Europe has lurched from a small crisis to a bigger one to a still bigger one. No one can say any more whether the euro or even the European Union will survive unscathed. But consider the subtext of events, and another question poses itself: will the crisis do good to Europe? That might sound like a question from Mars, given the trauma that Greeks are undergoing, the crisis that confronts Italy and the uncertainties about France. But for all that, there is a possible upside; the crisis has served as a wake-up call and heralds a return to cold economic realities. If collapse can be avoided, and political convulsions prevented (admittedly, both are big ifs), sweeping reforms will get under way and could work wonders.
The Greeks have been enjoying lower tax rates and higher pensions at an earlier age than the Germans and French, who are being asked to bail them out. Annual pension payments to dead Greeks totalled a staggering $8 billion, or about 2.5 per cent of GDP! It couldn’t have gone on, and therefore won’t go on. Whether it likes it or not, Greece will change.
Italy is where the action has been this past week. Ten-year bond rates of 7.5 per cent are unsustainable for a stalling economy (as a reference point, the government of India’s borrowing rate is 8.7 per cent in an economy with a higher inflation rate and also one growing at close to eight per cent). If Italy’s problem is that public debt is 120 per cent of GDP, net household wealth is more than four times that. Wealthy Italians should be able to bail out their government and resolve the crisis. Parliament is being presented with a sweeping reform agenda, including (it would seem) zero fiscal deficit in just two years.
France has already heard the wake-up call. Its government has announced two economic packages in quick succession, with austerity measures and new taxes that total 1.5 per cent of GDP. The plan now is to halve the fiscal deficit to three per cent of GDP in two years, and to eliminate it altogether by 2016! This is fiscal correction with a vengeance. Meanwhile, Portugal seems to have announced a 43 per cent slashing of government expenditure by 2014.
It is a measure of how much Germany and France have seized the reins that they (and pressure from financial markets) have forced these tough agendas on reluctant countries, and virtually written the exit scripts for two prime ministers. They are now looking at rewriting the rules for Europe — to strengthen the hands of the stronger economies and force the hands of the weaker ones. Already, the level of intervention in Southern Europe’s domestic politics and economics is extraordinary. At the same time, the German (and to a lesser degree the French) message to the euro zone is that it is not about to concede defeat on the common currency. As Germany sees it, the euro has been a success, it has been internationally accepted, it is a rival to the dollar, and it has served the efficient economies well. Today’s problems won’t go away in a hurry, but they can be fixed. And if Greece has to leave the euro, the currency will survive that; indeed, the loser will be Greece because pressure for reform would have been ejected along with European oversight.
No one can be sure that the unmistakable attempt to “Germanise” Europe will work. Crises have a habit of snowballing and burying the best laid plans. Still, amidst the flood of daily reports on the spreading crisis, it is worth noting the under-appreciated fact that a better, stronger Europe might well emerge out of the mess.