I know I’ve been super bad about keeping up with this blog in the past few months due to a combination of work and lack of inspiration. I shall return soon, but in the mean time I figure that I’ll at least keep this blog updated by posting a piece that I wrote for our Community Economic Development Newsletter here at PC Senegal. It’s on the Euro Crisis… not really Africa driven, but read and enjoy… this is only a prelude to a new post that will be coming out in about a week or two.
I apologize as the content is a touch dated, but it is still quite relevant to the goings on.
Although most Peace Corps volunteers enjoy struggling to keep up with the news, nothing can put you to sleep in your hut faster than the latest 15-page ”Analysis of the Euro Crisis” featured in the Economist. Let’s be honest, without a degree in economics or an economics term book at your bedside, those articles aren’t even decipherable half the time. But have no fear for this is a fun and easy read on how this whole crisis got started and where it’s been going for the past 3 and a half years…
The “European Project” is not a terribly new phenomenon. Starting with the European Coal and Steel Community in 1951, Europe began to shed its internal antagonisms in favor of greater political and economic unity. Political unity took another giant step forward in 1993 with the formation of the European Union (EU). Since then, despite some internal squabbling, the EU has given Europe what its architects had always hoped for: a louder voice in world affairs. As the EU, the countries of Europe have more political influence collectively than they do individually. Economic unity, those same architects reasoned, would give the EU increased economic influence. But whereas politicians will agree to anything, economists generally won’t. Speaking with a unified political voice may have appealed to the politicians, but managing their respective economies from a joint-account had little appeal to central bankers.
Six years of arm-twisting ensued as the EU pursued its dream of a single currency. By 1999, the rules had been established, but unity was lost in the bargain. Not every country that was qualified to join wanted to join, and some of the countries that were most eager to join weren’t qualified. Nonetheless, 11 members of the EU adopted a single currency in 1999 to become what is now known as the Eurozone. Those countries that hadn’t met the requirements for membership were offered the opportunity to join at a later date, provided they got their fiscal houses in order.
The euro as a currency quickly became a global competitor in currency markets alongside the dollar and the pound sterling. Things were going swimmingly. Greece qualified in 2000 and was admitted in 2001. By 2012, another five countries had joined (Slovenia in 2007, Cyprus and Malta in 2008, Slovakia in 2009 and Estonia in 2011), giving the Eurozone its 17 current members. These new members were mostly Eastern European countries—themselves new members of the EU—and an EU old-timer who’d failed the fiscal tests the first time around. But not all the lifeguards had been in favor of allowing more people into the pool. Some critics suggested the expansion had less to do with economics than with politics. Was Cyprus admitted to the Eurozone because of financial firepower, or because it was a convenient way for Islamophobic politicians in places like Greece and Germany (with a large Turkish immigrant population) to thumb their noses at Turkey? (Turkey has wanted to join the EU for years, but has been continually rebuffed.) Were the countries admitted in proper fiscal order, or was the EU just trying to keep them from looking east for economic assistance?
The cynics of expansion didn’t have long to wait for their “I-told you-so” moment. The financial crisis and ensuing global recession that hit in late 2007 soon exposed the divisions hiding under the surface of the EU. Since then, inter-European relations have started to resemble an episode of “Arrested Development.”
(Cue intro music)
This is the story of a wealthy continent that lost everything, and the few people who are trying to keep it all together.
(End intro music)
At the end of 2009, Greece (better known by his nickname George Sr.) revealed that he was in much more personal debt than he had led people to believe. After an assessment, the credit agencies decided to downgrade his bond rating. In danger of losing everything, the family agreed to help him if he’d try to tighten his fiscal belt. Unfortunately, he’d been living far beyond his means for far too long, and his attempts to roll it back fell almost comically short. By April 2010, Standard & Poor’s (S&P) decided to downgrade his bond rating to “junk” status.
Fitch, S&P and Moody’s are the three big global credit-rating agencies. When assessing the credit rating of government bonds, these companies look at a country’s GDP, current and capital account balances, and debt levels as a percentage of GDP. Based upon these and other things, they rate the bonds on a scale. The highest rated bonds generally have lower interest rates, due to the fact that the bonds will more than likely be paid back in full when they mature, so the bondholder is assuming less risk. The worse the bond rating, the higher the interest rates and the more squeamish banks get when you walk through the door. A downgrade usually means that a country is far down the hole, but also means that the country will now have to struggle even harder than it would have before the downgrade to get out of that hole. By downgrading George Sr., the rating agencies were saying there was a very high likelihood that people holding George Sr.’s bonds would never actually be paid back. In essence, a country’s bond rating is just like a personal credit score – and in the case of George Sr., it’s going to be real hard to find a preferential rate (or for that matter even a lender) for the loan he’s going to need to avoid filing bankruptcy.
Although the family continued to try and pull him out of insolvency, George Sr.’s efforts to reform continued to fall short, and the family began to worry that he might have to leave in order to save the rest of the family from utter collapse.
As these fears began to surface, other members of the family started to reveal that they, too, had been risking and spending far beyond their means. Ireland (also known as George Michael) was the next to get a bond rating downgrade in July 2010. The family was forced to bail him out, finally agreeing on terms in November. Being one of the more responsible family members, George Michael was able to shore himself back up in the coming years with prudent belt tightening measures.
