, panic is, alas, rational…
Wolf sums up a key element of the Eurozone situation in this short sentence:
A fiat currency backed by heterogeneous sovereigns is irremediably fragile.
As Wolf points out, “nobody knows” where the complex and volatile Euro crisis will lead. I certainly don’t.
But I do believe that, given Europe’s history (the good, the bad and the ugly) and its aspirations, the current crisis cries out for Europe’s (and the world’s) leaders, citizens and institutions to evolve in ways that not only address the immediate crisis, but also continue to move away from a past marked by violence and oppression, toward a future where citizens of every nation can experience peace, dignity, freedom and prosperity.
A saying sometimes credited to Rahm Emanuel, but more accurately sourced to economist Paul Romer (whose New Growth Theory I discussed here) is “A crisis is a terrible thing to waste.”
Like billions of others, I’m hoping we don’t waste this one…