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”)
1 January 2011
African Union: The Limits of the Possible
By Gwynne Dyer
“It’s not a bluff,” said an adviser to Alassane Ouattara, the real winner in November’s presidential election in Ivory Coast, who is now besieged in a hotel in Abidjan, the capital, under United Nations protection. “The (African Union) soldiers are coming much faster than anyone thinks.” But it IS a bluff, and the AU is just undermining its own credibility by threatening to use force.
The incumbent president, Laurent Gbagbo, who stole the Ivory Coast election by getting the Constitutional Council (headed by a crony) to invalidate many of Ouattara’s votes, still controls the capital and the army. His actions have been condemned by the United Nations, the African Union, the Economic Community of West African States (ECOWAS), the United States and the European Union, but getting him out will not be easy.
Gbagbo, once a history professor and a pro-democracy campaigner, has latterly turned himself into the self-appointed defender of the Christian peoples in the southern half of Ivory Coast. Now he says: “I do not believe at all in a civil war. But obviously, if the pressures continue as they have, they will push towards war, confrontation.”
He knows about civil war, because one broke out two years after he was elected president in 2000. Military mutineers, mostly Muslim troops from the north who didn’t want to be demobilised and lose their jobs, attempted to seize power in Abidjan.
They were quickly defeated in the capital, but other Muslim troops took control all across the north. French troops blocked them from moving south, and after a couple of months the divided country settled into the sullen cease-fire that has lasted for the past eight years. The civil war that Gbagbo is warning about would be the second round, not the first.
Then why doesn’t he just accept his electoral defeat and quit? Partly because he just wants to stay in power, of course, but it’s not as simple as that. He has real support among the Christians of the south, because many of them see Alassane Ouattara as the democratic facade of a Muslim takeover bid that began with the military mutiny in 2002.
The north-south division in Ivory Coast is real. The country has shifted from a narrow Christian majority twenty-five years ago to a Muslim majority today – and it has done so largely through illegal immigration from the much poorer, entirely Muslim countries to the north: Burkina Faso, Mali and Guinea.
About four million of the 21 million people now living in Ivory Coast are illegal immigrants, and almost all of those immigrants are Muslims. It has changed the electoral balance, because many of them register to vote, especially in the north of the country where they speak the same languages as the local citizens. Southerners are afraid that they will lose control, and so they back Gbagbo.
It’s really a rich-poor problem, not a Christian-Muslim problem. The country’s agricultural resources, particularly the cocoa plantations that make Ivory Coast the wealthiest country in West Africa, are mainly in the south. Southerners think that a northern-led government would divert a lot of that income to the north, and they are probably right.
That would only be fair, but southerners also believe that hundreds of thousands of illegal immigrants were allowed to register in the north, and that they all voted for Ouattara. They may be right, they may be wrong, but they believe it. So the November election didn’t solve the Ivorian problem; it exacerbated it.
The African Union is determined to force Gbagbo to accept the election outcome because it wants to break with the past and make democratic elections the norm in Africa. It has had some recent successes in thwarting military coups, but the situation in Ivory Coast is a lot murkier, and direct intervention by the AU would be a lot harder.
Armchair generals in the AU and ECOWAS talk boldly of military intervention to drive Gbagbo from power, referencing the successful operations to end civil wars in Liberia and Sierra Leone in recent years. But Ivory Coast is five times bigger and richer than either of those countries, and its army can actually fight.
Besides, where would the AU and ECOWAS find enough African troops to intervene effectively? Only Nigeria is big enough, but it is most unlikely to commit a lot of troops this year to what might be a real war in Ivory Coast. This is an election year in Nigeria, and body bags coming home as the voters go to the polls are rarely a vote-winner.
The United States and the European Union have already imposed sanctions on Gbagbo’s government, and the Central Bank of West African States has blocked his access to Ivory Coast’s account. These are measures that will work slowly, if at all, but there is no alternative. Starting a war is rarely a good idea. Starting an unwinnable one never is.
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To shorten to 725 words, omit paragraphs 6 and 7. (“Then…Guinea”)
20 June 2010
Today Belgium, Tomorrow the European Union
By Gwynne Dyer
Bart de Wever, the Flemish politician who promises the “evolutionary evaporation” of Belgium, is now the political king-maker in Brussels. The bureaucrats and politicians of the European Union, who also hang out in Brussels, will therefore have a ringside seat for the dismantling of the Belgian state. They should pay close attention, for their own turn may be coming.
