Conflict is chronic between the elite bureaucrats in Brussels and the voters in the Euro Union countries. Brussels elites have been setting policy for bailouts, baroque regulations, and in effect, spending voters’ money. Country leaders meekly offer their assent but avoid checking with voters. Most voters resent the austerity adopted by the 17 Euro Zone (EZ) countries and they do not want more of their money spent on strenuous efforts to preserve the EZ. Some voice cultural resentments but most are focused on the financial and monetary issues. Defenders of keeping the EZ intact have not offered conclusive explanations. Typically they say “losing it would be a disaster” and skip the key question of “why so?”
The game afoot is this: Greece and Spain may need to default on much of their bank and sovereign debts – soon. Italy and Portugal may reach that point later. When default happens they could exit the EZ, revert to their traditional currency and let it float to allow for international trade. If they default but try to say in the EZ, they would be dependent on EZ’s charity and probably unable to trade and grow effectively. They may be better off repudiating the debt burden if they have a way to grow their economy. Iceland defaulted and performed a quick turnaround. But Greece looks doomed regardless of its choices.
The sermon from Germany and France begs all to embrace protracted austerity during which countries fix their balance sheets. For PIIGS (Portugal, Italy, Ireland, Greece and Spain), the road to salvation is also about dumping chronic misbehaviors; tax evasion, excessive labor-protections, public-sector featherbedding, slowing new business formation, excessive entitlements and graft to political buddies. “Live within your means” and “let the market work” themes will not work quickly in club-med countries.
When PIIGS default, holders of their debt will feel pain. Private sector holders took a $100B loss when Greece defaulted on some of its sovereign bonds. In addition, PIIGS bank bonds are held mostly across Europe. Defaults on sovereign and bank debts could approach the $1 Trillion mark. Instead of facing massive loss, EZ countries could preemptively prop up the PIIGS with recurring bailouts, but the total of bailouts may approach $1T anyway and bailouts may not thwart all the defaults. Surely the EZ has analyzed its options, but it is not sharing the results, probably because the results would hasten disintegration. Today, frightening uncertainty overlays bleak austerity, recession and worsening finances in most EU countries. The US will feel some of the pain when the EZ unravels.
The EZ can be rescued, but probably not with cash. It would take a charismatic leader selling a shared and very persuasive goal. After the Great Depression, WWII became a unifying cause that restarted economies. In the 50’s and 60’s the Cold War spurred innovation and stoked economies. While we don’t wish for a war, the shared goal will need to be as compelling as the examples. Obama, Merkel, Hollande, La Garde and Cameron are unlikely leaders – for different reasons. But in the big picture, there’s a leadership shortage.
Alan Daley is a retired businessman who follows public policy issues from a consumer’s perspective.