A Greek Tragedy Haunts the World – Part I

LONDON: The crisis over the solvency of Greece’s state finances is much more than a monetary issue. It raises deep questions about the European project whose broad success over the past half-century is now clouded by doubts about the future. One thing seems certain though: with the dream of united Europe receding, the EU will be too preoccupied with internal cohesion to play a significant global role.

The crisis in Greece came with the revelation that the country faces a budgetary shortfall of 13 percent of GDP (more than twice the previous forecast) and has debts to the tune of 20 billion Euros coming due in April and May. The government in Athens had been concealing the extent of its indebtedness for years in order to remain in the continent’s single currency zone. Fiscal deficits for the EU were initially set at 3% of GDP while debt to GDP has a maximum limit of 60%. But Athens was found out with the end of the credit boom which had enabled it to borrow on a massive scale. 

The latest crisis burst upon the scene after increasing signs of faltering by the EU. This year has not begun very well for the 27-nation European Community. It may be the world’s major multinational grouping with a $16.5 trillion economy and a comfortable way of life for most of its citizens. It may have taken former Communist countries of central and eastern Europe into its democratic tent. It may be able to boast of having headed off the perennial armed conflict that marked the continent’s earlier history. But when it comes to global clout, the community is generally seen to be weak; President Obama showed his lack of interest by declining to attend a summit in Madrid this spring.

Meanwhile, after the final adoption of the Lisbon Treaty whose provisions are meant to make the EU a more effective force internally and externally, the choice as the union’s first president of Herman van Rompuy, a former Belgian prime minister little known outside his homeland, and of an obscure British politician, Catherine Ashton, as the community’s Foreign Minister has been greeted with a signal lack of enthusiasm bordering on disdain.

The bail-out plan for Athens remains uncertain, though it is clear that the 16-nation zone’s two main actors, Germany and France, will have to play a big role. Now there is talk in financial markets of the crisis moving on to other Mediterranean countries as speculators take another shot at the euro through its weaker members.

Beyond this prospect of a rolling crisis spreading across the continent, the current situation shows a fundamental and unresolved question that has dogged the European project since its earliest days. Put simply, this involves the relationship between member states and the supranational structure erected to encompass the community. Forty years ago, President de Gaulle of France fought a lengthy battle to curb the power of the supranational entity, as represented by the Commission based in Brussels. He launched an alternative plan for a system in which countries worked together but in which each government had the last word.

That foundered on opposition from federalist-minded Belgian and Dutch leaders. But de Gaulle’s vision has become reality. Though the Commission lies at the core of the EU, key decisions are taken by national governments. Political unity remains elusive because none of the major players – Germany, the United Kingdom and France – is ready to surrender the degree of national authority needed to make it work. So we get the appointment of van Rompuy and Ashton as the lowest common denominators whom the big European powers think they can dominate, by-pass or simply ignore.

The euro was meant to be different, a monetary union with a strong European Central Bank (ECB) based in Frankfurt currently run by the tough-minded Frenchman, Jean-Claude Trichet. It pleased the Germans to wage war on inflation and establish the euro as a world currency. It has succeeded in both respects, but there was always a flaw in its foundations.

The assumption was that once a common monetary policy was in place, common economic policies would follow. The architect of the single market in Europe, Jacques Delors, looked further ahead, seeing the euro as the precursor to political union. The Greek crisis, and the potential for trouble elsewhere, has shown the fallacy of this reasoning. Economic policies have not been aligned. The global imbalance between high-consumption America and high-saving China is replicated in Europe by the relationship between the surplus and deficit nations in the euro zone – Mediterranean countries on one side, Germany and the Netherlands on the other.

The obvious answer for Greece and others in trouble would be to devalue. But in a common currency zone that is impossible. Britain, outside the zone, has been able to let sterling’s value fall. But Greece and others in southern Europe cannot do that. As for boosting exports, they have no recourse to a currency advantage within the euro zone and, as one acid observer remarked, how many things does Greece make that Germans want to buy?

The one-size-fits-all approach adopted in the creation of the euro was always dangerous – that, along with the strength of anti-European popular sentiment in the UK was one reason Britain stayed outside. To suppose that Germany and Greece or the Netherlands and Portugal could follow the same path, the same ceilings on budget deficits, the same management of public finances, the same inflation targets was always an illusion. But uniformity was the price of progress.

The situation is exacerbated by the fact that there is no mechanism to transfer funds from rich to poor member states – hence the current scrabbling to find an improvised solution to Greece’s travails. Even if foreign banks do ride to the rescue, the logic of the system is that a country like Greece today - and tomorrow perhaps Spain, with its high level of mortgage debt and wavering leadership, or low growth Portugal - has to apply internal measures, notably in reducing wages. That is likely to heighten social tensions and give the euro a bad name among the populations of southern Europe which do not relish wage restraint as the Germans do and which have enjoyed highly regulated labor markets whose first purpose is to protect jobs rather than increase productivity.

There is also a problem further north. Europe’s main economic locomotive, Germany, suffers from weak domestic demand, making it too dependent on exports. Chancellor Merkel shows little inclination to alter that, particularly since growth forecasts for her country are turning negative. Even if Greece started to make goods the Germans want, consumers in the EU’s biggest country are not buying much.

The outlook, therefore, must be for spending cuts by governments, starting with Greece. Demand will fall. Growth will be curtailed. Countries with strong state finances like Germany and the Netherlands will look askance at the idea of moving to a true economic and monetary union which could saddle them with responsibility for bailing out profligate southerners. The dream of a political federation which has been around since the 1950s will remain just that, a dream, and Europe is likely to spend 2010 even more focused than before on its internal problems, and even less able to play a strong global role.