But, as is the way with such comic disasters, the downward spiral had only just begun. By the latter half of 2011, Italy (spelled Gob, pronounced “Jobe”), who had been acting pretty quiet up until this point, started to struggle to hide the fact that he’s been having a few too many bunga-bunga parties. He was actually in just as much, if not more, danger than some of his fellow family members due to years of gross fiscal mismanagement (never mind the gallivanting with underage girls). Finally, after years of debacles, Gob agreed to seek counsel and gave the reigns over to a prudent lawyer friend (let’s call him Mario Monti).
2011 came and went, but the euro debacle just kept on going. Greece was still languishing under its belt tightening, but not much closer to full recovery (and still in danger of needing to exit), and the whole family was starting to resemble a financial sick ward. The euro was still in big trouble, and so far the solutions they had tried to implement were ineffectual. By 2012 the family—led by the responsible and financially prudent Germany (Michael) and helped by the semi-responsible France (Buster)—looked to be slowly falling apart. During the first half of 2012 alone, new bailouts were given to the still unstable George Sr. and George Michael. To make matters even worse, Spain (Tobias) began showing warning signs of failing, and Portugal (Lindsey) asked for a bailout herself before being downgraded to “junk” bond status.
As a television episode this might be amusing. As one of the two largest economic zones in the world (discounting the EU itself as a zone), it’s frightening. Unfortunately, this is a story that has been repeated across the developed world for decades now: increasingly unsustainable fiscal budgets financed by larger and larger borrowing. Now, thechickens are finally coming home to roost for the most malfeasant individuals amongst the transgressors. This strikes right at the heart of public sector management, exposing the fatal flaws in the way that much of the Western world has been running its books.
Finally, in May of 2012, Germany and France started talking seriously about other possible solutions. France thought that, in the spirit of family and the danger that they were all in, they should collectivize their debts in the form of “Eurobonds.” France argued that part of the problem some members of the family were facing was high borrowing rates due to their poor bond/credit ratings, and that if debt was collectivized it could be paid back at a more preferential rate. Although the French raised good points, Germany rebuffed them, stating that the euro family has taken advantage and spent beyond their means for far too long, and in the end it boils down to a collective group of personal problems. Germany believed (with a degree of good reason) that if it acquiesced, it would lose out in the long run by fostering “moral hazard,” and none of the other members of the family would learn their lesson. Germany would end up taking the brunt of the blow from debt collectivization, and the irresponsible fiscal policies of states like Greece and Italy would continue unchanged, serving only to cause another meltdown further down the road. Without Germany’s consent, the deal fell through, and the escapades continued. In the following months, further hilarity ensued. Cyprus started to show signs of collapse, partially due to all the money it had given Greece, and France pissed off Gerard Depardieu by leveling higher taxes on him. (Buster and a Rasputin-costumed Depardieu have a bare-knuckled boxing match after Buster calls him “pathetic.” The fight is eventually ended by a jet-pack-wielding Putin, who rescues a badly beaten Depardieu who then escapes to Russia.) Finally, in July 2012, sick of the escapades and the constant “will he, won’t he” of a potential Greek exit (Grexit), the European Central Bank President finally stepped in and declared that the euro was “irreversible,” and that no members will be exiting. Not even a month later, Greece asked for yet more time to tighten its belt while still receiving its bailouts, but was turned down by both France and Germany. Ironically enough, as the family infighting and meltdown deepened, the extended family (the EU) was awarded the Nobel Peace Prize in October 2012 for all of the wonderful philanthropic work they have done over the years…
As the strikes that have rocked Europe show, change will not come easily, and may hurt those who least deserve it, but regardless of what happens change must come. “Moral hazard” or not, this is not a television show, and these escapades won’t magically resolve themselves at the end of the half hour.
The discord of Europe may be fun to watch, but the implications for the global economy and our way of life as we know it are staggering. The crisis is three-and-a-half-years in, has already permanently altered the short-term outlook on the European economy, and has as of yet been unable to stop the dominoes from falling. Internal squabbles and local politics continue to trounce sound economic judgment, and those tasked with saving the world economy are often too busy pandering to local audiences to avoid losing an impending election. Sound judgment and solid footing still look a long way off for the Eurozone.
Now that we’re sufficiently worried, let’s turn the show back on.
2013 has arrived and Cyprus (Lucile) is on the brink of collapse. Not only has she been spending beyond her means, but she’s also been saving and storing up significant amounts of money that the Russian vodka oligarchs have been giving her for safekeeping (about eight times the size of her own GDP). Foolishly, she gave a large portion of that to George Sr., thinking he was going to invest it wisely for her. She had turned to the Russians for help back in 2012 but good sense finally got the better of her by the end of the year and she turned to the euro family and the IMF (Lucile #2). (Now look up pictures of Christine Lagarde, the actual IMF head. Striking.) After a bit of arguing, they finally agree on a deal in March and yet another member of the family narrowly averts collapse. Looks like the euro debacle will live on to humor and scare us another day.
Next time on the euro crisis:
Gob has thrown out Mario Monti in favor of a comedian (guest star Larry David) and himself, feeling that they can better manage the finances. Meanwhile, Tobias is mired in scandal and the whole family is yet again looking pretty tense… Let’s just hope the Eurozone members still have enough of an economy left that they can watch the upcoming season of “Arrested Development” on Netflix.
Anthony in Africa 