Nobody likes Mondays. But as Mondays go, 7 May 2012 is uniquely awful. In fact, it ranks as one of the least happy in Europe’s history. It is the day that political debts of the European credit crisis were called in, and, as the Happy Mondays’ Shaun Ryder once eloquently put it, it’s clear that “there’s a ******* price to be paid for everything.”
The Year Ahead 2018
The world’s leading thinkers and policymakers examine what’s come apart in the past year, and anticipate what will define the year ahead.
It’s the culmination of two weeks of trauma. Across the board, voters and elected representatives have punished governments for the ongoing, damaging effects of the European credit crisis. In the space of fourteen short days, three governments have changed. In Holland, Prime Minister Mark Rutte was forced to resign after the far-right leader of the PVV, Geert Wilders, pulled out of the governing coalition in opposition to proposed austerity measures. In Greece, the two main coalition parties – Pasok and New Democracy – have suffered colossal losses, haemorrhaging support to the left-wing Syriza and the neo-Nazi Golden Dawn party. And in France, President Nicholas Sarkozy was dramatically unseated by Socialist challenger Francois Hollande in the second round of the presidential elections. To make matters worse, these changes have been accompanied by other shifts around the continent. On successive days, Hungary elected a new president, János Áder, to preside over mounting debt problems, and Britain’s governing coalition was mercilessly punished for its management of the country’s recovery in local elections.
But while each of these events would be remarkable enough in its own right, they collectively add up to something even more dramatic. In effecting such dramatic changes in vengeance for the scale of the continent’s economic woes, voters and parliamentarians may, quite inadvertently, have signed Europe’s death warrant. In fact, that’s putting it mildly. Perusing the newspapers this morning, my first reaction was actually “whoops, apocalypse.”
To explain this, let’s just try to survey the landscape of the new Europe we’ve woken up to.
In recent months, the Eurozone has managed to cling doggedly to solvency because the risk of internal instability has been contained within politically manageable confines and has been matched – if not outweighed – by continent-wide measures designed both to support government debt and to encourage structural growth. This morning, both sides of this incredibly finely balanced equation have been entirely disrupted.
The major ‘outgoing’ danger facing the Eurozone is the threat posed by the Greek debt crisis to the stability of the European banking sector and market confidence in the Euro itself. This danger is now much, much more pronounced. Whereas only a few days ago, European leaders could find some reassurance in the political stability provided by the technocratic Prime Minister Lucas Papademos and a coalition government broadly agreed upon austerity measures, the politics of Greece are now fragmented.
The key players in the previous coalition government – Pasok and New Democracy – have seen their support plummet. Pasok has slumped from 160 seats (43.92% of the vote) in 2009 to a meagre 41 seats (13.18%); and while New Democracy has actually increased its parliamentary presence, gaining 108 seats (up from 91), their share of the vote has collapsed (down to 18.85% from 33.47% in 2009). Even these staunch supporters of austerity measures wished to form a new coalition, they wouldn’t be able to muster the 151 parliamentary votes needed to hold a majority. The clear proof of this is provided by Antonis Samaras’ failure to form a coalition this evening.
The balance of power is now held by radical parties adamantly opposed to the spending cuts integral to the bailout deal. Syriza – the Coalition of the Radical Left – has won 52 seats with 16.78% of the vote (up from 13 seats and 4.60% in 2009), while the right-wing ANEL (Independent Greeks), holds 33 seats and the communistic KKE has 26.
Despite Angela Merkel’s stark warning that the fiscal pact was “non-negotiable”, it is clear that the deal so painstakingly agreed with the troika to manage Greece’s debt is in tatters. Any coalition that may be formed (and it is far from clear that this will actually happen) will certainly be politically unable to continue with the cuts that Merkel and the IMF demand. A default is now inevitable. There are now only two questions. How long will it be before Greece abandons the Euro? And how bad will the damage be?
In terms of scale, the impact of the Greek elections is likely to be huge, and it is no surprise that Greeks are today talking only in terms of “acute anxiety” and “fear”. Domestically, Greece’s economic health has already taken a beating. In a sign of things to come, shares in Athens fell by as much as 8.3%, and already high yields on 10-year government bonds in secondary markets jumped yet again to end at 22.2%. Investor confidence is falling.
Across Europe, there are already indications that the impact of political instability will be devastating. The Euro fell against the dollar to a year-low of $1.295, and banks are only just beginning to evaluate the damage that would be wrought by a default and/or withdrawal. Some of Europe’s major banks are already dangerously over-exposed to toxic Greek debt. BNP Paribas ($7.1 billion), Commerzbank ($4.1 billion), Societe Generale ($3.8 billion), Deutsche Bank ($2.5 billion), and HSBC holdings ($1.9 billion) are all beginning to look back at Dexia’s collapse with trepidation. The contraction of credit availability that could result is too vast even to contemplate.
