Saving Europe


April 17, 2011

Three months ago in this column I wrote about the 'Greek Tragedy' and two weeks later about 'Immoral Moral Hazard.'  

The first column was about the unfolding Greek economic crisis. I concluded, “Whatever the solution that the eurozone arrives at, it will be at great cost to the ordinary Greek. The profligacy of the past, hidden by corrupt reporting and politicisation, will now have to be paid for by the Greek wage earner and taxpayer for many years to come. 

 

The exact ending to this spectacular Greek tragedy is not yet known, but suffice to say it will lead to lots of tears.” It is now clear though that the Greek hubris that led to this crisis will not only bring many years of financial hardship to ordinary Greeks, but will impact the pockets of tax payers across Europe and indeed even in developing nations that contribute to Greece via the IMF.  

In the next column I discussed the role of moral hazard: the implicit guarantee given by a central bank to intervene in order to preserve financial security, that leads to immoral behaviour by some financial institutions, as they feel that in a worst-case scenario they will be bailed out by the central bank.

Here I concluded, “In our daily lives we all have to live the consequences of poor and immoral decisions. If we commit insurance fraud, hefty jail sentences await us.

Why should such behaviour be seen and tackled differently at the institutional or national level? Or, the flip side of the coin, why should everyone be punished because of the unpleasant actions of a few? 

The debate on the immorality of moral hazard is far from over.” In the Greek case the issue of moral hazard is far higher reaching: a government acted fraudulently over decades, knowing that as a member of the European Community and the eurozone, it would never be allowed to fail.

Complicit in this Greek debacle are the international banks, who turned a blind eye to the Greek fraud and lent massive sums of money to Athens, also certain that European governments would cover any problems with repayment of these loans and bonds.

So where does all of this lead Europe to now? Economists, financial gurus, politicians, and everyone else who has had something to say about Greece in the past few weeks, have focussed on a few hard facts: (1) the Greeks created their own mess; (2) any bail out of Greece is fraught with moral hazard; (3) not bailing out

Greece could lead to severe contagion across the eurozone, specifically to Portugal, Spain and Ireland. 

All of the above are true, which is why the US$145bn European/IMF package took a long time to put together. During this period of contemplation, the markets decided to make a determined onslaught on Greece, raising its cost of ten-year debt to a record 12.6 per cent, an unimaginable 9.82 per cent higher than equivalent German government bonds.

The markets, dispassionate and soulless, have decided that the Greek problem is one that most other European nations also have, and the yields of Portuguese, Spanish, Irish and Italian bonds have all soared to record highs against the German benchmark. 

In the past couple of days, European leaders have finally woken up to what this Greek tragedy is really all about: it is about saving Europe. The post Second World War European patchwork quilt, so delicately woven together over the past six decades, is about to unravel. 

Chancellor Angela Merkel of Germany, as leader of Europe’s largest and most powerful economy, has held the key to any solution for Greece.  She laboured for months, politicking the Greek problem in order to curry favour with voters in the narrow confines of regional elections in the German state of North Rhine-Westphalia, showing that she did not grasp the true significance of the anarchy that was unfolding in Athens.

Merkel, the first German Chancellor from the Soviet-controlled East Germany, more than anyone else, should really have understood the need to protect the European dream from the onslaught of the financial markets.

The Europe of the 21st century is the result of audacious statesmanship by a hand full of great leaders that personally witnessed the utter destruction of the Second World War.  

These leaders put aside personally painful experiences and won over sceptical populations to create a Europe that has never in its entire history been so unified and at peace for so long. The peace of the past 65 years has brought untold dividends to the peoples of Europe, and the continent has never known such vast levels of prosperity. 

One of these great statesmen was Merkel’s countryman, Helmut Kohl, Chancellor from 1982 to 1998. His 16-year tenure was the longest of any German Chancellor since Otto von Bismarck, and it encompassed German reunification and the tearing down of the Soviet Iron Curtain. 

German reunification was a key piece in Kohl’s European puzzle: a far-reaching European integration, culminating in the Maastricht Treaty in 1992 that created both the European Union and the single European currency. 

Kohl is only one of two recipients to be bestowed the title of Honorary Citizen of Europe by the European heads of states (the other was Jean Monnet) for his extraordinary role in creating peace and cooperation. Kohl was driven by a conviction that Europe must never again witness the horrors of nationalistic wars. 

This conviction, which was essentially his calling in life, allowed him to conquer his basic conservative political ideology and team up with a staunch French socialist, President Francois Mitterand, in order to drive European integration.

Giving up the hallowed Deutsche mark, the very symbol of post-war German economic might, was a price that Kohl felt Germany had to pay in order to further the political, social and economic integration of Europe. Five days ago, at his official 80th birthday celebration, Kohl had this to say: “Today, I am convinced more than ever that European unification is a question of war and peace for Europe and for us, and the euro is part of our guarantee of peace."

He went on to say: “I have no understanding for the current debate about Greece. For people who act as if Greece has nothing to do with them. Of course it is difficult," he went on, struggling to make himself understood after having a suffered a life-threatening skull fracture two years ago, "but one has to do everything.”

After 65 years of peace in Western Europe, it is easy to become complacent and scoff at the notion of warfare sullying the verdant countrysides of Germany or France or Holland.  

The terrible Balkan wars of the 1990s that led to mass crimes against ordinary ex-Yugoslavians are, however, a stark reminder that complacency is not such a good idea. The riots in the streets below the Parthenon could very well be the harbinger of much broader European social unrest, as the financial markets target the weaker

European eco-nomies. In order to save Europe, politicians such as Merkel need to rise to the occasion and 'do everything' to shore up the euro and help their weaker neighbours.

The short-term costs of bailouts might be high, but the long-term costs of allowing economies to fail and a disintegration of Europe are too extreme to contemplate, both for Europe and the rest of the world.