Bill Jamieson: Europe should pray for miracle

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AND now comes the reckoning. After a dramatic week of crisis, culminating in a thumbs-down to pleas for emergency IMF super funds, the worst still lies ahead for the Eurozone.

Miracles, of course, could still happen. Over the next few critical days, Greece may avoid a political melt-down if a government of national unity is formed that will implement the austerity plan agreed at the Eurozone summit less than two weeks ago.

Let’s assume also that over the next few weeks a similar government of national unity is formed in Italy. Let’s further assume that the IMF gets in to inspect the books in Italy, that there is agreement across all 17 member states for the Eurozone financial firewall plan, that the German parliament agrees to go along with it and that the European Central Bank will continue to buy Italian sovereign bonds.

In other words, let’s assume the Eurozone buckles down to solve the problems it has uniquely created for itself.

Oh, and let’s assume that the Eurozone avoids recession.

Even if the sun and the moon shine down as never before from here, the credibility of the single currency and those entrusted with its stewardship is shot beyond repair. It is hard now to type the word “euro” without millions of PCs automatically prompting to insert the word “crisis”.

A crazy experiment in monetary union, driven not by economics but by political ambition, has come hopelessly unstuck – with potentially catastrophic results for the world.

A resort to fresh elections by Greece may further delay the implementation of the Greek bail-out package. Eurozone leaders have already withheld ¤8 billion (£7bn) of fresh rescue loans to Greece and there are fears that further delays may see the government run out of cash and default on its payments. And a non-voluntary default would trigger a devastating chain reaction through the European banking system.

Monetary union was the construct that was to drive political union – rather than the other way round. That was the fatal flaw. It promised monetary stability, convergence of sovereign bond interest rates, closer economic integration and through these, more inward investment, and a higher rate of economic growth.

Each one of these laudable goals now lies crushed beneath a suffocating mountain of sovereign debt. Far from cementing in broad political convergence, progressive “solidarity Europe” has been blown apart. German voters deeply resent having to bear the costs of bailing out weaker members while Greece, faced with an austerity plan that offers no prospect whatever of economic recovery, is now in its most severe political crisis since the military coup of 1967. Who dares hazard a guess as to where the euro will be a week from now, never mind a year?

And how long can the same discredited EU leaders keep turning up at those discredited summits, only to pronounce yet more platitudes to disguise a failure to take the resolute action needed? Their performance throughout has been worse than lamentable. And that some are now blaming Germany, with its moderate government deficit for “inflexible attitudes” and the European Central Bank for not being “co-operative” in printing shedloads of money, reveals how this appalling experiment is now close to intellectual as well as financial bankruptcy.

The failure of Eurozone leaders to persuade the G20 summit in Cannes last week to create a massively enlarged IMF fund and thus get France, Germany and others off the hook, is another watershed moment. As if the vagueness and lack of detail of the Eurozone’s plan was not sufficient cause for doubt, the Greek prime minister went on to deliver a killer blow. Even with his referendum plan now scuppered, huge damage has been done and Greek compliance cannot be taken for granted.

Who can blame European voters now for feeling shut out of what may now degenerate into a desperate rush to fiscal union? What vengeance might they chose to wreak? More immediately, to whom might those in the debt-stricken countries now turn when the austerity programmes to which they are being forced to submit as the price for staying in the euro remove all hope of recovery for the foreseeable future?

Now, amid public rhetoric about “saving the euro”, there is a tacit admission that Greece at least may now be “let go”. This is a Rubicon moment. Finance ministries across Europe and beyond may well now be working on top secret contingency plans to deal with the possibility of an Italian default.

Economic chaos brings us dangerously close to social and political breakdown. No-one wants to see Europe revert to the dictatorships that prevailed for much of the post war era, still less to expose Greece to the risk of another period of rule by the police or military. But a brief revisiting of the economic record of those times is soberingly instructive.

The infamous rule of the colonels from 1967 to 1973 was also marked by high rates of economic growth coupled with low inflation and low unemployment. Growth was driven by investment in tourism, loose emigration policies, public spending, and pro-business incentives that fostered both domestic and foreign capital spending. Several international companies invested in Greece at the time. In addition, significant infrastructure development, took place.

Portugal under Salazar saw its GDP per head rise at an average rate of 5.6 per cent a year, making it, according to some calculations, the fastest growing economy in Europe.

The economic record of Spain under Franco was more mixed. A stabilisation plan in 1959 was deflationary and recessionary. Half a million Spanish workers chose to emigrate. But by the end of the year the country was able to show a current account surplus. Foreign capital investment grew sevenfold between 1958 and 1960. Tourism boomed. Foreign aid also played a big part in economic expansion, while foreign direct investment and the hard currency remittances of one million Spanish workers abroad also helped to support the current account.

No-one, I repeat, wants to go back to these times. But they are instructive in this respect: in periods of acute crisis, the economies of Europe were capable of resilience and recovery. Conventional routes such as devaluation are now closed off. Only a combination of credible governments, independent monitoring of the books, a shrinking of huge public sectors and tax cuts to stimulate recovery offers any prospect now of escape. As for the next few weeks – pray for miracles.