On edge

This week I boldly skip right over the County’s shoreline, over the Atlantic to Europe where the ongoing meltdown of financial and commodity markets is threatening to push the world into the abyss.

A short recap of the past seven decades. Europe emerges from a brutal and devastating war—aided by western nations but mostly driven by a desire to get back to work, family and nation building. As the continent becomes prosperous and the economy more robust, business and industry begin looking outward. Increasingly the smart folks in the economy begin pushing for a common European market—the free trade of goods, labour and services across its borders. This is needed to better enable the collective might of Europe to compete against the economic power of the U.S. A common market in time leads to a common currency— the euro. Not all nations get on board but enough do to make a powerful economic force. But here is where things begin to go wrong.

The 17 nations that adopted the euro failed to agree to a common set of rules by which they would manage their finances. Money was one thing—sovereignty quite another. When times were good, this omission wasn’t seen as a problem but rather something to be sorted out down the road.

But then along came a collapse of financial markets in the fall of 2008. The festering problems just under the surface in many European countries were suddenly out in the open. Greece, it turns out, had simply lied about its financial health—masking massive budget deficits in order to gain entry into the euro club in 2000. By 2008 bondholders had already figured out Greece couldn’t pay its debts and abandoned the nation—leaving the mess to governments and their agencies. Then fell Ireland, followed by Portugal. Now Spain needs help to pay the debt incurred by its failing banking system—kneecapped by a mismanaged housing market. Italy’s back-breaking debt puts it next in line for a bailout. France is said to be only a few steps behind.

Some, especially nationalists in the financially distressed countries, see the common currency as the problem. They argue that a return to the drachma, the lira and the peso will allow them to devalue their currency, and in this way make their goods and services competitive overnight. As long as they remain locked in the euro the only path to competitiveness is long, painful restructuring of their economies—indeed, fixing how they do business, collect taxes and administer social services.

Germany and other nations are demanding these actions be taken as conditions upon which they continue to bail out their euro partners. They want to see these nations put their financial houses in order before they put more money in the pot. The average worker in Saarbrucken is having difficulty understanding why they are being asked to pay for the mistakes of their hapless euro partners. Why should the industrious taxpayers in Stuttgart bail out the residents of Athens, many of whom take pride in their skill at avoiding paying taxes? Why should the taxpayers of Munich, who work to the age of 67, fund the retirement of Parisians who are eligible for full pension at 60?

Smart folks say this is the only way forward. Germany and other strong European economies must agree to share the debt of euro countries. Otherwise they warn of Austria in 1931, when the small nation was unable to pay its debts. Stronger nations failed to act decisively to help put out the fire. The first domino fell. Soon other economies failed and the world was thrown into a decade-long depression. Seemingly overnight a penny stamp cost more than a billion marks. Against this backdrop Hitler launched his first bid to overthrow the government. We all know how that turned out.

Some suggest the world stands at this precipice again. As equity, commodity and debt markets sink they insist, with increasing urgency, that Germany and rich nations including Canada and the U.S. must act now to prevent Europe from sinking into disarray. By ‘act now’, they mean fork over more money. Borrow our children’s money if needed.

Perhaps they are right. The lessons of the last 100 years in Europe still echo loudly today. They should not be ignored. But spare some sympathy for the average German resident who fails to understand why he must use up his nation’s resources as well as his children’s in order to bail out his ungrateful and irresponsible neighbours.

Even if Europe sidesteps full meltdown—the ills that grip this continent’s economies will still exist. France hasn’t balanced its national budget since 1974. For nearly 40 years its government has spent more than it has collected. With a new socialist government running the place this trend is not expected to be broken.

In Spain nearly a quarter of its workforce, many of its youngest and best educated, will still be out of work. Italy’s sclerotic economy will continue to repel competition and push jobs elsewhere.

At best, a massive agreement to mutualize Europe’s debts allows the euro project to muddle through. But if those member nations fail to fix their basic problems we will certainly all be back at this precipice once again.

rick@wellingtontimes.ca