Scoring the Eurozone in Crisis: Slippage? Or Progress? (11/21)     Print Email

UPDATE (11/21):

Spain's election Sunday gave Spanish conservatives their biggest election victory in the country's post-Franco democracy.  The center-right Popular Party, led by incoming prime minister Mariano Rajoy, 56, will have an absolute majority in the lower house allowing it to pass laws without the support of other parties. Rajoy campaigned on a pledge of tough austerity measures that he now promises to carry out -- in effect, rallying to the main thrust of the economic reform program that his party publicly rejected while it was in opposition.

This outcome fits a pattern of recent political dynamics in the eurozone. In country after country, the governments in six "weak" member states have now been voted out of power amid public resentment over budget-cutting deals designed to cope with mounting national debt, and then they are succeeded by opposition parties (usually conservative) that embrace their predecessors' overall theme of austerity and public sector reforms designed to maintain their country's position in the eurozone and in the EU.  In this sense, every stricken eurozone nation -- when asked in national elections whether it wants to pay the price of remaining a member -- has chosen to stay rather then opt for a departure from the single currency and its growing constraints on national sovereignty.

In Spain, the new government -- facing a collapse of its borrowing powers that could push the country to default -- has pleaded for markets to provide a breathing space for reforms.  In its bid to restore Spain's credibility, the new government will only gain full control over the levers of national power in mid-December when the current parliamentary holiday ends.

The incoming Spanish government will enjoy a strong domestic political position. Alongside his big parliamentary majority, Rajoy has a promise of support from José Luis Rodríguez Zapatero, the outgoing Socialist prime minister since 2004, who has offered his assistance and cooperation to help Spain ease bond-market tensions and lower the high unemployment rate, especially among the youth.


The headline-grabbing, often cliff-hanging perils of the euro’s future or lack of it reflect the force of powerful clashing global interests and agendas and the stickiness of Europe’s situation as politicians seek a way out from debilitating sovereign debt. European politicians are far from alone in this gridlock, but their problem over the euro is the abscess seems close to bursting.

Global markets, so skittish they seem to be afraid of their own shadow, tout plenty of evidence inspiring panic about the euro. Europeans – both in the protest-ridden streets and in the corridors of power -- are frightened and angry at the risk of losing the status quo, with its social benefits for the many and its perks of office for those in the corridors of power. Euro-skeptics, notably in the U.S. and Britain, are seizing on how the eurozone crisis has been managed since its onset in 2008 to bolster their preconception: that the eurozone has been a wrong-headed idea from the beginning and is now confronting its makers with a debacle of self-destruction.

Reactions and vehemence on all sides is being whipped up by a drumbeat of dramatic news (that often contradicts itself within a news cycle). Bond and stock markets gyrate wildly across the transatlantic economy. Political leaders in eurozone countries are whip-sawed by the competing austerity demands of economic over-seers in Brussels/Frankfurt and of angry lobbies, protest movements and ordinary voters who feel betrayed and sometimes take to the streets.

This powder-trail of protests and threatened collapse seems to produce new headlines almost every day. Mainsteam media have to report on the daily dose of uncertainties and challenges, and that diet of news is grist to the mill of euro doom-sayers. They stress a fundamental contradiction in the euro dilemma: the need for growth and the imperative of austerity. When confronted with arguments that the Europeans are doing about as well as could be expected in the situation they inherited from their predecessors, the critics stress, rightly, the financial complexities and political landmines to be navigated in moving toward a newfound stability.

Often overlooked in all this hubbub, however, are some salient changes and trends that keep alive the theme -- articulated by German Chancellor Angela Merkel along with French President Nicolas Sarkozy -- that the euro can conceivably emerge from its current trauma stronger than it was before the current crisis.

This point is easily lost from view after two years when the months dragged on, dotted by summits and grand settlements, that were written off in the media within days if not hours as the process hit snags. The pattern has spread a mood that Europe is a rudderless Titanic drifting toward disaster. This impression of paralysis was reinforced recently by the anti-climactic G-20 summit in France – a meeting with no results, according to the media scoring. The verdict was correct in noting that world leaders judged that they would not extend help until Europe had done all it could for itself. What was missed in this description was the fact that it was European leaders, notably the Merkel-Sarkozy tandem that was laying down the marker about what more Europe needed to do for itself, starting in Greece.

Meanwhile the international dimensions of Europe’s problems have deepened a global spiral into deeper uncertainties. Christine Lagarde, the International Monetary Fund head who has emerged as a powerful player and voice, is now warning publicly that the global economy is at risk of being plunged into a "lost decade."

Global problems of failing economic growth in major markets have been aggravated by the ongoing debt crisis in Europe, she said on November 9, but went on to add that efforts to solve the crisis were heading in the right direction, with more needing to be done to restore confidence.

"Our sense is that if we do not act boldly and if we do not act together, the economy around the world runs the risk of downward spiral of uncertainty, financial instability and potential collapse of global demand," she said.

Ms. Lagarde, who was speaking in China, called on Beijing to rebalance its economy, i.e. boost domestic consumption and reduce export flows. This mantra about the need for China’s help is based on the logic of Chinese adjustments to foster growth and job creation in Europe and the U.S., which in turn are vital to China as the key markets importing Chinese-made goods.

But China’s help -- on exports, currency adjustments and financial help to the EU’s fire-fighting tools in the markets – is unlikely to be forthcoming until the EU has gained enough ground on its own reform agenda to restore credibility to the eurozone.

Progress in this regard is elusive because the metrics of confidence can be so mercurial.  What should count as “progress?” Consider some recent facts.

