12 December 2011
Euro Crisis: Barking Up the Wrong Tree
By Gwynne Dyer
One senior European politician said angrily that British Prime Minister David Cameron was “like a man who comes to a wife-swapping party without his wife,” and there was some truth in that. Britain does not even use the euro currency, shared by 17 of the 27 EU members, but Cameron insisted on being part of the discussion in Brussels about how to save it. And in the end, he vetoed the solution that all the others had agreed on.
It was the eighth crisis summit of the European Union’s leaders this year, and it produced the fourth “comprehensive package” of financial measures to deal with the debt crisis. (The other three have already failed.) And if you judged the importance of the meeting by the scale of the uproar when Britain vetoed the EU treaty that was meant to stop the rot, it must have been a very important summit indeed.
But in fact they were all barking up the wrong tree in Brussels: the financial crisis over the euro will roll on, and the collapse of the common EU currency continues to be a real possibility. What the summit actually showed was how divided, distracted and deluded Europe’s leaders still are.
David Cameron went to Brussels knowing that his partners intended to come up with a treaty that would enshrine new financial rules for EU members, in order to reassure the “markets”, who have been demanding higher and higher interest rates to roll over the debts of EU members. He also knew that the nationalistic, “europhobe” faction in his own Conservative Party would never vote for such a treaty. They want out of the EU, not further in.
The only way out of Cameron’s dilemma, therefore, was to make sure that there would not be such a treaty. His stated reason for vetoing it was to avoid more stringent regulation, and possibly taxation, of the London financial markets, but his real reason was naked self-interest: a new treaty would split his own party and probably destroy his government.
His stated reason was nonsense. Any new financial regulations that would affect the London markets would have to be agreed unanimously by the EU countries at a later date; there was no need to veto the treaty if he just wanted to protect the free-wheeling, “casino” aspect of the London markets that had done so much to precipitate the crisis in the first place. Cameron just needed a cover story.
The other EU members feigned great anger at this, but some of them were secretly quite grateful for Cameron’s bad behaviour. They agreed to adopt the same rules anyway, but to do it outside the legal framework of the EU in order to get around the British veto. This had two great advantages: it meant that no referendums would be necessary – and if these new measures failed to reassure the markets, they could all blame Britain.
What were these fabulous new measures? They were all about “balanced budgets” in the eurozone countries, which would face sanctions if they let their budget deficit exceed 3 percent of GDP. They would even have to submit their national budgets to the European Commission, which would have the power to ask that they be revised.
These are exactly the steps that will be needed if the euro is to have a long-term future: it cannot survive if the countries using it do not have a unified fiscal regime. But the markets don’t give a damn about the long-term future of the euro; they just want to know for sure that they will get back the money they lend to eurozone countries, and until they have that assurance they will demand exorbitant interest rates on their loans.
In this context, the decisions taken in Brussels this week are merely a displacement activity. The bigger EU governments are using the crisis as a pretext to force through centralising measures that they have long wanted to impose on the weaker economies. But they are still not doing what the markets want, which is to take responsibility for the weaker countries’ debts.
Can it really be that simple? Can they really be that irresponsible? Yes, and yes again. Tip O’Neill, former Speaker of the US House of Representatives, explained why this sort of thing happens in politics seventy years ago. “All politics is local,” he said, and that is true in spades in Europe today.
It’s not just David Cameron who is putting his local political interests above the interests of a broader European community. So is German Chancellor Angela Merkel, who refuses to allow the EU to make a collective commitment to honour the debts of the weaker members.
That’s the only thing that will calm the markets, but Merkel’s voters are fiercely opposed to hard-working, thrifty Germans covering the debts of lazy, spendthrift Greeks and Italians (as many of them would put it), so she will not permit it. And so the euro crisis rolls on interminably.
But don’t worry: interminably is not the same as forever. Sooner or later there will be a real crash, and all these people will be duly punished for their fecklessness. Unfortunately, everybody else in the EU will be punished too.
