December 10th 2011

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Articles from this issue:

COVER STORY / EDITORIAL: Mining tax will hit Australian industry and super

CANBERRA OBSERVED: PM Gillard buys herself some breathing space

NATIONAL AFFAIRS: Treasurer Swan's budget cuts hit unwaged mothers

QUEENSLAND: Labor's dying wish: to bury marriage once and for all

WATER: Time to protest over second Basin plan

NEW ZEALAND: John Key's National Party increases its vote

GLOBAL WARMING: Durban conference switches tack on climate change

EUROPEAN UNION: EU's options for tackling the eurozone crisis

UNITED STATES: Sarah Palin castigates congressional corruption

RUSSIA: What Russia's presidential election portends

FAMILY LAW: Labor and Greens creating a fatherless society

SOCIETY: Social engineering and the abuse of children

YOUTH AFFAIRS: Schoolies week excesses: public debate needed

ABORTION: Deceptive advertising of the abortion industry

CINEMA: A ringing affirmation of fatherhood

BOOK REVIEW: Forbidden reading

BOOK REVIEW Dickens: the early years

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EU's options for tackling the eurozone crisis

by Colin Teese

News Weekly, December 10, 2011

Once events take over, there is no longer any possibility of sticking to timetables.

Only weeks ago, a large number of European leaders were still talking about how the eurozone could be held together without threat to the European Union as a whole. Confidence in that possibility now seems to be slipping away as the embattled euro-economies sink deeper into the mire of indecision and despair.

Europe is taking on a shape not dissimilar to that of the 1930s.

Within the corridors of EU policy-making, few seem willing or able to recall what happened all those decades ago — how it all began as an economic crisis, how quickly that morphed into a full-blown political crisis, then into a diplomatic crisis. World War II followed.

Twenty-five years earlier, much the same sequence of events drew Europe into the so-called Great War. On both occasions, democracy was an early casualty.

Are we, once again, heading in the same direction? Both the Greek and Italian democracies are having their democratically-chosen leaders replaced with unelected technocrats — disturbingly, they are already being called chief executive officers.

Early riding instructions from Brussels require both of them to embark upon a sale of public assets — presumably, the proceeds will be fed into the French, German, Netherlands and Austrian banks. We can only hope that the new CEOs are not eligible for “performance bonuses”. If so, there may not be much left for the banks.

Former Greek Prime Minister George Papandreou was removed because he was so misguided as to propose to call a referendum on the question of whether or not his countrymen were prepared to accept an austerity package largely devised in Brussels to satisfy the demands of banking and other lending interests.

Thus far, little concern has been expressed about this casting aside of the democratic process. And when the same medicine was being dished out to Italy, the consensus was that the country’s ex-Prime Minister Silvio Berlusconi deserved what he got.

The attitude seems to be: do whatever it takes politically to placate markets and save the euro. As for the small matter of democracy, we can worry about that later.

At the centre of all of this is the desire of Germany, with the support of a few other self-interested EU member-states, backed up by the bureaucracy in Brussels, to permanently recast the financial structure of the EU according to the German wish-list.

France, apparently, is going along with this idea, which must be causing some EU watchers to scratch their heads. How times can change! A couple of decades ago, the idea of allowing Germany anywhere near the driving-seat of Europe — financial or otherwise — would have been unthinkable.

Does having been ravished by three German invasions in the last 140 years count for nothing? Or have the French suddenly taken leave of their long-term memories?

Successive postwar German chancellors, from Konrad Adenauer to Helmut Kohl, knew better which buttons to press: they laboured for half a century building bridges of European co-operation. The question of Germany becoming more than one among equals never arose. Quite the reverse. Germany seemed happy to fund higher standards of living for less fortunate member-states.

What broader Europe — that, is countries both inside and beyond the European Union — thinks about German resurgence, it is too early to judge. Russia, for one, will be one of the interested bystanders, perhaps trying to decide whether to laugh or cry at Europe’s plight.

That is the broader view, but more important still is what is happening at ground level. The optimists want the rest of us to believe that technocrats waving their magic wands will solve the problems in both Greece and Italy, and, in the process, the other ailing eurozone economies.

Common sense dictates otherwise. Neither Greece not Italy can regain solvency — let alone sovereignty — without massive economic growth. A sustained level of GDP growth above 5 per cent annually for perhaps 20 years will be needed merely to finance repayment of principal and interest on Italy’s loans. Much the same goes for Greece.

Any domestic austerity program makes this impossible. Lower wages and higher taxes translate into less rather than more growth. Neither is it realistically possible to build economic recovery around the prospects of export growth.