De Wever’s New Flemish Alliance won 28 percent of the vote in Dutch-speaking Flanders, the northern half of Belgium, in the national election on 14 June. Elsewhere that would not be an impressive result, but in the highly fragmented Belgian political system it counts as an avalanche.
A long struggle will now ensue while the many Flemish and Walloon parties struggle to form a coalition with a parliamentary majority. It’s always a struggle, because there is very little by way of shared identity between the Flemish and the French-speaking Walloons. (After the 2007 election, it took 200 days to negotiate a coalition, and then there were three governments in three years.) Belgian politics has reached a state of semi-permanent paralysis.
The project for an independent Flanders is no longer a political pipe-dream, but the reaction elsewhere is likely to be a loud Who Cares? So we end up with a separate Flanders and a (reluctantly) independent Wallonia. We can live with that. However, the very thing that is destroying Belgium may also destroy the European Union, or at least drive it back to a much earlier version of itself.
It is customary, when discussing what’s wrong with Belgium, to recite a history lesson about how the French-speaking part, Wallonia, was one of the first industrialised areas in Europe and dominated the Belgian state for over a century. The Flemish always resented their lower status, and after the Second World War the shoe moved to the other foot.
Wallonia’s smokestack industries were dying, while Flanders got all the new high-tech industry and grew rich. By the 1980s the Flemish were powerful and confident enough to demand and get an extravagantly federal system, but in two key areas they failed. The Walloon political leaders ceded all sorts of powers to the various federal entities, but they managed to keep both taxation and social spending under the control of the central government.
So long as the Flemish politicians must negotiate with them about how money is collected and spent, the Walloons can ensure that a big chunk of federal spending is actually transfers of wealth from rich Flanders to poorer Wallonia (where unemployment is twice as high). After a few decades of subsidising the Walloons, many of the Flemish have concluded that the problem is the central government itself, and that the solution is its abolition.
Now consider the present difficulties of the European Union: most urgently the crisis of the euro currency, but more broadly the growing popular resistance to any further attempts to “broaden” or “deepen” the EU.
Might this be connected to the fact that the richer countries of northern Europe are getting fed up with the huge transfer of resources to southern Europe, and in particular with the way that their common currency has been undermined by the fiscal irresponsibility of the southern members? Of course it is, and it does not bode well for the future of the EU as currently constituted.
The architects of the euro half-understood that rich countries like Germany and France and relatively poor countries like Greece and Portugal need to run their currencies in different ways. The euro, as a one-size-fits-all straitjacket, was therefore a problematic currency from the start, but the elite policy-makers who wanted to “deepen” European unity were determined to have it anyway.
They tried to erase the north-south disparity by large transfers of resources from the rich to the poor countries, but that didn’t really change the economic structures and political habits of the poorer, mostly Mediterranean countries – and it awakened a powerful sense of grievance among the rich. Like the Flemish in Belgium, the northern European countries that use the euro are running out of patience.
Large transfers of resources between different regions are possible if people at both ends of the exchange see themselves as part of the same greater enterprise. But the Flemish don’t see themselves in that light – and neither do most ordinary people in the EU.
The “European” identity that has emerged with the growth of the EU in the past half-century is not a mere fantasy, but it is not a deeply rooted, instinctive identity for most people either. The sheer foot-dragging reluctance of the German government to finance the bail-out of Greece, even though the euro itself was at risk, is a measure of how deep the rot has gone.
Greece will probably declare bankruptcy in a couple of years, but the euro currency as a whole will survive until the next major recession. It will probably not survive beyond that, however, unless the national economic policies of EU countries can be subordinated to some all-powerful central bank. That is very unlikely to happen.
The euro, it turns out, was probably a step too far. Devised as a means of uniting Europe, it instead threatens to divide it fatally, and all the good that the previous, more modest version of the EU did could be lost.
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To shorten to 725 words, omit paragraphs 3, 12 and 14. (“A long…paralysis”; “Large…EU”; and “Greece…happen”)