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To shorten to 725 words, omit paragraphs 2 and 6. (“It was…indeed”; and “His stated…story”)
6 November 2011
Euro Crisis: Muddling Through
By Gwynne Dyer
In December 1893, the Greek prime minister of the day stood up in parliament and announced: “Regretfully, we are bankrupt.” Nobody was greatly surprised, because the country had already defaulted on its foreign debt three previous times during the 19th century. It defaulted once more in 1932, and the smart money is betting that it will do so again in 2012.
Since Greece uses the euro, the common currency shared by seventeen members of the European Union, this is not just a matter of local concern. Many fear that a Greek default could take the euro itself down with it, so there have been frantic EU attempts to cobble together some financial aid package that could keep Greece solvent.
The latest package was enormous: 130 billion euros ($178 billion) in direct aid, and a 50 percent write-off of Greece’s huge debt to various European banks. In return, Greece must impose an even tougher austerity programme on its citizens to bring its deficit under control. But Greek citizens are already fed up with austerity, so every day brings a new surprise.
On Tuesday, the 1st of November, Prime Minister George Papandreou agreed to the European Union’s rescue package, and everybody heaved a sigh of relief. But on Wednesday he astonished everybody by promising to hold a referendum on the financial package in February: three more months of uncertainty, with a high probability that Greek voters would reject the deal in the end.
The markets erupted in panic, and the EU leaders exploded in fury. On Thursday, they told Papandreou that he couldn’t just hold a referendum about the rescue package, as if the Greeks could renegotiate the deal if they didn’t like it. The referendum must simply ask Greek voters if they wanted to keep the euro as their currency or not. There would be no more money from the EU until they said yes, and none at all if they said no.
So late on Thursday night Papandreou cancelled the referendum. On Friday he barely survived a confidence vote in parliament by promising to allow the creation of a broad coalition government. But on Saturday Antonis Samaras, the leader of the main opposition party, said he would not join a “government of national unity” and demanded a snap election instead.
On Sunday, however, Samaras agreed to join an interim government that would pass the promised austerity measures and then hold elections in February – on condition that Papandreou not be prime minister again. The roller-coaster ride continues.
Greeks practically invented drama and they do it very well, but Greece is a small country and foreigners don’t really care about either its economy or its politics. The markets are panicking because this crisis isn’t really about Greece at all. It’s about the future of the euro, which was built on a very shaky foundation from the start.
It was primarily a political project, intended to lock the EU members into perpetual union by the device of a common currency – but there was no public support in any EU country for the surrender of national sovereignty that creating powerful shared financial institutions would require. Nobody wanted a European Central Bank that could give orders to their own government on issues like budget deficits and inflation rates.
The founders of the euro compounded their error by not restricting membership to a northern European core of high-productivity economies. It was about unity, so Mediterranean countries like Greece, with dramatically lower productivity, were encouraged to join as well.
Greece, with access to practically unlimited credit because its currency was the “sound” euro, ran up enormous foreign debts: the government’s salary bill doubled in a decade. It couldn’t go on indefinitely – and so it didn’t.
When the crisis struck last year, it became obvious that the Greek government could never pay its debts, no matter how savagely it cut its spending. If it defaulted, however, the big European banks that lent so much money to Greece would be gravely damaged. Some might collapse, as might even the euro itself .
So the EU is shovelling enormous amounts of money into Greece to forestall a default, while forcing European banks to take a “haircut” of 50 percent on their Greek loans. Even with all that, however, Greece is still drowning in debt, and the EU is no closer than ever to creating a financial authority with the power to protect the euro. It can’t, because there is just no political support for a genuinely federal Europe with harmonised economies.
When will Greece finally default and get it over with? Here’s a clue. Euro deposits in Greek banks fell by 14 percent last year, as depositors moved their money abroad to protect it from being converted into “new drachmas” at a huge discount when Greece crashes out of the euro. In just the past month, euro deposits fell by a further six percent. It may not be long now.
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To shorten to 725 words, omit paragraphs 10 and 11. (“The founders…didn’t”)
25 September 2011
Will The Euro Survive Until Tomorrow Afternoon?
