EDITORIAL: by Peter WestmoreNews Weekly
Global implications of Europe's fragility
, November 13, 2010
My recent short visit to Europe took place during the outbreak of strikes in France, Italy and Greece against the austerity measures now being introduced throughout Europe to address the massive debt problems caused by the global financial crisis.
Strikes in Europe are nothing new. What is different about the present strike wave is that they represent a popular reaction against governments of both right and left which, after decades of budget deficits, are now being forced to balance their budgets.
Officially, the pressure to balance budgets comes from the heads of the European Union (EU). The EU controls the European Central Bank which issues the common currency, the Euro.
In fact, it comes mainly from the wealthier nations of Europe, France and Germany, which have told the other countries that unless budgets are balanced, they will not support rescue by the European Central Bank. Without a rescue package, the fear is that many national governments would be unable to meet their debts; their major creditors - the banks - would become insolvent; and there would be a financial meltdown on the scale of the 1930s Great Depression.
The proposed financial rescue package would be administered by the European Central Bank, to guarantee the economies of the nations of the EU. The size of the Eurozone support package agreed to last May was a massive €700 billion ($A1,000 billion).
The effect of the package was to dampen fears of an imminent financial collapse in countries such as Greece, Spain, Ireland, Italy and Portugal.
The German Government, whose taxpayers and parliamentarians were very reluctant to bankroll the package, has made clear that the condition for the bailout includes the imposition of balanced budgets in the EU.
However, it is far from clear that forcing European governments to balance budgets, through a combination of tax increases and cuts to government spending, will work.
It is interesting to note that when the global financial crisis struck in 2007, the response of European governments was the opposite of what is now being proposed. In 2007, governments expanded public spending, reduced interest rates and guaranteed the banking system.
Coming on top of decades of spendthrift policies by opportunistic politicians in Europe, there is a very real possibility that the austerity measures will cause a deepening of the financial crisis: negative growth in manufacturing industry, a deflation of asset values, and lower tax revenue.
It may be that the medicine being dispensed will worsen the disease. At the same time, a failure to administer the medicine could be fatal.
The consequences will be as much political as economic. Even before the hard measures were implemented, there have been riots in major European cities. As the austerity programs bite in 2011, street violence is also likely to increase, destroying public and business confidence and, quite probably, not a few governments.
Quite apart from this, there is a danger that the cutbacks will force Western Europe into a double-dip recession.
As the international business editor of London Daily Telegraph
, Ambrose Evans-Pritchard, recently noted, "An ominous pattern has emerged across much of the Eurozone periphery: tax revenue keeps falling short of what was hoped. Austerity measures are eating deeper into the economy than expected, forcing further fiscal cuts. It goes too far to call this a self-feeding spiral, but such policies test political patience to snapping point." (UK Telegraph
, October 31, 2010).
The worst of it is that the consequences do not end in Europe. Just as the global financial crisis emerged from a housing crisis in the United States in 2006, so the developing financial crisis in Europe will affect other parts of the world which trade with it. This is an inevitable consequence of globalism.
Between them, the European Union and the United States account for about a half of world trade, and their economies are highly interdependent, as was obvious at the time of the collapse of several major American and European banks in 2008 and 2009.
Separately, China is the EU's second largest trading partner, exporting about $300 billion worth of goods in 2009. An economic slowdown in Europe would inevitably cut Chinese exports.
Even for Australia, the consequences could be worse than expected. As a major exporter of minerals to China, Australia would be indirectly affected by a reduction in China's export trade.
Additionally, the European Union is Australia's second largest trading partner after China. Australia exports a range of minerals (coal, gold and iron ore) and agricultural products (including wine and wool). Australia is a major market for European goods and services.
2011 is shaping as another year of crisis in the world's financial system, and not just for Europe.Peter Westmore is national president of the National Civic Council.