Europe: When last chance is really last chance
By Claude Smadja*
The two best news that have happened in the last two years with respect to the European crisis may well have been the election of Fran?ois Hollande as President of France and, one week later, the defeat of Mrs. Merkel?s CDU party to the opposition social-democrat party SPD in the elections of North Rhine-Westphalia, the most populous German state, where the Chancellor then close ally ? he was dismissed after the defeat ? had based the party?s campaign on the continuity of the austerity policy championed by Berlin. You don?t necessarily need to have any special sympathy for the socialist candidates, or their party, or their domestic programs, in making this assessment. This, more simplistically, reflects a sense of relative relief about the fact that at long last something significant is happening to help budge Germany?s government from its insistence on the suicidal economic policies that have been enforced so far throughout a Europe already sick of steadily rising unemployment ? especially among the youth ? and growing despair.
After two years of spreading contagion and continuous deterioration of the situation all over Europe, it is about time, that there be a recognition that recipes for curing the economic crisis, focused only on blind austerity and structural reforms, have miserably failed, getting increasing parts of the euro zone into an inextricable debt trap. It is also about time that there be a recognition that it is not by starving countries and getting them poorer and poorer that one creates the best conditions for them to repay their debts. Simple logic would dictate that if after two years of the same bitter medicine the patient is even sicker and the sickness is spreading, then either the medicine, or the doctor, or both of them have to be changed. One may only guess at the bewilderment of historians, some years down the road, when they will be trying to understand how Europe allowed what could have been a manageable Greek problem to degenerate into a continent-wide economic and political crisis threatening to engulf the global economy.
Confronted with tremendous pressures to accept that the Berlin consensus be watered down at the G.8 summit (?Our imperative is to promote growth and jobs?, dixit Obama), and facing now a credible front between President Hollande and Prime Minister Monti of Italy, Chancellor Merkel will have to make concessions - or pave the way for them - during the informal European Summit on 23 May. President Hollande has been pushing hard for the introduction of Eurobonds to help lower the now unsustainable levels reached by interest rates on government bonds of ?dubious? countries. This would be expecting too much from Germany, which has been adamant in its opposition to such a proposal for the last 18 months. However, an agreement on common ?projects bonds? to finance jobs-creating infrastructure projects seems reachable. In the same way, an agreement on additional funding for the European Investment Bank to allow it to be more active in financing new projects seems also reachable, as well as an agreement on re-directing some of the existing EU funds towards projects that would contribute to re-activate economic activity in the most distressed countries. One even further step could be envisaged in allowing the European Financial Stability Fund (EFSF) to change its status to be able to borrow additional funds from the ECB in case of need.
Of course there will be a lot of negotiating during the informal EU summit and in the days following it, in preparation for the formal summit at the end of June. However, what is crucial is that a clear message emerges that the absurdly exclusive focus on blind austerity, as a solution to the crisis, has been ended and that Europe is moving towards a more balanced mix of calibrated austerity, growth-promoting measures and structural reforms. Who knows? If the message is clear enough this might help tilt the balance for the upcoming elections in Greece on June 17. If a leftist coalition advocating Athens rejection of its loan agreement with its creditors were to consolidate its gains and achieve a majority this could trigger a disorderly Greek exit from the euro zone - and even from the EU.
Even though there has been some bluster from European personalities that Greece should ?take it or leave it? and that the euro zone could survive and overcome a Greek exit, this is dangerous empty talk: The euro zone, Europe as a whole and the global economy are bound to go through tremendous, seismic, shockwaves were such an event occur. Nobody ? truly nobody ? can claim to know, or to figure out exactly what kind of chain reaction a Greek exit might, or might not, create; nobody can really fathom whether or not this would trigger a run on banks in countries like Spain, Portugal, Italy that even the resources available from the EFSF would not be able to contain; and nobody can really ascertain the tremendous impact on the credibility of the euro as a reserve currency: One member has exited what guarantees that others will not do the same under this or that circumstances?
Angela Merkel and her tough talking finance minister Wolfgang Sch?uble, are now confronted with the choice of either giving some ground or assuming the risk of an implosion of the euro from which the German economy would also suffer tremendously. A number of signs, like Mr. Sch?uble?s admission that Germany could live with higher wage levels and a higher inflation rate, indicate that Berlin is now ready for some compromises ? but how much of that? Everybody is only too aware of the fragile and very vulnerable phase through which the global economy is going. In this context, neither the US, nor China and other emerging markets, nor most European people would be ready to forgive any country or group countries whose policies or obstinacy would end up generating a new global crisis that would make the 2008 pale in comparison.
Over the last two years there have been too many summits, to many meetings that were ?last chance? ones, only to end up with the kind of ?too little, too late? outcomes that would just get the situation to deteriorate more. What happens at the informal European Summit, and what will follow over the next two or three weeks, might well prove to be the real last chance? and not only for Europe.
*Claude Smadja is President of Smadja & Smadja, a Strategic Advisory Firm