By Gwynne Dyer
Few things are as galling as being right too soon. Back in 1970, dissident Soviet historian Andrei Amalrik wrote a book boldly called “Will the Soviet Union Survive Until 1984?” He predicted that it would not, which greatly annoyed the Communist regime. He was sent to Siberia for his temerity, and later forced to leave Russia for the West. Even worse, he was wrong. The Soviet Union survived until 1991.
Many pundits find themselves in the same situation today with regard to the future of the euro, the decade-old common currency that is shared by 17 of the European Union’s 27 nations. They are suggesting that the euro could collapse any day now, and that the EU itself may follow. Making such blood-curdling predictions is great fun, but they are getting ahead of themselves again.
We are dealing with three different things here. One is a default by Greece. That could happen any day now. Indeed, it SHOULD happen soon.
The second is a collapse of the euro, triggered by a Greek default. That would plunge Europe back into recession, and cause chaos in the world’s financial markets.
The third thing is the collapse of the European Union itself. This, we are warned, would cause it to rain blood, or at least frogs, all over Europe. And that clinking sound you hear offstage is the Four Horsemen of the Apocalypse saddling up.
So, let’s begin with Greece. Why should it default on its international debts? Because they amount to 160 percent of Greece’s Gross Domestic Product, and the savage austerity measures that the EU has forced on the country have driven its economy deep into recession. The Greek economy is shrinking at 7 percent a year – so Athens can never repay the debt.
The market knows this: Greek government bonds due for redemption next March are trading at half their face value. The interest rate that Greece would have to pay on new loans to roll over its debts is prohibitive, and ordinary Greeks are already in revolt against this pointless exercise in financial orthodoxy. Default and get it over with.
Default for a country has much the same consequences as when an individual declares bankruptcy. You find yourself a good deal poorer and nobody will lend you money for a while, but you escape from a crushing burden of debt. You really shouldn’t have let it get so out of hand, but it benefits nobody to keep you in debtors’ prison for the rest of your life.
However, Greece uses the euro. Wouldn’t a Greek default bring the whole common currency into disrepute? Well, maybe, but that’s certainly not an inevitable outcome, and it would be in nobody’s interest to push it in that direction.
The euro is the root cause of Greece’s difficulties. It has an uncompetitive economy, and the government fails to collect even half the taxes it is owed. So back when it used the drachma, it paid high rates for foreign loans, and devalued the drachma once in a while to deal with the competitiveness problem.
Greece should never have been allowed to join the euro, but it was allowed in because the new currency was not really about financial advantages; it was seen as a vehicle to greater European unity. In practice, however, what it meant was that weak economies like Greece’s, which normally could not borrow money cheaply, could now get foreign loans at the same rate as Germany or France. So they borrowed a lot, of course.
The European banks are as much to blame as the Greeks. They lent torrents of money to a country that they knew was a bad risk, calculating that if the Greeks couldn’t pay them back, the EU would bail them out to save the euro. But that is turning out not to be true, and so the banks are going to be hurt. Some of them may fail.
The euro will probably survive this crisis: what are ten million Greeks compared to the 325 million people who use the euro? But it probably won’t survive more than another five to ten years, because there are much bigger countries using the euro – notably Italy, but perhaps also Spain – that have an equally problematic relationship with the common currency.
The problem, in a nutshell, is this. A common currency generally presupposes a single government with the fiscal and monetary tools to protect it, and the political unity to do so. The euro common currency, a primarily political project, was created without any of those fundamental assets, and it is bound to fail unless the EU can now come up with them in a hurry.
It almost certainly won’t, because that would require the members to surrender far more of their sovereignty than they are prepared to do at this time. The euro in its current form will probably collapse before 2020. Will the European Union collapse with it?
Why should it? The EU has been in existence, under various names, since 1958. It survived all but the last ten of those fifty years without a common currency, because its existence served the purposes of its members. It will survive a future without the euro, too.
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To shorten to 725 words, omit paragraphs 7 and 8. (“The market…life”)
18 April 2011
The Mediterranean Frontier
By Gwynne Dyer
“I wonder whether in this situation it makes sense to remain within the European Union,” said Italian foreign minister Roberto Maroni two weeks ago, in a crude attempt to blackmail other EU countries into taking more of Italy’s illegal immigrants. But the time may come when Italy’s northern neighbours will be quite happy to see Italy leave the Union. In fact, they may even close their borders with all the EU’s Mediterranean members.
