Capitalism and democracy under threat from euro zone crisis

November 3, 2011

By Laurence Copeland. The author is a professor of finance at Cardiff University Business School. The opinions expressed are his own.

It takes quite a lot to make me feel sorry for politicians, especially the European variety, but I must say that Nicholas Sarkozy and particularly Angela Merkel have a right to be livid at the news that the Greek government now proposes to hold a referendum on whether they will agree to be given another gigantic dollop of aid. Having only reached agreement (of a very vague kind) at last week’s summit in the early hours of the morning, you can imagine how the French and German leaders must have felt when they discovered that their marathon negotiating sessions may all have been in vain. It seems the Greeks are now too wary of foreigners bearing gifts to accept their largesse without weeks or months of prior deliberation and debate.

The acceptance of the referendum proposal is apparently not a foregone conclusion, which is just as well, since it is plainly insane.

First, consider the wording of the referendum question. Opinion polls appear to show that Greeks remain keen on staying in the EU (and maybe even in the euro zone), so as things stand at the moment the outcome could be a majority in favour of rejecting the deal, but staying in the EU.  But is this option still open to Greece? If not, the Greek government could end up with a mandate to follow a road that is already clearly blocked.

To pre-empt this scenario would require some sort of clear statement from Brussels about whether they would be willing to allow Greece to stay in the euro zone and/or EU if it rejected the latest round of austerity measures.

Even supposing the details of the referendum are sorted out, what then? How long is all this supposed to take? The vote could hardly go ahead before mid-January at the earliest. What on earth does Mr Papandreou think will be happening in the markets in the meantime?  Does he think they will simply sit on their hands and wait patiently for Greek democracy to grind through the gears?

In reality, the momentum of this crisis is so inexorable that you can be quite sure that the deal currently on offer will have become totally irrelevant by the time any referendum is held, if the offer hasn’t anyway been withdrawn by the time you read this.

In any case, while the eyes of the rest of the world are on Athens right now, they ought instead to be on Rome. Monday saw the cost of insuring Italian debt rise by 10% to a spectacular 443 points (compared to 83 points for Britain and Germany) – and no wonder. While the Greek government owes a paltry 300 billion euros, Italian government debt is nearly two trillion euros or 120% of its GDP (and has been around  that level for several years), and even though their budget deficit is only 4%, it does not seem to be falling.

The EU, which means essentially Frau Merkel, is demanding that Italy cut its spending, raise its pension age and liberalise its labour markets – for example, to allow  firms to lay off workers rather than face bankruptcy – but it is hard to imagine a buffoon like Berlusconi pushing through reforms in the teeth of opposition from all sides of the political spectrum, including his own shaky coalition. The best we can hope for is a fudged austerity package which will carry about as much credibility as does the Italian PM himself, i.e. zero.

Eventually, the Germans will be forced to recognise that the euro zone is a bottomless pit which will swallow all their savings into the indefinite future, so they must either stop saving and join the other member states on the road to hyperinflation or cut their losses, recapitalise their own banks and relaunch the deutschmark. The cost of this course of action will be high, but finite, whereas the cost of keeping the euro zone going will be unlimited. In fact, the more prolonged the agony, the greater the bitterness on all sides, and hence the greater the danger of an acrimonious divorce at the end, which could well pose a threat to the single market, the EU’s only real achievement to date.

The euro zone was intended to bind the newly united Germany into Europe.  Predictably enough, it has had the opposite effect. It is now causing serious friction with Greece, and will do with Italy too, as soon as any serious attempt is made to enforce austerity there. Then there is France to consider, its president posing as joint saviour of the euro zone, when in reality France’s own fiscal position means he should be in a bed alongside the other patients rather than standing in the centre next to Frau Dr Merkel.

The general lesson for Brussels is the same as it always has been. Leadership in a democracy means winning over the public to the course of action you believe is best, and only then, if you succeed, going ahead. The current mess results from riding roughshod over the European electorate and counting on them to see the supposed benefits ex-post. In reality, they were never very keen even during the good times, so it is hardly surprising they are now in open revolt.

I have no idea how it will all end, but it is not just the economic stress across Europe which is worrying. It is capitalism – and, with it, democracy – which is under threat.

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