A long time before the euro’s introduction, economist Milton Friedman had already warned that Europe’s commitment to the euro would be tested in the first serious economic downturn. That first downturn is upon us. Not exclusively an economic crisis but more so a financial and a currency one.
The good news was the unequivocal commitment and solemn declaration by all to support the euro and the EU economy. But the good news stopped there. Declarations are no substitute for action.
From the very beginning, Europe did not present a united line-up but a disjointed squad with a frail commitment and a number of fragmented solutions.
Just to give one example, it has become particularly obvious that what suits Germany and France, whose banks are heavily exposed to European bonds, does not necessarily suit Britain, which feels that its taxpayers need not sustain a currency that they refused to join. Furthermore, the rest of the eurozone countries were not all singing from the same hymn book.
It might appear that Europe is running out of ideas. It might well be the other way round. EU ministers and leaders are continuously being faced with a whole host of diverse solutions, coming from different countries with very dissimilar interests. This is making it more difficult for all countries to agree on one solution.
During any crisis, decision time is as important as the decision itself. Delay in decision making was one of the factors why Standard and Poor’s decided to penalise the US dollar’s rating. The EU process time involved in discussing, deciding, ratifying and implementing is taking too long. In the meantime, the sovereign debt crisis is spreading rapidly. The risk of contagion is now even threatening beyond the periphery of the eurozone. EU leaders cannot persist in buying time because time is working against them.
Financial markets are not confident that the austerity package Greece has accepted to implement is actually being put into action. They are even doubting whether adequate monitoring procedures are in place. The European Commission president has admitted that the decisions taken by the July 21 Council meeting did not have the desired effect on the situation.
These same markets are questioning whether the EU is taking the right decisions. The EU is focusing on a wholly financial solution, ignoring the importance of the economic aspect. Giving Greece money without any economic support might postpone and not solve their problem.
It was only a few weeks ago that EU leaders were assuring each other that the euro crisis was over. Since then, the sequence of events is by now quite familiar. All countries denying that a bailout is necessary, then they suddenly announce one. The countries that originally needed bailouts were Greece, Portugal and Ireland (eurozone’s periphery countries). Italy and Spain (eurozone’s third and fourth largest economies with a 25 per cent contribution to the eurozone GDP) are possibly next, with Cyprus soon joining the queue as well.
Where does all this leave us? Are we any better than some of the other eurozone countries? I think so. Do we have a lesser risk than these same countries of being negatively hit by the crisis? I do not think so.
From a national perspective, we have every interest that the euro and the eurozone economy retain their strengths. While reiterating our unambiguous support towards this endeavour, we have to keep in mind the limited resources we have at our disposal. There is a very fine but intense line between what we would like to contribute, what we are expected to contribute and what we actually can afford to contribute.
Our commitment is already quite significant and extremely substantial by our standards. We are already committed to about €850 million, an equivalent of 14 per cent of our GDP, in loans and guarantees and, so far, our commitment seems to be open ended without any limit or capping.
This is one of the many questions we asked to which we were never given any answer. The Finance Minister would have us believe that this is some exciting investment opportunity simply because we are getting interest on the loans we are giving Greece. Yes and tomorrow PIGs will fly!
We are borrowing money against our guarantees, which we are then required to lend without any guarantees to a country that has been performing badly (with all due respect).
Perhaps the minister might give the taxpayer some comfort that interest payments will keep on coming and some guarantee that the principal will be repaid.
Dark clouds are looming, there are threatening gale force warnings and, instead of persistently boasting about our virtual economic strength and financial stability (which I entirely question), it would do us no harm to brace ourselves in preparation for any eventual storm.
In spite of all this, we continue to believe in our currency and in our economy and remain confident that the eurozone will eventually overcome the crisis. Having said that, let us stop singing our own praise and not be complacent about any eventuality.
The author is the shadow minister on finance