So, it’s happened! Let’s all celebrate, pat ourselves on the back and drink to the politicians that made it possible. The bailout of the Greek economy is going ahead and Europe is on the mend. Yippee!
French President Nicolas Sarkozy (seeking re-election this year) says “Today the problem is solved” and The Greek Finance Minister Evangelos Venizelos declared the debt swap an “exceptional success”. Phew, that makes me feel better..and I thought it was a car crash just waiting to happen.
Hang on a minute.. what have the politicians, and the financial institutions that politicians put in place, done? They have cut the value of billions of euros worth of investments, they have enforced an austerity on the Greek people, that will almost certainly last well beyond the 8 years that is expected, and have pumped so much money into the system future governments will have to raise interest rates beyond what any of us can afford.
What’s more; we have to ask just what has changed after the bailout? We all still have debt, we still have a banking system in crisis and economists are becoming more and more pessimistic about growth.
So what happened to the political ideals of the 1990’s of one big happy European family? At the time continentals seemed to be so pro-Europe, pro-single nation and all that entailed. Politicians were united and driving the way forward.
Let’s wind the clock back to February 1992 when the Maastricht Treaty was signed by 27 European nations. It was the cornerstone document that conceived the European single currency. Two nations had negotiated an opt-out; the UK, under the leadership of the, then, UK Prime Minister John Major, and Denmark and so both had a legal right to stay outside (a right that remains).
In the Treaty there were some cleverly constructed economic parameters. Most notably the restrictions to contain spending to restrict a budget deficit of no more than 3% of GDP and total government debt to GDP of no more than 60%. There were also financial penalties in place for those economies that broke the rules. So everything seemed to be set.
However, small clouds were gathering in what was otherwise a bright blue sky for Europe. These started with those economic rules being broken. First the French and the Germans took spending beyond the agreed limits and the EU imposed no sanctions so then everyone else followed suit and started to spend. This took the economic balance to dangerous levels. But, in the event, who cared? We still had growth, the banks were lending and a golden period was just starting to emerge across the world.
This was the beginning of trouble that has led us directly to the door of the dark place where we are today. Those blue sky’s are now totally obscured by cloud which, in some places, are building to deliver some dreadful storms. Politicians, eager to be re-elected, not wanted to be labelled by history as the “spoilers” are driving us closer to the abyss.
In reality the Maastricht agreement didn’t go far enough, there should also have been a fiscal union (a unified tax system) written into the wording for the new Eurozone.
So why was a fiscal union not written into the document? Politicians, led by that great European Unionist – Valéry Giscard d’Estang, knew at the time that the public would not go for this as it meant that so much sovereignty would transfer to a European centralised government. As it was, only 51.05% of the French people voted in favour of the Maastricht Treaty in a referendum in September 1992.
John Major was one of the only politicians that foresaw the consequences of not signing up to fiscal as well as a monetary union, or certainly he was one of the few that said as much. This was behind his 1991 decision to go for the opt-out, knowing that monetary union would not work without a unified tax structure.
So, wind the clock forwards again to today and ask “what do we do?”
Well, politicians’ hands are tied that’s for sure. They can’t be seen to allow the troubled economies to default, but can they really keep on bailing out the problem areas? No, certainly not. The electorate will have its say in a while for both Nicolas Sarkozy and Angela Merkel, but at some point pressure will be brought to bear on the politicians to act to stop the rot and find a way to unwind the cycle of despair for those economies that are in trouble.
By the way, the Greek economy currently has a debt to GDP ratio of 160% and has been in recession now for five years. It will need an economic miracle not to default at some point in the future. There are also elections in Greece in a months’ time and politicians there are held in very low regard.
Finally..a footnote to M. Sarkozy: Monsieur, the problem may be solved for “today”, but all you are doing is kicking the can down the road!
Jeremy R Naylor