- The debt saga has already claimed the political heads of the prime ministers in six of the 17 eurozone countries (Ireland, Portugal, Slovakia, Greece, Italy and Spain).  Despite massive bailouts for three of these countries, the EU’s third largest economy, Italy, has suffered a massive loss of confidence in international bond markets -- a market-driven process that has had the effect of pushing out of office the country’s long-incumbent (and long-discredited) leader, Silvio Berlusconi.

- The European Central Bank has not deviated officially from its anti-inflationary dogma, but its new head, Mario Draghi, has continued the practice of his predecessor in pragmatically injecting financial support on a tactical basis to help debt-stricken economies, including both Greece and now Italy.

- EU leaders agreed on a grand strategy for containing the eurozone’s debt and setting a platform that would attract outside financial support, but the week after their summit accord the plan seemed to go on hold as Greece’s Prime Minister George Papandreou announced plans for a referendum on austerity, then was forced to abandon the plebiscite and his post.

- Across Europe, political critiques constantly call for more democratic participation in decisions that affect the basic social contracts for eurozone citizens, but there are also signs that governments of “technocrats” may be needed, at least temporarily, to put into effect drastic (and drastically needed) reforms. (Europeans have not forgotten a model for this approach: Hungary’s previous prime minister negotiated an iron-clad pledge of support across party lines that enabled him to produce a small economic miracle in his year in office. Similar assurances are presumably being sought by potential “technocat” premiers in Athens and Rome.)

Are all these developments signs of progress or slippage? It is an open question for the moment, certainly in the eye of beholders in the bond markets.

The only right answer, to borrow lawyers’ rhetoric, is: it all depends – on events and how they are handled. Suppose, as it seems safe to assume, the EU leaders’ modus operandi remains “muddling” and hopefully “muddling through.”   How does the record stand up when read in this light?

Critically, for those analysts who are cautiously optimistic about the eurozone, the record shows so far that every country where governments fell over the austerity programs demanded by the ECB and the IMF they have been succeeded by opposition parties that themselves embrace the tough measures they opposed when they were out of power. If that trend continues in Greece and Italy, as seems possible and even likely, it must mean that even the Europeans who are hardest hit by draconian austerity and restructuring still prefer that hardship to any siren song of leaving the euro or the EU.

This fundamental choice means that there remains compelling coherence across the continent to the vision of European unity and the increasingly accepted corollary that the future of the euro and even the EU will require big steps toward shared sovereignty on national budgetary issues to match the existing pact on monetary union.

Proof of this realization can be seen in the arrival in Athens and in Rome of watch-dog teams from Brussels that are assigned to provide independent over-sight (or at least early-warning alarms) about budget data, financial forecasts and related policy moves by the Greek and Italian governments.

These IMF-like procedures of inspectors and conditionality on financial help have been “imposed” by the EU and its heavy-weight member states led by Germany. But, all importantly, the intrusive steps have been accepted by these countries’ leaders, starting with Greece’s Papandreou and Italy’s Berlusconi. If these two long-dominant leaders in their countries have been forced from office, it is not because they accepted terms from Brussels (and Frankfurt) that were rejected by their voters. Instead, it was because their departures became a condition for effective national adherence to a program restoring their nations’ credibility.

In Papandreou’s case, it was because he had put on the table all his political capital in the heroic bet and herculean task of bringing his country back from the brink of default. It was the final step and sacrifice in this process when he used his resignation to pry away the center-right opposition from its anti-austerity stance and draw it into pivoting behind the program of new fiscal discipline in Greece. In the process, he had managed to obtain a significant discount on his country’s national debt to foreign lenders and set an example of leadership capped by his decision to step down when the time came.

In a valedictory address today on Greek television, Papandreou claimed victory for the main goal in his term in office. “In the next few months, Greece will do whatever is required, not only to remain in the euro but to take advantage of the benefits of the agreement of 26-27 October [the EU bailout deal]."

That deal included a “haircut” for international lenders to ease the way forward – on condition that the new government proceeds to “tackle tax evasion and bring greater transparency to the public finances,’’ as Papandreou pledged that his successor will do.

Given this trajectory that Papandreou has found for his country, history may well accord him a place in the pantheon of great leaders of modern Greece, alongside his father and grandfather, who led the country before him.

The story is quite different for Berlusconi, of course. But there is a key similarity in that both these leaders’ countries seem likely now to be on course for financial surgery, then the therapy of restructuring labor markets, public-service sectors and privatization. In some scenarios, this process could set the stage for a return to economic growth, which would be boosted by help from the G-20 countries that have withheld any assistance until the eurozone recovers political credibility.

If this scenario materializes, particular credit will also be due to Germany’s Merkel and France’s Sarkozy – the leaders of the northern and southern lobbies in the eurozone who finally chose to give the Greek nation an ultimatum: toe the line or exit the eurozone. That brought new clarity to the turbulent politics of Greece and of other debt-crippled countries in the eurozone. Their stance was backed by the G20 nations, which withheld any further international help in the euro crisis until the EU countries take credible steps to implement long-promised economic reforms. It is stern discipline for Europe’s weaker economies. But, logically, it puts an implicit responsibility on the big countries outside Europe – China, Brazil and others – to respond if their demands are heeded. If they are, then these countries, along with the IMF, will be expected to pitch in with help that helps stimulate economic growth. That revival is the only stable “solution” for Europe’s debt overhang.

More will have to be endured by poor countries; more will have to be given by the richer member states. All of these developments foreshadow more centralization of power, notably fiscal authority. These political tests cannot have foregone conclusions. For the moment it seems that Europe is determined to disprove its obituaries and muddle on ahead. Of course, events are lurking out there -- as always in times of trouble.

-- European Affairs