If you read the pages of the Wall Street Journal or the Financial Times (as you do!), you would be forgiven for thinking that Europe is about to implode economically and the great experiment of a European single currency is dead in the water. We are told by eminent Keynesian economists like Paul Krugman in New York that the euro is going to collapse, while monetarists like Wolfgang Munchau in the FT explain the whole Eurozone is bankrupt and the Eurozone is going to break up into little nationalist pieces very soon.
But is the euro really being killed off by the government debt crisis in Europe? The short answer is no, or at least not yet.
The long answer is this. The government debt crisis started in the same way as the mortgage debt crisis started in the US. That started with the smallest fragment of the mortgage market, the high risk, sub-prime-no questions asked part of the housing market. When that went belly up as sub-prime mortgagees defaulted on their rising debts, it spread into the rest of the mortgage market.
Most of America’s mortgages were bundled up into bonds and sold to ‘stupid Germans’, as ‘fabulous Fabio’ of Goldman Sachs called his clients when he marketed his dodgy batch of mortgage ‘derivatives’ to them. So when US house prices plummeted, not just the US mortgage lenders went bust, huge losses were racked up across the world, particularly among Eurozone banks. So the sub-prime crisis spread to the prime and to the world.
This sovereign debt crisis is a product of an expansion of debt in the government sector, as politicians desperately tried to bail out the banks and avoid a Great Depression. Government bailouts of the financial sector and spending to keep enough people at work have led to huge government budget deficits and an expansion of public sector debt to levels not seen since the second world war. And this time, this debt is not just confined to a few countries that paid for that war. This time every capitalist economy is taking on another mountain debt of that governments (and that means you and me) will owe to the banks and other financial institutions and through them to the pension funds and other savers.
Public debt to annual output was about 60% in the UK, 50% in the US and 65% in the Eurozone before the crisis and the Great Recession. Next year it will be 95% in the UK, 90% in the US and about 85% in the Eurozone.
The smallest part of the Eurozone had the worst debt ratio: namely Greece. As I have explained before in a previous post (Greek countdown, 1 February 2010), Greek capitalism is one of the weakest in the whole of Europe. But the Greeks blagged their way into the Eurozone and with help of subsides from the rest of the Europe, they were able to maintain some semblance of standards of living for the populace, while the capitalists themselves lived the life, paying no taxes and corrupt as hell. The Great Recession exposed a Greek public debt ratio of 120% of GDP and rising.
The Germans had had enough of them and wanted the Greek capitalists to stop the party. The Greek leaders are now trying to get the Greek people to pay for the mess. Markets panicked when they realised what a mess Greek capitalism was really in and worried that the Germans would let them go to the wall so they could not pay their debts. They began to wonder if other Eurozone countries like Portugal or Spain could meet the same fate.
If several countries with big debts found that they could not ‘roll over’ those debts or borrow any more except at exorbitant rates, they may decide to default on their obligations. Thus the sub-prime Greeks would have spread the crisis to the prime Spaniards or Italians.
That is the fear and also the prediction of many American and British commentators. But then they are biased. For the Americans, a united and strong European capitalism is a threat to their hegemony and British capitalists are divided between those who look to the Americans for leadership and those who look to Europe for markets. The ‘eurosceptics’ want to see European capitalism break up.
But it is not going to happen because the Greeks or the Portuguese default on their debts. They may get thrown out of the Eurozone but the currency will survive. It would only collapse if Franco-German capitalism wants it to.
The great European project began after the war for two reasons. The leaders of recovering European capitalism wanted to set up a structure to ensure that there could never be another war on the continent of Europe (something not entirely achieved if you count the Balkans). The French would embrace the Germans in an economic and trade pact that would ensure German nationalism was entrapped, replacing it with European unity.
The second reason was to turn Europe into a major competing power with the American capitalism. To do that, they needed to set up a free trade area and then eventually a single European currency. This aim was a great success as Europe shot forward during the Golden age of capitalism in the 1950s and 1960s. Europe gained relatively over the US during the 1970s and 1980s as American capitalism’s relative decline was exposed, signified by the ending of the dollar’s fixing to a gold standard in 1971 – an indicator that the US could no longer afford to support economically the rest of the capitalist world against economic slump or the Soviet Union.
But in the 1990s, Europe stuttered. After the fall of the Wall, West German capitalist leaders decided to annex eastern Germany. This was very expensive, but on balance was regarded as better than the alternative of leaving it separated and outside their influence. But for a while German capitalism had to leave the project of the euro to the French who allowed all sorts of riff raff like Greece, Portugal, Spain and even Italy to enter the Eurozone. As a result, strong German capitalism with a strong currency was watered down into a weaker currency zone.
Now the chickens have come home to roost. German capitalist leaders are now much less enamoured of the whole European project which has weakened them. They have sacrificed profits to build this Eurozone and now the Greeks have cheated. There has been a nationalist surge among Germans, fed up with the idea of having to pay more taxes to finance the lives of a Greek elite (although it has been described in the German papers as the ‘fat cats’ of Greek public sector workers). But the Germans have been persuaded by the French and the Italians to cough more funds to hold the euro project together.
The Eurozone won’t break up unless the Germans want it to. So far, they are willing to make the project work rather than abandon it. But the price for others like Greece, Portugal or Spain will be severe cuts in living standards to pay down the public debt. It remains to be seen whether governments in those countries can force these measures through or popular protest will throw them out. If the latter happens, then the Germans might call it a day. But that scenario is still some years away.
If we get some economic growth over the next few years and popular protest is sufficiently contained, then Eurozone governments will probably muddle through and the euro will continue. After all, the debt hangover after the Great Recession (see my post, The overhang of debt, 1 March 2010) is actually much less in the Eurozone than it is in the UK, the US, or Japan where debt levels are even higher. If there is to be a debt crisis, that’s where you should look over the next few years.