The Fall of Europe?

With riots sprouting throughout London, the fears of crisis in Europe are only inflamed by the growing uncertainty of the financial markets, the relief packages, and the potential lack of willingness by EU members to support the continued existence of the Euro zone.

The past two weeks of dismal economic news have made the new reality of the West impossible to ignore:  Europe is in serious trouble. Volatile markets and angry demonstration from Athens to Madrid to London are manifestations of the desperate scramble by European politicians to contain the Euro zone debt crisis.  The government of the Euro zone have taken some significant steps to resolve the euro crisis but their influence, or lack thereof, has led to the clear realization that the steps taken did not go far enough. The newly established European Financial Stability Fund (EFSF) has been put in charge of solvency problems, the degree to which a state’s current assets exceed the current liabilities.  The European authorities failed to increase the size of the EFSF which has stopped it from becoming a credible fiscal authority for the Euro zone.  This emphasizes the problem that there does not exist a European body to supervise banking supervision; rather, it has been left to national agencies illustrating the lack of a true union between EU members.

The European Union and the Euro zone were supposed to bring about economic stability and remove traditional barriers to growth , such as tariffs and regulations.  Instead, the union has become dependent on the strongest economy in Europe, Germany, as the indebted nations of Eastern and Southern Europe have flocked to the growth of Germany for aid.  With current resolution being limited to relief packages of billions of taxpayer euros, critics have begun to rumor about the dissolution of the EU and the reversion to individual currencies.  Simplistically, this is not plausible.  The breakup of the Euro zone, or even a growth-dampening serious of costly bailouts, will reverberate from Beijing to Washington and back again (Global Integration and Global Integration #2).  Europe is the largest trading partner of both the US and China and being the only viable alternative to the dollar as a global reserve currency, their dissolution of problems would spread to the US and China which are interconnected with every other nation in the world.  Many Latin American nations hold the euro as a reserve currency and the dissolution, or even a mere depreciation, of the euro would make the nations much weaker and punish emerging markets.

According to Harvard Economic Kenneth Rogoff, the West is going through a “second Great Contraction” of growth.  The needed bailouts for Greece, Portugal and Ireland have left the “bailers” as beleaguered states, left with few resources and tools to cope with stagnation, high-unemployment, populist politics, and social instability.  Evidence is widespread of social instability, London’s most current riots have already left 5 dead as the younger generations take to the streets to act against the austerity cuts to education and social programs. This is further demonstrated by the Athens’ bombing of the JP Morgan Bank on May 5, 2010 which killed 3 people, including a pregnant woman.  Furthermore, the riots only begin the slippery slope of problems that emerge with the kind of anarchy that is sponsored by such financial uncertainty.  Europe’s debt crisis is fueling a resurgence of polarizing, right-wing politics, rooted in xenophobia and anti-immigrant sentiment.  The most extreme and current development of such an instance is the Norwegian Massacre in July, killing 76 people.

Where are the problems blooming?

As stated in “The Broken Euro“, the European Union is not what it promises.  The mention of Union is a form of presence falsification in that EU members are selfish of their sovereignty and will not cede a fragment of their power to a European Finance Ministry to control financial stabilization and, when needed, transfer funds from the central body to individual states.  This body would be able to manage the debt, the inflation, and the growth of the cohesive body that is the European Union.  There does not need to be a European “superstate” mirroring the United States of America, but elements of their power in foreign policy, defense, border control, and of course finances would aid in bringing the EU more together and out of the current problems.  Currently, without a centralise political control or accountability, countries like Greece are free to borrow from the credit window of the European Central Bank (ECB) and take on more debt than they can handle.  Moreover, countries like Germany are unable to stop weaker states from undermining the viability of their shared currencies.  This has forced Germany and many other “bailer” nations, such as France and Italy, to make painful structural reforms that are unpopular with voters, including cutting welfare programs, reforming tax collection, and trimming pensions to build the relief packages for these weaker states. Back in 2010, Germany insisted that EU members agree to tougher sanctions for countries that have excessive government debt.  After coming under fire, Chancellor Merkel back down, and the Greece relief package went through without any restrictions.  Thereafter, the problems only grew in Greece and problems began emerging in both Ireland and Portugal, infuriating the German people whose taxpayer euros were being squandered.

