Bill Jamieson A moment of truth for the euro

COMMENT

BILLJAMIESON | Executive Editor of The Scotsman

A moment of truth for the euro (another one)

Business confidence and investment will never recover until this uncertainty is ended.

Which is the more unpleasant experience – a visit to the dentist’s for root canal treatment, or keeping up with news from the eurozone? Having recently been through a course of treatment I would say that visits to the dentist’s are preferable. The anaesthetic is effective, the technology of treatment ever improving and the hit on the wallet, though acute, wears off after a time. It is unpleasant. But the discomfort is finite.

Not so the eurozone. We are now into the third year of acute and throbbing pain. There is no anaesthetic to speak of; the treatment – the subject of endless bickering and dispute among the surgery staff – has proved useless. The agony is getting worse and there seems no end to it. As for the bill, it is colossal beyond measure.

Week after week, month after month, nothing has more sapped business confidence across the Western world than the deepening crisis of the eurozone and the ever more worrying prospects of bank credit downgrades, a mass banking panic, a default by Greece, a knock-on effect on Spain and a most disorderly exit from the single currency zone. Indeed, the other day I heard it seriously argued that the best prospect for the survival of the euro would be the most disorderly Greek exit conceivable, thus scaring the remaining member countries into a state of rigid compliance with the fiscal stabilisation pact. This is what now passes for a ‘solution’.

The outcome of this crisis is impossible to predict. But what we do know is that the longer it continues, the greater the economic damage. A massive hit is being felt on business confidence across Europe generally and thus on business investment and recovery. Europe’s corporates have already amassed big cash balances as investment and acquisition plans are put on ice and purchasing orders deferred. Exhortations by politicians to invest fall on deaf ears while the fate of the European single currency is now fought out between paralysed eurozone leaders and national electorates now in growing revolt against austerity economics.

The ‘eurozone crisis’ has now become the defining event of our time. Even if, by yet more fudge and nudge patchwork, its resolution is deferred for another few months, its impact on the course of European economic history will be profound.

The outcome of this crisis is impossible to predict. But what we do know is that the longer it continues, the greater the economic damage.

Tough questions

This debacle has brought deeper questions to the fore. Can modern liberal democracies cope with periods of government spending reductions for any length of time? Has high welfare spending brought such a sense of right and entitlement that debt and deficit reduction cannot be undertaken with any degree of consensus? And what are the means by which economic growth can be achieved that does not involve a continual ratcheting up of debt?

For all that Europe has grown top heavy with governmental and political institutions attended by an elite of comfortably well off advisers, regulators and analysts and officials numerous enough to fill football stadia, this huge machinery of governance is no nearer to understanding, still less creating, the sources of economic growth. The working assumption for a generation has been that ever rising government spending and borrowing would keep economies on a growth tack and bear down on unemployment and social ills.

Grafted on to this was a conviction that a politically determined common currency would speed both political integration and economic efficiency. The very opposite has proved the case. The eurozone has now come to the brink of collapse because of deep flaws inherent in the ‘one size fits all’ approach across 17 different economies and national tax and spend policies.

This entire approach is now in ruins. Eurozone policymakers scramble to keep the crumbling edifice intact as the prospect of a Greek exit widens the cracks in Spain’s tottering banking edifice. But they lack both the will and the means to act decisively and effectively. It took the US administration weeks to put together the famous Hank Paulson ‘bazooka’ to staunch a financial meltdown in 2008. The eurozone is now in its fourth year of an endless series of crisis summits, patchwork solutions, fudged deals and grandiose proclamations of successful resolution before markets are back on the slide.

In this worst of outcomes for the disastrous single currency project there are two glimmers of hope. The first is that, confronted with the spectre of financial and economic collapse, there will be a long overdue recognition that endless rises in welfare spending cannot continue and that it is enterprise and innovation that provide the best hope of meeting the Asian economic challenge.

The second, related to this, is the importance in the southern European countries of the informal economy and the income and employment generated by businesses out with the formal economy. Any new economic disposition in Europe will have to give greater recognition of the dynamics of this sector and less – far less – on the maintenance and upkeep of a eurozone governmental hierarchy that has become utterly overblown. n