Comment: Defaults don’t spell disaster
IS IT really “Eurogeddon”? Or should we all calm down a little? There’s no denying now that a showdown moment in the Eurozone crisis is close at hand.
But might it present, rather than the end of the world in common portrayals, a moment of profound liberation and relief, to be recalled in much the same way as we in Britain look back on our expulsion from the Exchange Rate Mechanism in 1992? Few recall that now as a disaster, but as “White Wednesday”: the date of deliverance when a long recovery set in.
Whatever may unfold in the next few weeks, the Eurozone crisis has reached a momentous inflection point. Either it must move, immediately and decisively, towards fiscal integration – with the tax, spending and borrowing policies of the member governments brought under a common set of rules and supervised from the centre – or one or more countries are set to leave the single currency, with massive implications for banking and finance across Europe.
The weakening of the European Commission’s power to influence events is one of the many signs of the ongoing disintegration of the European Union and its institutions. The real game-changing consequence of a break-up is likely to be more political than economic: the dream of Europe’s political elites of “ever closer union of the peoples of Europe” would lie in tatters.
Little wonder then that the architects of the single currency, the “euro-crisis summit” junkies of Brussels and Strasbourg, and their bouncing caravan of apologists are apoplectic at this prospect. Last week Olli Rehn, the EU economics commissioner, warned of a “disintegration” of the Eurozone. Mario Draghi, the president of the European Central Bank, described the current Eurozone set-up as “unsustainable”. The political construct, which the Euro elite championed and over which they refused to countenance doubt, may indeed now be in tatters. But the fate of the underlying economies and their ability to recover should not be similarly written off.
Fortunately, events are no longer being driven by the Euro elite but by a momentous capital flight, first out of Greece and now under way in Spain. The people are voting with their wallets – and the rotten banking systems created by the euro are being drained by the day.
For the past three years, the Eurozone crisis has corroded an already fragile business confidence across Europe and the advanced industrial economies. Businesses here in Britain have built up enormous holdings of cash. Pension funds have been pulling out of stock markets and are fearful of investing.
This confidence corrosion has intensified by the month as the euro crisis is played out daily in the press and on television. And until the boil is lanced, it is impossible to develop any view as to what life might be like in the aftermath. “Europe can’t go on like this” is the common refrain. But there is no clarity at all as to what a post-crisis Europe may be like, other than the blackest prophesies of chaos, panic and economic destruction. All we can see – or we are told we can see – is a medley of horrors, a slow-motion train wreck or the approaching Horsemen of the Apocalypse. Take your pick.
But is this really the end? Or a traumatic passage that could set in motion a resurgence and recovery that would consign those euro-crisis summits and their processional train of attendants, problem-deniers and can-kickers to the dustbin of history?
In any broad sweep of global economic history, one of the most outstanding features is the frequency of sovereign default. I am grateful to Jonathan Compton, of fund management group Bedlam Asset Management, for the accompanying table of country defaults – rather more common than the airbrushed histories of Europe have admitted. Spain has experienced 18 such defaults or reschedulings, Portugal seven, Greece five.
And Mr Compton also reminds us that 2 July this year marks the 15th anniversary of Asia’s bone-jarring economic collapse. Thailand’s banking system was decimated. Singapore and Hong Kong had to resort to massive economic and stock market intervention. South Korea endured a virtual shutdown of international banking, while Indonesia and the Philippines suffered currency collapse. Anyone who predicted an Asian renaissance on an unprecedented scale within a few years would have been dismissed as hopelessly deranged.
Yet not for the first time, and not for the last, economic events turn out to be the opposite of the received wisdom.
There is no doubt the process of default and break-up will be economically and socially disruptive and painful. Yet, as Paul Krugman has argued, a Greek exit would at least offer some hope of recovery for its economy.
I come to a similar conclusion but by a different route. It is only through default and departure that the necessary restructuring and recovery can take place. Recovery post-default would, says Compton, be driven by a reversal of capital outflows; foreign businesses would see the opportunity of competitive wages and a weak currency; governments, anxious to secure recovery, would modify or scrap labour market controls and regulation for the SME sector; Italian car maker Fiat could see its cost base halve.
Break-up would be a shattering, energy-releasing, liberating, Schumpeterian moment of creative destruction: the beginning of a powerful recovery and renaissance for the peoples of Europe.
Like our own “White Wednesday” in September 1992, it would be marked in subsequent years by a sense of merciful release and as the date when recovery from recession began.
Defaults are destructive. But they are also the enablers of a new economic order.
Finnish noir: bring it on
BUT not all in the Eurozone is debt-sodden and in crisis. Last week in Edinburgh I had the pleasure of meeting Pekka Huhtaniemi, Finland’s ambassador to the UK, before he had an audience with First Minister Alex Salmond. Mr Huhtaniemi was leading a trade mission of leading Finnish business figures on a two-day visit to Scotland.
Mr Salmond could learn from Finland, a country with a similar-sized population to ours and a commitment to high welfare spending. It has a debt-to-GDP ratio of 48 per cent (lower than Germany), a budget deficit down from 2.5 per cent of GDP to 0.5 per cent and a triple-A credit rating. Unemployment is lower than ours at 7.7 per cent and growth last year hit 2.9 per cent. “I love both austerity and growth”, declared its EU minister Alexander Stubb, “but I can’t stand deficit-driven growth”.
Bring it on. All the country seems to lack to attain cult media attention here is a dark crime drama series dripping with Scandinavian noir to match The Bridge. But two hours of Finnish austerity with subtitles after 9pm – could we bear it?
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Weather for Edinburgh
Saturday 25 May 2013
Temperature: 6 C to 17 C
Wind Speed: 13 mph
Wind direction: West
Temperature: 9 C to 16 C
Wind Speed: 14 mph
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