I AM writing this piece from Arizona where I have just heard the brilliant American economist Austan Goolsbee — the chairman of the Council of Economic Advisers and the youngest member of Obama’s cabinet — argue that the European economic crisis will go on for a long, long time. He kicked off Google’s Zeitgeist conference with a tour de force on the US and the global economy.
Is he right? Will the crisis go on and on?
The political news of the past few days suggests that this titan of American economics has good reason to be fearful. Consider this litany from European politics in the past week, a litany that is likely to culminate with Spain asking for EU assistance to keep the lights on.
We kicked off with Angela Merkel greeted by riots in Athens. Meanwhile, Catalonian nationalists announced that they would bring forward elections in the hope they will lead to more sovereignty. In Venice, 200 years after the Republic of Venice ceased to exist, local politicians are again talking about a new Venetian Republic.
Meanwhile, the finance ministers of Germany, Netherlands and Finland go rogue; they claim that legacy bank debts are none of their business. All the while, the people at the top of the European pyramid react to these local and national solo-runs by calling for more federalism, something that nobody wants.
This is an elite that is out of touch with the people. This is probably not surprising because, despite everything that has happened, the people who are running the European project are dancing to bankers’ and financiers’ tunes rather than listening to the people who are pulling in the opposite direction.
The people in Brussels and deep in the policy-making establishments in every European capital claim that they are increasing moves towards more federalism in order to save the euro. This is their prerogative. However, in order to save the euro, they will risk destroying the EU.
The euro was supposed to bring the people of Europe closer together, but it’s obvious from taking the pulse of the streets — rather than the boardrooms — that the effort of saving the euro is driving the people apart, increasing nationalistic feeling and splitting the unity of the EU as countries move to protect their own interests.
Rather than seeing the euro as being the cause of the problem, the elite is portraying the chaos in the eurozone as being the consequence of other policy mistakes which had nothing to do with the currency at all.
This is nonsense. Here is what happened. The architects of the European project calculated that by imposing a new single currency led by Germany, the rest of the Europe would become more German. This counter-cultural notion was based on the idea that a German currency would impose Germanic discipline on the rest of us.
But what actually happened was something entirely different.
Within the euro the Greeks became more Greek, the Spanish more Spanish, the Irish more Irish and so on. In fact, far from disciplining the rest of Europe, German money actually allowed the rest of Europe to indulge national idiosyncrasies. Here is the rub: the huge amount of German cash, which cascaded into the periphery, allowed the periphery to become less not more German.
Now this realisation is dawning on the German people and they are beginning to reassess everything based on the fact they know they might have to finance the periphery into perpetuity.
The economy is not just weakening in Ireland, it is weakening all over Europe and the country which is the really weak link in the chain is not Spain, but France.
France is a county that is incapable of reforming itself. Due largely to the position of the trade unions, the chances of France implementing an austerity programme are virtually nil. But why might France have to implement an austerity programme, you ask?
The reason is as growth falters, financial markets will look at France’s current account deficit, its budget deficit and its weakened and exposed banking system and then they will sell French bonds. This is likely to cause French bond yields to go up and, like Spain, it will need a loan from the rest of the EU.
That loan will come with conditions and those conditions will demand that France implements large cuts in government spending to qualify for the loan. This is something that France will be incapable of delivering.
Once this becomes apparent, the position of Germany will be stark. Up to now, Germany has been talking like it wants to “do everything possible to save the euro” but in reality it has been trying to do as little as it can get away with. If France wobbles, Germany will not be able to maintain this position because it will have to act to save France. The Paris/Berlin axis is the heart of the EU and — unlike Dublin, Madrid or even Rome — it will not be sacrificed.
The implication is that Germany might decide to protect France by letting the peripherals go into a weaker or second-tier euro. This is what is ahead of us. While the focus today is on Spain, the real battle will be in France.