“It is better for all concerned, in particular for Greece, if the country leaves the Euro temporarily” – Hans-Warner Sinn, University of Munich economist

Like most situations in which crisis emerge, many critics and experts have reverted to scapegoating a certain nation (much like the populist right-wing parties mention earlier).  As the statement displays, many Europeans have considered casting Greece out of the EU because of their supposed role in sparking the problem.  First of all, even if Greece’s financial system had not collapsed first, Ireland or Portugal would have.  Nevertheless, Greece has been unable to resolve its growing issues despite the international focus and aid it has received. Moreover, Greece has been dependent on IMF, EU, and Germany’s aid for repeatedly and has left other ailing nations in its wake.  Despite the surmounting evidence against Greece, their membership in EU will not allow them to be cast out.  If Greece were to be “temporarily suspended”, it would serve as an illustration of the EU’s inability to appropriately contain and resolve its financial situations and it may also serve as a preemptive warning that the EU will not be able to deal with the problems in Ireland, Portugal, Spain, and Italy, which would all most assuredly grow after Greece left.

Furthermore, Greece reverting to the Drachma would constitute a recession along the lines of the Great Depression because of the deflation that would occur in the Euro, the Drachma would also be nigh bankrupt because of the recession in Greece, and without the Euro being a viable alternative to the dollar, invested nations around the world would experience chronic depression leaving the global financial system in shambles.  Also, to be simplistic, Greece would not be able to support an individual currency because of its current state. Greece would not be able to stop the Euro from existing within its borders, the Drachma would be nigh impossible to circulate, and no foreign nation would accept or invest in a currency that has almost no hopes of recovering.  Evidently, “excommunicating” Greece is not a viable option.

“Germans are a very disciplined people, this characteristic has also made us masters of export in the global economy.  The Greeks, by contrast are governed more emotion and impulse” – Peter Walshburger, professor of psychology of economics at Berlin’s Free University

The German economy is Europe’s strongest, a regional powerhouse that its indebted neighbors depend on for billions of euros they need to cope with their staggering indebtedness.  After being virtually destroyed in World War II, dealing with financial problems after reunification with East Germany, and investing in reconstructing the East Germany; Germany rebuilt its economy on a system of strong rules governing virtually every aspect of business, becoming known as “Ordnungspolitik”, or “order politics”.  For these reasons, Berlin has repeatedly demanded for the EU to force restrictions on its members in exchange for German funds.  Nevertheless, critics have constantly stated that Germany has not the stomach to support the EU and is unwilling; and yet every relief package, reformation of laws, and European leader meetings has been advocated and sponsored by Germany. The European nation, if it persists on throwing money at its problems, will require trillions in capital injections from France and Germany.  Clearly, being expected of such sacrifice will make any nation reluctant; more so when France is already being scrutinized for its growing debt, lack of growth, and its large investment in Greece’s debt.

So saying, it comes down to a conflict of confidence between the nations of the world.  France, being a major port for both China and the US, has come under scrutiny after S&P downgraded the US.  The downgrade has served as a reminder that no nation is safe, and with France highly invested in troubled nations like Greece and experiencing a rise in debt from 67% in 2007 to 85.3% of GDP this year, the reminder only serve to emphasize reality throughout the global financial system.  With France being the second largest economy in Europe, a bailout would be unrealistic because of the size it would need to be.

“It boils down to a crisis of confidence.  We haven’t seen a policy maker come out with a plan that is viewed as comprehensive, coordinated and credible” – Philip Finch, global bank strategist for UBS AG.

It is no longer a question whether it is worthwhile to have a common currency.  The euro exists, and its collapse would cause incalculable losses to the baking system.  The only way that Europe can escape from this trap is acting in anticipation of financial markets’ reactions, rather than yielding to their pressure after the fact.  They cannot wait until the last second, clearly exemplified by the status of the US.

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One response to “The Fall of Europe?

  1. Pingback: EU: Three Levels of Failure | Year of 1989

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