This would all be bad enough on its own, but it is only half the story. The stabilisers have been removed from the already tottering European training bike. The only factors preventing the Eurozone from plunging headlong into disaster – the strength of the Franco-German economic axis, and the political will to establish a Eurozone-wide facility to limit the effects of endogenous shocks – are both in jeopardy.
It’s all Francois Hollande’s fault. There’s no doubt that he’s a nice guy. Indeed, as I have argued in previous articles, there is much to be said for many of his social policies. But in economic terms, his victory in the French presidential elections is really, really bad news for Europe.
Hollande’s entire platform is based on the notion that “austerity [is] no longer the only option”. This has two elements. On the one hand, his bid to boost jobs and growth rests on an old-fashioned willingness to tax the rich and on a discreet reintroduction of fiscal stimuli. The problem is that the measures he has proposed are likely to kill, rather than cause, growth. With a new 45% tax band on people with incomes over €450,000, a cap on total income and wealth tax at 85%, Hollande’s policies risk stifling individual investment among France’s entrepreneurial class. Similarly, his plan to increase capital gains taxes on banks and to introduce a financial transactions tax risks crippling the profitability of French banks and increasing the cost of borrowing well above its present level.
On the other hand, Hollande’s scheme also extends to Europe. If his domestic policies are in danger of strangulating French growth, however, his broader economic policies are likely to make the European effects of a French downturn even worse. Key in this respect is his attitude towards the EU’s fiscal pact. Despite Angela Merkel’s convincing attempt to defend the pact in its current form, Hollande has committed himself to renegotiating the agreement, particularly with respect to the creation of Eurobonds. Whatever the outcome, the fact that Hollande’s policies will raise questions about the validity of the pact can only worsen market fears for the Eurozone’s future stability. Investor confidence in the Euro could nosedive.
Taken together, the impact of government changes in Greece and France could be devastating. Combined, a Greek default, French economic contraction, and Europe-wide policy confusion may end up being apocalyptic.
But while unrepentant optimists might still argue that the worst still might not happen, the situation is, in fact, even worse than this. Although France and Greece are naturally at the centre of attention at present, the Eurozone is part of a much broader and more complex economic structure. Unfortunately, that’s where the problem lies.
First, the impact of Hollande’s determination to renegotiate the EU’s fiscal pact will be made worse by the fall of the Dutch government. Not only will Eurobonds be up for renegotiation (whether Merkel likes it or not), but austerity itself will be cast into question. Hollande’s interest in expanding the function of the ECB to encourage growth is matched by the Dutch PVV’s emphasis on limiting cuts to maintain government spending. The future agreement of pan-European budgetary targets is thus in doubt. And at a time like this, disunity and disagreement are the last things a fragile single currency needs.
Second, the influence of non-Eurozone economies cannot be dismissed entirely, including even the weakest. Hungary, whose bonds are officially junk, is heavily indebted to Western European banks and, as the election of its new president demonstrates, politically intransigent. Although its economic clout is limited, it is emblematic of the instability of the European periphery and of the atmosphere of vulnerability which surrounds the Eurozone. In the event of a Greek default unmitigated by French growth and Europe-wide agreement on austerity, the volatility of peripheral economies could contribute to the acceleration of a snowball effect within the Eurozone.
Third, stronger non-Eurozone economies are perhaps even more worrying. Britain is a case in point. However restricted local elections may be in scope, their implication are potentially far-reaching. Having received a hammering at the polls for its management of the UK’s ongoing recession, David Cameron’s Conservative-led coalition will perhaps have to moderate its (not entirely unsuccessful) austerity programme and restrict its willingness to offer support to the EFSF. As one of the EU’s largest and – at present – healthiest economies, the subtle shift in Britain’s economic alignment is likely to destabilise one of the many planks propping up the Euro.
There is, therefore, good reason to suspect that Monday signalled the beginning of the end. The political earthquakes of the last two weeks are most likely to be the recipe for economic apocalypse. The end is indeed nigh.
There is, however, a bitter irony in all of this, and this is why my first thought was “whoops, apocalypse”. However terrified most Europeans may be at this moment, we have to acknowledge that we chose this. The results of the Greek election, the French presidential election, and the British local elections are the direct consequence of voter choice. So too, the withdrawal of the PVV from the Dutch coalition and the election of the new Hungarian president are the consequence of actions by elected representatives acting on behalf of the will of the electorate. If there is an apocalypse, Europe has chosen it. Whoops, apocalypse indeed.