BERLIN – On the weekend of May 7-9, the European Union gazed into the abyss of historical failure. The fate of the euro was at stake and with it European unification as a whole. Not since before the signing of the Treaty of Rome in 1957 had Europe been in such grave political danger. On the surface, the matter at hand was the financial stabilization of Greece and of the Europe’s common currency, but the real title of the play was “Saving the Banks, Part II.”
If Greece had defaulted, not only would Portugal, Spain, and other weaker eurozone economies have been threatened, but Europe would have faced a run on its securities. That, in turn, would have triggered the collapse of supposedly “too big to fail” banks and insurance companies, not just in Europe, but worldwide.
When the heads of the EU’s member states met in Brussels to deal with the Greek crisis, the interbank market, which is decisive for the liquidity of financial institutions, had started to freeze, just like after the collapse of Lehmann Brothers in September 2008. The world financial system again stood at the edge of a precipice. Only after joining forces in providing a €750 billion bailout package, did the eurozone’s member states and the IMF prevent another systemic crash.
But how many bailouts will the people of the Western democracies tolerate before the crisis of the global financial system turns into a crisis of Western democracy? The answer is clear: not many more.
The crisis has not yet manifested itself to most citizens of the West in the appalling, ground-shaking way of 1929. So far, financial crisis still seems a rather more vague threat: people are afraid of inflation, stagnation, unemployment, and loss of assets and status. They don’t yet think that the world as they know it is coming to an end.
Moreover, the mood in the West swings between a realization that this crisis will not be resolved without fundamental commotions and changes, and hope that it will be resolved in the normal, cyclical way of other crises – Mexico, Asia, the Internet bubble, etc. – and that in the not-so-distant future things will start to pick up.
This uncertain response partly explains Western governments’ lack of will to draw tangible conclusions from the systemic failure of the financial sector. It is also why governments give the impression that they don’t know how to steer their societies through these troubled waters. Leaders talk about “systemic risks” and the necessity of bailouts, but at the same time let those responsible for two consecutive systemic failures maintain the same global casino that twice brought the world near collapse.
Sixty years ago, a global crisis such as the one we are witnessing today would have had the potential to unleash another world war. Fortunately, this is no longer a realistic option. The reality of the atomic bomb precludes large-scale war between world powers; governments intervene, upon global agreement, with large-scale bailouts; and today’s Western societies and emerging powers are much richer than those still devastated by World War I. In 2007, global assets (including stock, private and public debt, and bank deposits) amounted to $194 trillion – 343% of annual global GDP.
Moreover, the failure of the global financial system comes at a time when power is shifting from West to East. Today, the hopes of the world economy rest with the emerging powers in east and south Asia, led by China and India.
For all these reasons, the global crisis will not be devastating in the same way as the Great Depression was. Indeed, our current predicament has all of the hallmarks of a “post-modern” crisis. But we need to ask ourselves where and how the energies unleashed by this crisis will be discharged, because there can be no doubt that they will be discharged one way or another. After all, the evidence so far suggests that the crisis is here to stay for a long time, with unforeseen eruptions, such as the recent adversity in Greece and surrounding the euro, as well as inflation, stagnation, and populist rebellion.
Indeed, there are good reasons for believing that the Tea Party movement in the United States, connected as it is with the economic disaster that followed Lehman’s collapse, is one of the channels of the energy released by the crisis. Developments in Greece or Hungary make it easy to imagine failed European states if the EU unravels.
The fact that the current global crisis is a post-modern one does not make it any less dangerous. Post-modern crises entail post-modern risks, resulting in disintegration and implosion of power vacuums, not the danger of classical wars. But, given European governments’ behavior, the urgent question presents itself: Do these governments have any inkling of what is at stake at the table where they sit playing roulette with history?