The Dysfunctional Eurozone: Divided it May Fall

The Dysfunctional Eurozone: Divided it May Fall

iStockphoto/The Fiscal Times

The turmoil (and desperation) in the eurozone is such that Monday’s announcement that EU leaders would agree to agree on a bailout for Greece sent world stock markets soaring.  The Standard & Poor’s 500-stock index rose more than 3 percent and the euro staged its biggest one-day advance against the dollar this year.  There is no plan, but rather a commitment to come up with a plan in time for the November G-20 summit.

The rally may have been engineered by those at their wits’ end trying to sort out the continent’s endless dramas and bickering.  No less an authority than President Obama has blamed our faltering recovery on European miseries (as well as on George W. Bush, the Japanese tsunami and numerous other obstacles that Americans have become too “soft” to overcome). He has a point. The uncertainty hanging over the confederation is thick as a London fog; meanwhile, the global economic rebound requires growth and stability in the eurozone. 

European banks are in trouble because they lent money to nations that are in trouble that may have to bail out troubled European banks.  Lewis Carroll could have written this script. Unhappily, the merry-go-round continues. Europe again faces the need to recapitalize banks about to suffer substantial (as yet to be determined) losses on their holdings of Greek sovereign debt. Consequently, the fiscal position of various countries on the hook to steady those banks is precarious.  The failure of Belgium’s Dexia Bank and more recent concerns about Austrian banking group Erste reveal not only the interconnectedness of the problems but also a troubling lack of transparency.  Analysts for some time have cautioned that eurozone banks had not swallowed the bitter write-downs and recapitalizations prescribed for U.S. lenders; it turns out they were right. However, until recently, few imagined that funders of an EU member state would be cut loose.  

Solvency issues aside, there are some further pesky problems that cloud the eurozone’s outlook. For instance, it is widely acknowledged that the citizens of northern countries like Germany and, well, mainly Germany, work harder than others. By contrast, in places like Italy and Greece, where the sun is always shining and the retsina flows like water, sloth takes hold. This profound productivity differential means that “Northern Europe in effect has been subsidizing southern European consumption from the onset of the euro,”  former Federal Reserve Chairman Alan Greenspan wrote in a recent Financial Times op-ed.  This gap, reflected in varying bond yields across the continent, has gone mostly unremarked until now,   perhaps because the assumed EU backstop had never been challenged. Going forward, it could undermine the union.

Another ticklish and distinctly euro-centric issue surfaced earlier this week, when it developed that the future of the region’s effort to stabilize Greece, which portends the future of the federation itself and just possibly the entire Western world, rested on the shoulders of Richard Sulik. This was a great surprise to everyone, including Richard Sulik, who leads Slovakia’s Freedom and Solidarity Party, part of a four-party coalition in Slovakia. 

Sulik does not approve of the proposed $600.34 billion rescue package. A self- made millionaire, apparently a rarity in Slovakia, he believes in free markets and is described as a libertarian. (Think Ron Paul with a foreign accent.)

After he dug in his heels and refused to budge, the plan was rejected by the Slovakian Parliament Tuesday evening, although a second round of voting is considered likely. To enlarge the fund, every one of the 17 countries that use the euro must agree; currently, Slovakia is the sole holdout. This might be described as an “oops” element in the organization of the eurozone.
A more significant “oops” for the federation is of course is that the English never adopted the euro even though Great Britain is part of the EU. Having the U.K. more firmly entangled in the EU web today would bolster France and Germany, on whose sagging shoulders the federation’s financial troubles so firmly rest. The English are, of course, delighted to have been spared. 

One group that pushed for the common currency was the U.K.’s Labor party; don’t imagine that the Conservatives haven’t been cheerfully rubbing their opponents’ noses in that history. In a recent speech to his party’s annual convention, Prime Minister David Cameron made a point of reassuring his countrymen that during his watch the U.K. will never, ever, abandon the pound. In the future, strong countries will doubtless avoid the euro like the plague as those with less solid finances aspire to jump aboard.

The eurozone’s problems are rippling through the world’s economy. Growth across the region has nearly ground to a standstill, further weakening the individual countries’ fiscal prospects, and slowing global trade.  Europe must adopt a program not only to shore up the federation’s banks but also to constructively corral the fiscal policies of its weaker members; let us hope they indeed have a plan by November 3, the date of the next G-20 meeting.   That seems a tall order for a group that is now divided on just about everything.