Portugal, Italy, Ireland, Greece and Spain (the so-called PIIGS) are all suffering from financial Euro-fatigue. Michael Collins asks whether the boffins who created the Euro-mess can get them out.
Italy is now run by 17 technocrats, a term loosely defined as anyone with relevant qualifications who isn’t a career politician. That’s the composition of the cabinet chosen by Prime Minister Mario Monti, an academic economist who, having served for a decade with the European Commission, meets anyone’s idea of a technocrat.
The rise of these largely unknown non-politicians is, in essence, a coup by bond investors. After lending Italy’s government money equivalent to 120 per cent of the country’s GDP, fixed-income investors demanded unsustainable yields (anything over 7 per cent for a lengthy period) to renew Italy’s expiring debt. The fact that they engineered the removal of the discredited Silvio Berlusconi made possible the transition on November 16 to an emergency government, with a cabinet comprising bankers, lawyers, civil servants and professors. The next elections are due in 2013.
Greece, which bond investors thought worthy of entrusting amounts totalling 160 per cent of GDP, has seen a similar putsch. Until elections in February, the most troubled of the Eurozone countries is now led by a “government of national unity” under Lucas Papademos, another academic economist and a former deputy head of the European Central Bank.
On November 11, Papademos replaced George Papandreou, who was ousted for daring to propose a referendum on whether Greeks would accept the austerity tied to rescue packages funded by the International Monetary Fund (IMF) and other European Union (EU) countries. The leaders of Germany and vulnerable France (its ratio of government debt to GDP is heading towards 90 per cent) torpedoed the proposal, which was really a vote on whether to keep the euro. Berlin and Paris were concerned the referendum would delay Greece’s €130 billion (A$180 billion) rescue package announced in late October that was designed to ring fence the rest of the Eurozone.
While Papandreou blew the politics of proposing a referendum (he didn’t even tell senior colleagues of his idea), his administration elected in 2009 – that is, not responsible for Greece’s mess – was doing the will of Greece’s creditors and rescuers against fierce domestic opposition. In other words, he was imposing an austerity package that has made Greece almost ungovernable and the debt situation worse.
Capital versus democracy Bond investors seem happier that technocrats are running Greece and Italy and, no doubt, would push for the same result in Ireland, Portugal and Spain, where voters have engineered regime changes in recent elections. The majority of Greeks and Italians support these solutions for now, which highlights how mistrusted their politicians are.
It’s understandable why investors and voters are fed up with democratically elected politicians. They are either imposing bad policy (such as the self-defeating policies of austerity) or shirking decisions like the US bipartisan debt “super committee” that failed to meet a November deadline to identify US$1.2 trillion in spending cuts over the next decade. (Bizarrely, the super committee was an attempt to skip the normal process of US congress and the president approving fiscal decisions.)
But Europe’s technocratic governments may not fulfil their promise. Technocrats have little credibility when it comes to the euro. And it’s hard to see how these shadow governments will have the political skills to pacify their populations as they impose drastic solutions.
As technocratic governments by default base themselves in the centre of the political spectrum, their unpopular solutions will tend to boost parties on the extremes. They will only help to fuel the beliefs that the political elite is out to protect the financial elite and that the EU is rigged in favour of the continent’s larger (core) powers such as Germany.
Boffin-led euro It was the intelligentsia that drove the flawed creation of the euro in 1999 against the popular will and much expert advice. So it is ironic they are being asked to defuse the time bomb they laid.
The idea for a common currency was spawned after World War II out of an idealism that an economically and politically unified Europe would make for a peaceful, prosperous and powerful continent. The idea veered towards reality in 1989 when Germany committed to a single currency to gain France’s support for reunification. This led to the Maastricht Treaty of 1992, in which the European Commission’s 12 member countries agreed to a single currency by 1999. Among other things, treaty signers accepted limits on government deficits (a 3 per cent cap) and public debt-to-GDP levels (a 60 per cent ceiling).
Elites found it challenging to get their people to agree to the various treaties surrounding financial and social union. They sometimes found it necessary to rerun and rejig referendums to get voter ascent. For example, Denmark’s referendums on Maastricht in 1992 and 1993 and Ireland’s on the 2007 Lisbon Treaty (a Maastricht amendment) in 2008 and 2009. Swedish voters in 2003 rejected joining the euro while in 2005 Dutch and French voters rebuffed the proposed European constitution. The usual political resort was to fudge integration while avoiding polls.
The greatest shirk of all was that Europe’s political class baulked at pushing for the political union needed to make any monetary union work. Europe needed to federate – as Australia’s states did in 1901 – because this allows politically acceptable tax and payment transfers across the single currency zone to help challenged areas that, in joining a common currency, have foregone an independent monetary policy and an ability to depreciate their way back to competitiveness. The ruling classes knew European voters would reject that, but nonetheless pressed ahead in locking disparate economies into a currency union, disregarding criticism that warned that this flaw could sink the euro.
