Four reasons why the Eurozone may survive – and two reasons it won’t
1 COMMITTED TO AUSTERITY
Despite (well denied) rumours at the end of last week about a Greek pullout from the euro, Greece, Spain and Ireland are less opposed to reform and austerity than many in the media would have us believe.
In Ireland, the electorate remember the prosperity of the Celtic Tiger years and want to return to it; they understand that hard times are necessary to get the economy back to its pre-financial crisis state. The Irish government is targeting the centenary of the Easter Rising in 2016 as a useful timeframe for national recovery.
Greece has huge problems of corruption and inefficiency. There is now a consensus that Greece must change and George Papandreou, the Prime Minister, has the political will to push through the necessary policies. The €110bn rescue package comes with plenty of pain attached, but Greeks are beginning to see the crisis as a catalyst for overdue reform.
Spain, which sees itself as one of the most pro-European members, regards its financial problems as homegrown, not the fault of the Eurozone. There is a consensus that Spain is paying for overspending, and the European Central Bank (ECB) is not only a necessary corrective, but also the right institution to demand it.
2 A GROUP OF INDIVIDUALS
Each country’s crisis is actually different; explanations not taking this into account fail to appreciate the situation properly. Here is a nation-by-nation synopsis:
i) A Greek budget deficit running at 15.4 per cent of GDP was caused by structural problems: lax accountancy, inadequate tax take systems and over generous benefits. The bailout package demands that the economy be liberalised. Though this faces opposition from the Greek people, public sector wages have already been frozen, the retirement age has been raised to 67 and, while restructuring loans are being considered, an actual pullout is unlikely.
ii) In Ireland it was the banks’ investment in a property bubble that created the problems, and the state’s debt guarantee that turned it into a crisis. The areas of the economy that need reform are the public sector and banks. The election of a coalition government led by Fine Gael has proved timely and cathartic, akin to the fall of John Major in 1997 or Gordon Brown in 2010.
iii) Spain is a line in the sand that can’t be crossed. It is seen as a large, global economy and if it fails, the Eurozone may fail.
Jose Zapatero, Spain’s prime minister, was initially a crisis denier, insisting his economy was robust and his banks were healthy. However, Spain’s economy is uncompetitive and, at Germany’s insistence, reforms have begun. Austerity packages have been introduced, although the unions may prove a stumbling block as they oppose new labour laws.
3 SMALL IS POWERFUL
In reality it will be politically difficult to lead these countries too far in directions they don’t want to go. Ireland wants to return to affluence, but it will fight to keep corporation tax low. This has been attacked by Germany, and especially by France, but the Irish government has dug in on this policy. Low corporation tax didn’t cause the current economic difficulties, and is seen as a separate issue, which is unrelated to the crisis, and is essential to encourage growth.
4 TOO BIG NOT TO BAIL
Most major banks are at risk if more countries default (according to the IMF, UK banks are estimated to be exposed to over £100bn worth of bad debt in Ireland). This makes it less likely that Germany, France and the UK will allow the situation to get out of control Thus the Eurozone will not fail because politically and economically there is too much at stake. Instead we are likely to see sustained commitment to the restructuring of debt combined with continued austerity packages.
5 A DEFICIT OF SOLIDARITY
There are signs that the communautaire reflex may not survive the euro crisis. Growing rancour could sour relations for a long time to come.
Here are three reasons why:
i) Berlin hasn’t made any wrong decisions, but it hasn’t won any admirers either. Meanwhile, many in Germany are fed up with having to pay for the mistakes of others.
ii) In Greece there is a common line of thinking that ordinary people are suffering austerity solely to protect the profits and high salaries of German and French banks.
iii) Spain thinks of itself as a big player in the Eurozone and feels disappointed by perceived lack of German support and leadership.
6 THE REAL THREAT COMES FROM OUTSIDE THE EUROZONE
Germany’s prosperity is predicated upon its exports to China. If China’s economic growth falters, then Germany’s rapid recovery could halt, undermining its ability to underwrite the Eurozone. Without Germany’s deep pockets, no amount of political will would stop the Eurozone’s future looking dangerously fragile.
Edward Shawcross works for Chartwell Partners, the specialist speaker bureau, which organised this meeting. www.chartwellpartners.co.uk
CV | PARTICIPANTS
● DR ROBIN NIBLETT
Director of Chatham House
● SIR STEWART ELDON
UK ambassador to Ireland (2003-2006)
● DAME DENISE HOLT
UK ambassador to Spain (2007-2009)
● SIR DAVID MADDEN
UK ambassador to Greece (1999-2004)