Alarming newspaper headlines greeted me at London’s Heathrow Airport on my arrival from the Balkans yesterday. The Daily Mail led with the EU President’s warning that “Ireland’s debt crisis could kill the European Union stone-dead.” The Independent’s front page (“Ghost estates and broken lives: the human cost of the Irish crash”) was accompanied by a photo that could have been made in Soweto. “EU left ‘fighting for survival,’” announced the Telegraph.
Having spent two previous weeks in Serbia, Croatia and Bosnia-Herzegovina—where the rhetoric of “European Integration” is still tirelessly parroted by the political class—I was amused to see that the Brussels-registered “Titanic” was performing, yet again, as expected by those of us who would not be sorry to see its demise.
The latest news is that the crisis has been contained. A team of officials from the European Commission, the European Central Bank and the International Monetary Fund came to Dublin with an offer that could not be refused. Ireland is now a state with its sovereignty as limited as that enjoyed by the German Democratic Republic before November 1989. This outcome was also expected, and in the next few days we’ll see many reassuring statements by various EU bureaucrats and Bundesbank officials that the Eurozone is safe and sound.
The underlying structural problems of the euro and of the European Union project itself remain unresolved, however. It was Greece yesterday, it is Ireland today, and with Spain, Portugal, and possibly even Italy, the question is “when,” rather than “if.” The Euro-IMF bailouts will be repeated, with ever greater losses to private bondholders, ever greater hardship to the inhabitants of the Eurozone PIGS (Portugal-Ireland-Greece-Spain), and ever-receding prospect of the experiment’s long-term viability.
The collapse of the single European currency was averted five months ago, following the Greek rescue operation and the establishment of the €440 billion European Financial Stabilization Facility (EFSF). The euro went up from $1.19 in June to $1.41 three weeks ago. Yet only last Tuesday EU Council President Herman Van Rompuy admitted that the EU was “in a survival crisis” and its future uncertain. His words were tantamount to an SOS signal directed at Germany, and German Chancellor Angela Merkel responded reassuringly by declaring that “if the euro fails, then Europe will fail, and with it fails the idea of European values and unity.” Her words reflected the consensus in Berlin and Frankfurt that the cost to Germany of another rescue is well worth the benefit of bringing the Union ever more tightly under its fiscal, economic, and political control. In other words, the Germans remain committed to an ever-tighter Union, controlled by themselves, and they are willing to endure financial costs in achieving it.
As the Financial Times noted, also last Tuesday, the result will “give an official EU imprimatur on Europe’s dirty secret: public treasuries will do anything to make private bank creditors whole.” Their ability to continue doing so indefinitely is far from certain, however. The following day the FT warned that the Irish crisis may herald further “contagious defaults”: there is but “little hope that the other ticking bombs with which Europe’s economies are riddled are going to be disarmed in time.”
The process will continue until the euro is taken apart, or until the four PIGS are expelled from the Eurozone. This may not happen in the next few months but it can hardly be avoided. It is noteworthy that, unlike the Greeks, the Irish had enjoyed two decades of strikingly successful growth before 2008. Its government tried to behave responsibly (unlike its counterparts in Athens) and applied painful austerity measures. As Matthew Lynn of Bloomberg’s London bureau explains, the problem wasn’t Ireland—it was the euro:
When the euro was launched, it was a big bet that sharing the same currency would make a group of very different economies converge, and so allow the European Central Bank tooperate a single monetary policy for all of them. It was an interesting theory, but it turned out to be wrong. The economies are just too different to allow a single central bank to manage all of them. Interest rates are always wrong everywhere. How that expresses itself varies. In Greece, it was a fiscal crisis. In Ireland, a banking collapse. In Spain, a construction bubble that burst. In Germany, a massive trade surplus. But, like a river looking for the sea, it always comes out somewhere. This crisis will keep moving from country to country. The only permanent fix is splitting up the euro into more manageable currency areas.
Until the euro area’s leaders recognize that simple truth, Lynn concludes, every bailout they come up with is only going to shift the attacks elsewhere.
The continued will of the German political and financial establishments to continue maintaining and extending their dominance over “United Europe” as a substitute for the failed past attempts at open continental hegemony is the key. Even if the political will of the country’s elite class remains strong, Germany’s ability to underwrite the bailouts will be severely tested if Spain and Portugal join the fray some time in 2011.