At its inception the common currency was going to last for ever, but now it might not see out 2012
In any account of the history of nations there are years that stand out forever. We count among them 1789, 1848 and 1917 for the revolutions they brought; 1914 and 1939 for the onset of world wars; 1929 for the Wall Street Crash; 1989 for the fall of the Berlin Wall.
Each of these convulsive years had a long tail of consequence. The year just ending might fairly claim to be among the most newsworthy and consequential for a generation. But it is 2012 that is more likely to secure a place as a year of epochal game-change.
Recent months have brought a succession of portents and pointers that the modern construct of European institutions is heading for a moment of truth. What were once presented to us as permanent, indestructible stepping stones to ever closer union are working themselves loose. Beware of words such as permanent and indestructible when viewing events in Europe. The Austro-Hungarian empire and the Soviet Union clung tightly to them as they perished.
For almost two years concern has mounted over the durability of the 17-nation single currency. The central preoccupation of finance ministers, central bankers and senior EU officials has been to find a way to defuse the ticking bombs of sovereign deficit and debt that could blow the eurozone apart. Emergency summits have come and gone. Accords have been pronounced and solutions earnestly proclaimed. Yet there is still no clarity as to how a Greek sovereign default is to be avoided or from where the required reserves of bail-out money will come to halt a chain reaction of default and/or secession.
When former UK chancellor Alistair Darling warned earlier this week we are in even more financial danger than ever and that “I just see the situation getting worse and worse”, his words barely registered. This was not new at all, but repetitious – just another roll of wallpaper with the fiery pattern of apocalypse. Altogether more striking were reports of preparations by the UK government: a chilling combination of something portrayed as routine but which could have momentous consequences for all of us.
The reports tell of Foreign Office preparations to evacuate thousands of British expatriates and holidaymakers from countries that may be stricken by a break-up of the eurozone. The Ministry of Defence is also said to have been consulted about evacuation plans should UK citizens find themselves trapped in countries which have closed their borders and where bank withdrawals have been suspended.
In the frontline of this preparation is the Treasury, where reports have been circulating for weeks of contingency planning in the event of a disintegration of the single currency. Key arrangements include plans for the imposition of capital controls. Immigration and border controls would also be tightened.
Cross-border emergency evacuations; curtailment of the movement of money; detailed checks on crossing borders: these are the very opposite of the free movement of capital, goods, services and labour that the European single market was supposed to enshrine. The assumption behind these plans is that there would be a panic-fuelled capital flight as a banking failure took hold. The end result could be a freeze of electronic transfers and a halt to disbursements from hole-in-the-wall machines. And if people have no access to their money, those stricken countries in the eurozone do not just have a banking problem, or a sovereign debt problem. They have a law-and-order problem.
Now these preparations, it should be stressed, are being undertaken only on the basis of “worst-case scenario” and would run alongside similar limited capital controls across Europe that would be invoked to contain the disruption of a break-up and to ease the transition to new currencies.
This does not at all mean that the government believes such an outcome is likely. “Hope for the best, prepare for the worst” is the glib homily routinely trotted out on such occasions: its very banality should surely calm our apprehensions. However, when ambulances and fire appliances suddenly appear at the end of your street and emergency rescue teams fan out across the neighbourhood, assurances to householders that this is merely routine contingency planning cannot but beg questions. That there is nothing remotely “routine” about such preparations is enough to prompt householders to ask why – and why now?
More likely – or so runs the official line – is that such an extreme outcome will be avoided. This can be the result of four possible developments: one, that the 17 members of the eurozone agree to proceed forthwith to greater economic and political union with central oversight of tax, spending and borrowing; two, that massive ECB funds will be made available for the European Financial Stability Facility bail-out kitty; three, that German opposition to such an ECB bail-out will evaporate; and four, that Greece (state debt: $1.2 trillion; budget deficit 14 per cent of GDP) will agree to such a combination of austerity and productivity improvement as to avoid default, create growth and bear down on these horrendous debt levels.
The fact that there is still no resolution despite all the emergency summitry and that the eurozone is set to enter recession in 2012 is a gauge of how credible in the markets any one of these four outcomes now are.
Among the disconcerting truths of Michael Lewis’ compelling book Boomerang is not just the magnitude of the mess we’re in but that the idea of Greece becoming more like Germany is preposterous: national culture and character just do not change overnight. But these are the spent tickets of hope to which the defenders of the euro-zone desperately cling. What fools.
Economic necessity would seem to make a rapid push towards budget and economic integration more likely, however politically unpopular. But even if this prevails short term, how likely is it to last? Such was the confidence in “ever closer union” when the euro was created that the possibility of withdrawal was not even legally provided for in the treaties. But such euro treaties do not have much of a shelf life, as we all now know.
The salvation of Europe would, on the contrary, appear to lie in the overwhelming popular preference for people to be governed locally and by their own people, rather than by supra-national constructs. This is the counter-force that the events of 2012 will unleash as the debt and deficit crisis enters a new and explosive stage. That is why next week we will be in no ordinary year, and in no ordinary new era.