The current fuss has arisen because Italy, the closest EU country to Tunisia, was hit by a wave of Tunisian “refugees” after the recent revolution there. They are not really fleeing from persecution and repression: the revolution largely ended that. They are economic migrants taking advantage of the fact that the chaotic new regime, unlike the Ben Ali dictatorship, no longer patrols the beaches to stop them from leaving for Italy.
Ben Ali had an unwritten deal with several EU countries to control the migrant flow in return for financial and diplomatic support. Since his regime collapsed in January, an estimated 25,000 Tunisian “refugees” have flooded into Italy, mostly in boats that dump them on the shores of the nearby Italian island of Lampedusa.
This is profoundly unpopular in Italy, a country with a severe allergy to immigrants from the wrong parts of the planet. Prime Minister Silvio Berlusconi, who is currently fighting charges of bribery, abuse of power and paying for sex with underage girls, is certainly not going to defy that popular mood.
Indeed, Berlusconi is on record as saying that Milan “seems like an African city” because of the number of foreigners in the streets. (Actually, only 4 percent of Italy’s population are non-citizen foreign residents, and more than half of them are European.) So when Lampedusa was inundated with Tunisians, Berlusconi came up with a sneaky way of getting rid of them.
Most of the “refugees” from Tunisia would rather be in France anyway, because many of them have relatives there and most of them speak some French. So Berlusconi’s government just made it easy for them to go to France.
Early this month Italy began issuing six-month temporary residence certificates to the Tunisian refugees. Once they were Italian residents, however temporary, they were legally free to go anywhere else in the “Schengen” group of countries, an area with no internal border controls that includes almost all of Western and Northern Europe except the United Kingdom. Most of the Tunisian refugees immediately headed for France.
Which is why, last Saturday, the French authorities began stopping the trains that normally cross the border from Italy into France without any identity checks. The Italian government responded with feigned outrage, but the French message was clear: you can’t dump your refugees on us, no matter what the Schengen Treaty says.
Now fast forward thirty years, and assume that the average global temperature is 2 degrees C higher than it was in 1990. That’s a reasonable assumption if there is not a drastic cut in global greenhouse gas emissions in the next ten years.
“Global average temperature” is a number that combines cooler temperatures over the two-thirds of the planet that is covered by oceans and considerably higher ones over the one-third that is land, so in Italy it will be three to three-and-a-half degrees C hotter. And Italy, like all the countries on both sides of the Mediterranean, is in the sub-tropics, which will suffer a major loss of rainfall in a warmer world.
Less rainfall and much higher summer temperatures mean that less food can be grown, and few of the sub-tropical countries will be able to feed their own populations any more. Countries like Italy are rich enough to import food to cover any local crop failures now, but they may not be able to when simultaneous crop failures all around the sub-tropics drive export prices sky-high.
This is a scenario in which not tens of thousands but millions of people are fleeing the drought-stricken countries of North Africa, trying to get into Europe. But it’s also a scenario in which millions of Italians, Spanish, Greeks and citizens of other EU members in the Mediterranean take advantage of the Schengen rules on free movement to move somewhere cooler that still has enough food. Like France, for example.
Will France (and Germany and Poland and Sweden) let all these “climate refugees” from the Mediterranean countries in? Not very likely, is it? And are strategists in the more northerly EU countries aware that this problem is coming their way? Of course they are.
Nobody is going to discuss this scenario in front of the children now, but you can see what happened to the Italian trains trying to cross into France last weekend as a dress-rehearsal for the future. Not an inevitable future, nor one that will be upon us the day after tomorrow, but an ugly and quite probable future nevertheless. And similar things would be happening along all the other borders where the sub-tropics meet the temperate zone.
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To shorten to 725 words, omit paragraphs 3 and 5. (“Ben…Lampedusa”; and “Indeed…them”)
Gwynne Dyer’s latest book, “Climate Wars”, is distributed in most of the world by Oneworld.