Other indebted countries, no less trapped in the overvalued currency of the euro, will be trying to do the same thing. It is extremely unlikely that any of them can trade their way back into economic and financial health.

The European monetary union idea was flawed from the start. The euro wasn’t so much a new European currency as a deutschmark renamed.

The change seriously unbalanced economic relationships and trade flows within the EU. The consequences of those imbalances are now being exposed.

Founder and co-chief investment officer of the global investment firm Pimco, Bill Gross, puts it clearly in a recent article entitled, “Take flight from Europe’s policy food fight” (Financial Times, London, November 16, 2011).

Ever since the currency union of the EU was established, he tells us, business growth in the peripheral eurozone countries has been built on the basis of debt and imports. Now lenders have had enough. They no longer believe that the financially troubled euro borrowers represent safe investments.

Denied a capacity to continue borrowing, these countries can no longer rely on their debt-based business growth model, and their economies have ground to a halt.

Indebted Europeans cannot borrow, nor can they trade or grow their way out of debt because they are locked into an overvalued currency, the euro. Those whom Gross calls “serial debt offenders” — the United States, Britain and some others — are more fortunate. Having borrowed in their own respective currencies, they can devalue and have their central banks print money. Activating those relief valves helps them to reduce their debt and grow their way out of trouble.

In some measure, it is understandable that the EU’s bureaucratic leadership in Brussels, along with the northern European member-states, would prefer not to have to confront these realities.

The various possibilities for dealing with them are proving both politically difficult and potentially divisive. The early strategy, beginning with Greece, was to play for time, in the hope that some kind of orderly default mechanism could be constructed.

The consequences of a disorderly default would be heavy indeed. Were Greece to leave the euro and revert to its own heavily devalued currency, this would translate into huge losses for both direct investors and others involved commercially with Greece. Losses could amount to perhaps 70 per cent of the value of current financial obligations, as currently expressed in terms of the euro.

Moreover, disorderly default by Greece would probably spread to the other embattled economies. In the process, Europe’s currency union would be destroyed.

Those are seen as the drawbacks. But there are possible advantages.

Abandoning the euro could work in another way: it could, for example, help restore competitiveness to the indebted economies.

Other benefits could follow. With their own devalued currencies, the ailing peripheral economies would have been thrown a lifeline as their imports would become dearer and their exports cheaper. This could halt their slide into further debt and even help them begin to pay their way again.

Restoring these countries to reasonable economic health would finally make it possible to re-instate financial and economic stability in the EU. In turn, a stronger Europe would enable the world to breathe more easily.

There is no point denying that following such a course would be difficult, painful and protracted. Letting the indebted European countries exit the euro and undergo currency devaluation against the euro would only mark the beginning.

If these economies are to regain full economic health, there must be economic re-structuring — though in a manner accommodating to the social and cultural structures of the countries concerned. There can be no question of one uniform German policy being imposed on all.

Recapitalisation of the EU’s crippled banking system is essential. It will need to be undertaken by the governments standing behind the various financial institutions — with all the political problems that entails. Negotiations with the banks will be no less difficult. Governments will have to persuade them to accept much stricter controls as a condition of bailout.

There remains, then, the matter of the EU itself. German Chancellor Angela Merckel says she wants closer political union. At this moment, a more unwelcome suggestion could hardly be imagined.

The EU in its present form is already deeply unpopular, even among some of the founding member-states. Especially disliked is the idea of free movement of people within the EU. While this may have been a well-intentioned and apparently logical step once upon a time, it has brought with it unwelcome and unintended consequences. There is widespread feeling that it must be modified.

That is not the only concern. Whereas Chancellor Merkel has declared her wish for closer political union, the general preference of European voters is for looser political ties. David Cameron, the Prime Minister of Britain, whose citizens are among those most deeply worried about uncontrolled migrations of people, is firmly of that view. Mr Cameron wants political power being devolved back from Brussels to the member-states. Other political figures, perhaps less vocal, have the same view.

At least for the moment, EU member-states appear to have lost confidence in the Brussels administration. There is the feeling that it has pushed for centralised powers too hard, too fast and too far. Hopefully, wise heads in Brussels will read the signs and see merit in a strategic retreat. Taking a few steps back now might even improve the possibility of future consolidations.

None of the necessary changes will be easy to achieve, nor will they happen quickly. But a start must be made; and, at least some measure of success is essential, if some kind of catastrophic collapse in Europe is to be averted.

A postscript: At some time, not too far ahead, the EU will have to fix the matter of trade and financial imbalances. So will the rest of the world. To achieve this will probably require a level of international cooperation similar to that which created the Bretton Woods agreement 65 years ago.

Colin Teese is a former deputy secretary of the Department of Trade. 

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