Europe’s Recurring Financial Crisis Has Not, Repeat, Not Ended
It will happen again. Europe will go through another financial crisis, probably centered in Greece but not necessarily. It has had several already, because from the start few of the troubled countries have made the fundamental reforms needed to meet their obligations. Instead, the richer parts of the currency union, Germany in particular, have advanced funds on conditions of austerity that not only ignore the fundamentals but are otherwise counterproductive. The recipients pretend that they will abide by German conditions, and Berlin, to duck the disruption of a prolonged financial crisis, pretends to believe them. Rescue loans flow, and then, when another failure looms, the show repeats according to the same script. It will happen again.
The most resent run of this show was performed in spring of 2015. Greece, which had starred in the original pilot back in 2010, could not meet the payments due on its debt. German Finance Minister Wolfgang Schaeuble first lectured Greece on its spendthrift ways and then, according to script, said that Berlin would block any aid until Athens increases taxes and cuts spending sufficiently for its budget to run what is called a “primary surplus” (revenues less costs excluding the expense of debt service) equal to 3.5% of gross domestic product (GDP). Greek Prime Minister Alexis Tsipras, also according to script, refused, pointing out, correctly too, that past such efforts have imposed unsupportable hardships on the Greek people. At the last moment, again according to script, he caved into Schaeuble’s demands. Berlin allowed Europe to extend the loan, and the crisis quieted as past crises have at this point of the show.
But Berlin knows Greece and others in this predicament cannot keep their austerity promises. Even the International Monetary Fund (IMF), sometime ally of Berlin in this regard, admits that German demands are impossible. Its Europe Department head, Paul Thomsen, explained during this last round of negotiations how the austerity so constrains the economy that revenues fall and demands for social services rise, making deficit reduction an uphill battle at best. In the circumstance, he concluded, the best Greece could achieve is a primary budget surplus of 1.5% of GDP. He went on to quote chapter and verse how past austerity efforts have weakened the Greek economy fundamentally and made its politics more fragile. Certainly available statistics support his argument. The economy has shrunk more than 4% a year in real terms since the efforts began in 2010. Unemployment has risen to over 25%. Youth unemployment verges on 50%.
In all these instances of back and forth over the years, no one — neither the Germans nor the IMF nor the government in Athens nor the European Union leadership in Brussels — have considered the fundamental reform measures that just might get Greece and other problematic EU members out of this seemingly impossible situation. If Greece and some of these other troubled countries, such as Italy or Spain or Portugal, were to liberalize their infamously constraining labor and product laws, as France tentatively has begun to do, and ease their restrictions on new business formation, their economies might have a chance to grow, even in the face of stringent budget measures. In such a case, private investors might even gain enough confidence to lend Athens and these other governments money at supportable rates and so obviate its need for them to go to Europe hat in hand.
Yet, since this farce’s opening production in 2010, Greek governments left and right have resisted such steps, as have governments in Italy, though Madrid and Lisbon have taken small steps. Instead, established business interests have managed to keep down competition with a regime of government red tape, extreme even by European standards. Greece and others have through it all maintained a set of product regulations that stymie the free flow of goods in favor of existing buyers and suppliers. Their unions and others in established positions have secured themselves behind labor laws that constrain business’ ability to either hire or fire, even for cause. Full-time employment has consequently grown little. Those who have protected themselves in this system have done so at the expense of new job seekers, especially the young. It speaks to the power of these interests that the governments of these countries prefer to impose tremendous hardship on their people rather than make the needed changes.
Since neither Athens nor these other countries seem able to unwind their crony capitalist regulatory regimes, the only path then open to Europe’s currency union is to follow the by-now familiar script. It can no doubt keep it up for a long time. Germany gains so much from the currency union that it is willing to put up a lot in rescues to keep those advantages. Ultimately, however, the absence of fundamental reforms will cause one of these troubled governments to stiff its creditors and leave the Eurozone to return to a depreciated national currency. Though a depreciated currency might help its exports and tourism, it would further impoverish an already suffering population by reducing the global buying power of its income. The breakdown will also hurt by limiting its government’s ability to borrow at supportable rates for years. Then, the succession of scripted crises will end with a big one.