Muddling in Europe

S P SETH

When Angela Merkel, German Chancellor, recently visited Athens, it is as well that she didn’t see the Greek protestors carrying posters depicting her as Hitler with his trademark half moustache. She was obviously shielded from any exposure to what has now become a regular feature in Greece, with its citizens protesting against more and more austerity measures imposed by the European Union. Otherwise, they won’t get the bail out money and the country will go broke, with all the nasty consequences.

Greece and, for that matter, Spain and other euro zone countries that have mounds of debt, are furious with Germany for insisting on a severe austerity regime to receive European credits. Because Germany has to contribute much more for the bailouts being Europe’s strongest economy, it insists that the debtor countries commit themselves to put their financial house in order. Which translates into austerity for the recipient countries, making Germany highly unpopular in Greece, Spain, Portugal, Ireland and much of Europe. A case is made that an undue emphasis on severe austerity will further depress these economies, and that won’t help them generate enough revenues to pay back their debts. Hence, too much austerity will be counter-productive.

The problem, though, is that Germany has to foot the major part of any further debt relief and it is not convinced that stimulation will produce the necessary results. In any case, it will be a long-term solution, if it works, and German citizens are not ready to carry the can for an indefinite period.  Besides, even though Germany has a sound economy, even the soundest economy can invite disaster on itself by becoming the ultimate banker of half-a-dozen or so sick economies in the euro zone.  Germany is also conditioned by its experience of run away inflation that created conditions for the rise of Hitler. Which explains Germany’s caution against throwing good money after bad.

Having said that, it is certainly as much in Germany’s interest as the rest of Europe that the eurozone should survive because its unraveling will have severe consequences, both politically and economically. It is important to remember that the progression of Europe into a European Union not only managed to keep peace in Europe but also led to an era of great economic prosperity.  And coming after the great disaster of WW11, it is no mean achievement.

Were eurozone to unravel, the European project is unlikely to survive the consequent economic turmoil of competitive devaluations and much more.  It is difficult to imagine how the existing debts and credits denominated in euro will be sorted out or settled. Greece’s exit alone, if that were to happen, will have a cascading effect on other debt-ridden countries, with Spain already under terrible strain. Italy too is wobbly, and if it were to need rescuing, Europe alone, even with Germany’s commitment, will not be able to cope. Spain and Italy are the fourth and third largest European economies respectively. The consequences of their failure for the global economy, mired as it is in the throes of the 2008-9 financial crisis, will not be pretty.

Until the financial crisis hit Europe in the last few years, every country in the project Europe gained from it. Germany was a major winner. Its membership of the European Union and NATO made it into a normal country overcoming its Hitlerist legacy. As a comparison, Japan still has to confront criticism of its wartime atrocities from neighbors. In economic terms, with its strong economy and competitiveness, Germany gained considerably from a larger European market for its goods. At the same time, as with other European countries, it bought its security cheap within Europe from NATO’s umbrella, with the United States footing much of the defense bill-- though for its own great power ambitions and security considerations.

For the rest of Europe, project Europe was important in containing Germany’s European ambitions and harnessing them to continent’s common good. And for Europe’s relatively poorer members the agricultural subsidies they received, with Germany paying a major share, significantly improved their living conditions. It is, therefore, apparent that project Europe has been a win-win situation for all, until now. And if it crumbles, Europe might take a long time to put itself together, if at all.

 However much the European countries want to keep Europe together, there is undoubtedly a lurking fear that they might not succeed. And greater the articulation of that determination to keep the eurozone intact, the more shrill the language becomes. Take this open letter, published in the New York Review of Books, from Alain Minc, President of the French consultancy firm A M Conseil.  In this he takes issue with “the financiers of America” about  “prophesies” regarding “the imminent death of the euro”. He writes forcefully that, “ …there is not one European political leader… who would be willing to take the blame in the eyes of posterity for signing the death warrant of the euro. “

And this is because, “The memory of the wars that ravaged European society is still too strong for anyone to be willing to undo the process that led to European unity…” In other words, despite all the emphasis on austerity, he seems to suggest, even Angela Merkel and German politicians might not let euro collapse, whatever the economic costs. The passion of such statement(s) indeed seeks to still the doubts that keep cropping up.

On the other hand, another high profile business magnate, George Soros, a Hungarian-American who is chairman of the Soros Fund Management, writes in a long article that if Germany were unwilling to underwrite euro and stimulate European economies, it might be best if it were to quit the eurozone. He believes that, “After the initial disruptions the euro area would swing from depression to growth. “ His hope is that faced with such a prospect, Germany would prefer to stay on.

Because:“…Germany would fare much better if it chooses to behave as a benevolent hegemon [like the United States did with its Marshall Plan to rebuild Europe after WW11] and Europe would be spared the upheaval the German withdrawal from the euro would cause.” Imagine eurozone without the strongest European economy! Soros can’t be serious. In whatever way Europe’s economic travails are resolved, or not resolved, the uncertainty is proving disastrous for Europe, and doing much harm to the world economy still mired in the aftermaths of global financial crisis.

 Note: This article was first published in the Daily Times.