|"Los indignados" demonstrate in Madrid|
We cannot ignore the weighty events going on around the Murdoch empire, which are at least starting to wobble, if not rock, the foundations of the British Establishment. But these are heady times. We – and it seems, even the European media, also obsessed with NewsCorp – have rather taken our eye off the ball regarding an even larger drama unfolding elsewhere, which affects the lives of many, many more millions of people. And which has far greater long-term implications, as Jon Snow observed yesterday.
The Euro crisis, as former US Treasury Secretary Larry Summers put it on Monday, “has entered a new and far more dangerous phase”. For one thing, he notes, the sheer debt repayments already involved for Portugal, Greece and Ireland are approaching, if continued at market rates, World War I reparations levels. Well, you may remember what happened after that: the Weimar Republic and the rise of European fascism. Interestingly, he proposes a solution which does not involve the tax systems of the Euro countries to be joined up in any way, which many have stated to be a sine qua non. But the real problem, as Summers points out, is finding the political will.
Today’s Berlin summit – or another, even more desperate one very soon – will likely decide the future direction of the European Union, if not its very survival in its present form. The Euro-zone at its heart must reform or die. And the prognosis of the patient is poor, unless politicians can get their act together.
Some background: Portugal, Greece and Ireland have already been bailed out, but still have strong possibilities of default. And, much more worrying, last week Italy – a far bigger economy – looked in serious danger of joining the party. How could it possibly get worse? You have only to think about where many of you will shortly be going on holiday.
Spain, which has consistently over the last year had even higher borrowing costs than Italy, yesterday increased them further. Despite making some slow progress towards its austerity targets and some very modest growth this year, its economy is still a bit of a mess. It has stubbornly high unemployment hovering around 20%, is swimming in debt and its vital, longer-term economic reforms – such as the labour market – are going painfully slowly.
Well, as long as people have confidence that the country is moving in the right direction, you’d think, things could still turn out fine. But they don’t. The timing of the Euro crisis couldn’t be worse for Spain.
In recent weeks, uncertainty about the country’s political direction has further increased. Its unpopular Prime Minister, Zapatero, has finally agreed to step down after next year’s elections (which may be brought forward, further increasing uncertainty). This leaves him a lame duck and the administration half-paralysed. His anointed successor Rubalcaba, although competent, is unlikely to win, according to the polls (and even if he did, would probably be poorly-placed to make the really tough economic decisions required in time). So everyone has, till now, been looking to the conservative PP to sort out the economic mess.
However the PP now has its own troubles. As of a few days ago, party leader Rajoy is now once more mired in the slow-burning scandal of the “Gürtel case”, which threatens to swamp his party. Camps, the sitting PP President of Valencia, looks likely to be convicted of corruption. If Camps falls, it seems difficult to imagine the already fatally uncharismatic Rajoy, who has supported him, becoming Prime Minister. And if not, he will serve as an unpleasant reminder of how a certain level of corruption in Spanish politics is accepted.
So, who is going to sort out this mess? No-one knows. It’s not surprising the country is fed up with its politicians and confidence is rock-bottom. Hence, the recent mass sit-ins in Madrid and Barcelona by the indignados – the indignant ones – to protest at government, globalisation, corruption, the economy and just about everything else.
Not exactly the kind of backdrop you want, if you could be the lynchpin country in the middle of a Europe-wide crisis. Worryingly, it only takes either Spain or Italy to fall for the Euro to enter a life-threatening crisis. And the only long-term solution, many say, is to agree some kind of fiscal or political union between countries which seem unable to agree on the length of a sausage, let alone a massive, international, politico-economic project.
Finally, as Europe burns, it seems that its politicians are fiddling. Cameron is up to his neck in Hackgate and doesn’t see it as his problem. Merkel is already managing down expectations from the summit. Berlusconi is part of the problem, not the solution. Only Sarkozy, as current European President, seems to be trying to get things moving to avert disaster. And, finally, don’t forget that this is taking place against a background of global instability caused by the Capitol Hill impasse on US debt.
Meanwhile, as you read this, the speculators are calculating probabilities and waiting to dive in, to sell the debt of those countries whose arguments they do not believe. Weakness and hesitation in supporting a country’s debt with credible reform packages can easily cause default to become a self-fulfilling prophecy.
In short: the prospects for a pain-free solution to Europe’s debt problems are currently very poor indeed. And the results of political failure are likely to make Hackgate look like a tea-party.
A storm is coming: count on it.