Is the Eurozone crisis a threat to democracy?

Here’s a piece I’ve done for Yale Global magazine on democracy under strain in Europe.

Politicians in power since the 2008 financial collapse, regardless of their political stripes, find themselves in peril. Analysis of the recent French and Greek elections followed three lines of thought: voters soundly rejecting strict austerity measures, blaming incumbents, and abandoning mainstream political parties for more extremist leadership, both right and left. The three interpretations are linked.  Read more

Britain and Europe after the veto

What a day. Five observations:

  1. My initial reaction this morning: On a sinking Titanic, the UK is lobbying to avoid further damage to the iceberg.  If David Cameron was motivated mostly by his wish to suck up to the City (and to his backbenchers), then he deserves all that fate can throw at him. He has transformed eventual British exit from the EU from Eurosceptic fantasy to the new conventional wisdom in just 12 hours. Quite a feat.
  2. But maybe… his government has decided that the euro is now doomed and has made a rational decision to swim as far from the vortex as possible. Many believe that a disorderly break up of the single currency has become more likely than not. That would probably cost the UK 10% of GDP and make British default a near certainty. But if that’s what’s going to happen, then we better knuckle down to being as resilient to the shock as possible.
  3. The British veto makes euro failure more, not less, likely. In theory, agreement between a core group is easier than having all 27 countries in the room, but the legal complications of conjuring a new set of institutions from thin air are daunting. Also, expect the core to shrink as the summit’s aspirations are chewed up by domestic politics. Each defection will provide a potential trigger for wider breakdown – probably when a group of the strong decide all hope is lost, and make a collective rush to the lifeboats. By being the first to desert the ship, Cameron has made it much easier for other European leaders to follow.
  4. Contingency planning must now go much deeper. Behind the scenes, governments are playing out failure scenarios, and most big businesses have some kind of post-euro plan in place. Much of the thinking is still pretty rudimentary, however. The eurozone countries can’t risk letting markets see them flinch and have to put a brave face on their prospects, but the UK no longer needs to have such scruples. What exactly would we do if the euro goes down? What would be thrown overboard? What, and who, would be saved? How can the government organise effective collective action as the catastrophe hits?
  5. Nick Clegg is dead, politically. That was already true, but I can’t imagine even Miriam González Durántez now plans to support her husband at the next election. Paradoxically, accepting his terminal status could give Clegg new freedom of action. Instead of continuing to play the role of coalition gimp, he should offer leadership to those keen to explore what comes after the storm. Politicians with proper jobs – Cameron, Osborne, even Cable – are going to be overwhelmed by events throughout this parliament, even in the best case where Europe struggles back onto its feet. Clegg, though, has an opportunity to focus energy on the longer term. He’ll still lead the Lib Dems to electoral Armageddon, but catalysing a vision for renewal might make posterity a little kinder to the poor man.

Has Will Hutton gone mad?

Over the weekend, Will Hutton offered a ‘modest proposal’ so bizarre that it must have left his colleagues at the Observer fearing for his sanity.

David Cameron, he suggested, should…

… travel to Germany and make a speech in German – however embarrassing – spelling out the choices. If Germany is unprepared to accept them, he should argue that the least bad option is not for Greece to leave the euro – but for Germany, whose economy is strong enough to take the shock, to do so.

He should say that while it was right for Britain not to join the single currency as it was previously constructed, if Germany were to act responsibly, Britain would peg sterling to a reformed euro and in the long run even consider joining the regime. Moreover, Britain would do this either way, he could argue – eventually joining a single currency in which Germany accepted its responsibilities or a single currency without Germany.

Now the idea that Cameron should offer to swap places with Angela Merkel at the heart of the Euro meltdown is, without doubt, genius. The Germans, I am told, feel cursed to stagger on endlessly chained to the corpses of weaker European nations. So… why not help out? Strap them to the UK instead!

But it’s Hutton’s tactics I worry about. Year after year, with consummate skill, he’s been inching [sorry, centimetring] Britain towards Euro membership.

Who can forget his moving plea from ’99 that the UK adopt the single currency because “we read the same bible, drink the same wine, haunt the same discos, play in the same Champions League” as our European neighbours?

Or his reassurances from 2002 that fears the Euro could crack were ‘scaremongering’ and ‘wishful thinking’? Or his masterful solution for the problem of one-size-fits-all interest rates (in a crisis, European countries survive by running up bigger deficits!)?

Or from November 2008, his Cassandra-like insight that only through immediate Euro entry – now, this minute – could the UK avoid ‘national bankruptcy’ and the ‘clutches of the IMF’?

Or perhaps most prophetic of all, his essay from just a fortnight ago, hailing European leaders for taking an ‘inspiring leap’ towards financial stability, by creating “a self-help club” in which every European country could be both strong and free?

But it’s the language thing that makes me fear Hutton is losing his marbles. Our PM may not be able to speak a word of yer’actual German, but he can do a hilarious German accent (this is taught to all boys as part of the British national curriculum). He even whipped it out on the campaign trail:

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What’s more, he’s almost certain to push things too far by borrowing a costume from Prince Harry to make his big day in Berlin memorable for all concerned. The likelihood of embarrassment is overwhelming! He’s sure to come across more John Cleese than JFK.

No – what Cameron should do, obviously, is resign forthwith and allow Nick Clegg a fluent German speaker to take over. Clegg could then appoint a government of technocrats to prep the UK for Euro membership. I nominate one Hutton, W as our next Finanzminister….

Sarkozy threat to pull France out of Euro?

Seems Nicolas Sarkozy, Global Dashboard’s favourite European leader, was in typically understated form during the recent Eurozone crisis summit:

Sarkozy demanded “a compromise from everyone to support Greece … or France would reconsider its position in the euro,” according to one source cited by El País.

“Sarkozy went as far as banging his fist on the table and threatening to leave the euro,” said one unnamed Socialist leader who was at the meeting with Zapatero. “That obliged Angela Merkel to bend and reach an agreement.”

Europe: don’t look to us when sterling collapses

UK reluctance to help with the Euro bailout has not gone down well at all:

Jean-Pierre Jouyet, the head of the French markets regulator, said sterling was bound to come under pressure on the markets given the delay in forming a UK government after last week’s inconclusive general election.

Mr Jouyet, a former Europe minister who is close to President Nicolas Sarkozy, indicated that Britain could expect no help from the eurozone.

“The British are most definitely going to be targeted given the political difficulties they have,” he told Europe1 radio. “If they don’t want solidarity with the eurozone, we will see what will happen with regard to the United Kingdom.”

Following its refusal to help its neighbours, Mr Jouyet said Britain had become a peripheral player in the bloc.

There was now a “three-speed Europe”, he said: “Europe of the euro, the Europe of countries that understand the euro, such as Poland and Sweden, and the British.”

Greece screwed – Euro next?

On Greece, Martin Wolf is bleak

Yet [despite the bailout] it is hard to believe that Greece can avoid debt restructuring. First, assume, for the moment, that all goes to plan. Assume, too, that Greece’s average interest on long-term debt turns out to be as low as 5 per cent. The country must then run a primary surplus of 4.5 per cent of GDP, with revenue equal to 7.5 per cent of GDP devoted to interest payments. Will the Greek public bear that burden year after weary year? Second, even the IMF’s new forecasts look optimistic to me. Given the huge fiscal retrenchment now planned and the absence of exchange rate or monetary policy offsets, Greece is likely to find itself in a prolonged slump.

Would structural reform do the trick? Not unless it delivers a huge fall in nominal unit labour costs, since Greece will need a prolonged surge in net exports to offset the fiscal tightening. The alternative would be a huge expansion in the financial deficit of the Greek private sector. That seems inconceivable. Moreover, if nominal wages did fall, the debt burden would become worse than forecast.

…Felix Salmon depressing

Even if Greece were running a zero primary deficit (and I’d love to know if it’s ever managed that particular feat), a default without devaluation would still keep the country mired in its current uncompetitive state. If you’re going to go through the massive pain of a default, you might as well get the upside of devaluation at the same time, and exit the euro.

At that point, the only question is: do you default and devalue now, or do you wait a couple of years? Germany and France might well want to wait, in the hope that their banks will be better able to cope with such a thing in a couple of years’ time. But from a Greek perspective, if the pain is coming, best to go through it now and bring forward the growth rebound, rather than push off the devaluation stimulus to an indefinite point in the future.

…while most of Simon Johnson’s readers have now slit their wrists:

The Europeans will do nothing this week or for the foreseeable future.  They have not planned for these events, they never gamed this scenario, and their decision-making structures are incapable of updating quickly enough.  The incompetence at the level of top European institutions is profound and complete; do not let anyone fool you otherwise.

What we need is a new approach, at the G20 level; this can definitely include debt restructuring, but it has to be done in a systematic fashion (and even then there will be a considerable degree of total mess).  Such a change in framework for dealing with these issues will not get broad support until after further chaos in Europe, but it now needs to be put into place.

The Europeans will not lift a constructive finger.  The leading emerging markets are too busy battening down the hatches (and accumulating ever more massive chests of reserves).  And the White House still seems determined to sleep through this crisis.  Expect nothing.

What are the chances of the Euro emerging from this unscathed? Increasingly slim, it seems – surely one or more countries are going to find it almost impossible to stay inside the currency union. While the UK gazes at its navel, phase 2 of the global financial crisis has firmly taken hold.

We now have an inter-related banking and sovereign debt crisis; no procedures for an orderly bankruptcy of countries (having ignored the lessons of the East Asian financial crisis); and no legal way to allow the destitute to exit the Euro.

What a mess.

Eurozone crisis – Alistair Darling needs to get off the campaign trail

If you’re in any doubt of the seriousness of the Greek sovereign debt crisis, read Mohamed El-Erian in the FT. A banking crisis has fuelled a sovereign debt crisis, which could in turn spark another banking crisis (with the whole caboodle, as I have argued, part of a sustained episode of financial instability that stretches back to the 1990s):

A number of things have to happen very fast over the next few days to have some chance of salvaging the situation. At the very minimum, the government in Greece must come up with a credible multi-year adjustment plan that, critically, has the support of Greek society; EU members must come up with sizeable funds that can be quickly released and which are underpinned by the relevant approval of national parliaments; and the IMF must secure sufficient assurances from Greece (in the form of clear policy actions) and the EU (in the form of unambiguous financing assurances) to lead and co-ordinate the process.

This is a daunting challenge. The numbers involved are large and getting larger; the socio-political stakes are high and getting higher; and the official sector has yet to prove itself effective at crisis management.

Meanwhile, the disorderly market moves of recent days will place even greater pressure on the balance sheets of Greek banks and their counterparties in Europe and elsewhere. The already material risks of disorderly bank deposit outflows and capital flights are increasing. The bottom line is simple yet consequential: the Greek debt crisis has morphed into something that is potentially more sinister for Europe and the global economy. What started out as a public finance issue is quickly turning into a banking problem too; and, what started out as a Greek issue has become a full-blown crisis for Europe.

Election or no election, the UK simply cannot afford to sit on the sidelines while this crisis runs out of the control. Alistair Darling needs to stop giving speeches to activists in Scotland and get back to work at the Treasury.

Lord Adonis stopped campaigning as soon as Eyjafjallajökull erupted. Darling must do the same as the UK faces contagion from Eurozone turmoil.