The Europeans Start to Take Their Bitter Medicine
Not much fun being a European head of government right now. Most leaders are making apocalyptic speeches, saying, “Friends, Europeans and countrymen, give me your money.” And that’s pretty much what is happening.
The one trillion-dollar bailout of the euro may have stabilized currency and markets. But even if only partly used, it will leave a humungous bill that has to be paid off. The US is working its way through a similar amount of red ink as well.
However, the bailout is only part of the story. It goes along with huge budgetary cuts by the most indebted eurozone countries, both those who are being bailed and those who are doing the bailing.
The so-called PIIG economies are topping off already existing austerity measures with more. Spain and Portugal have cut the salaries of civil servants by five per cent. But the real hurt will come in the form of pension freezes, withdrawal of welfare benefits and a freezing of government funded construction and general demand decline.
The European governments, most notably Germany and France, that lent money to the PIIGs will also be raising taxes and cutting expenditure. The public of these countries will be particularly irritated because they will perceive their pain as being a consequence of the extravagance of the southern Europeans. They benefited from that extravagance, but that will be an academic issue for them.
And its not just euro countries. The new binary UK government has cut its minister’s salaries by five per cent and frozen their salaries for five years. Budget cuts across the board will be savage and they are preparing the political ground for a lot of fiscal bloodletting.
The Greek and Spanish trade unions will all be marching next week in protest and more will occur as the actual belt-tightening begins to pinch. But there seems to be a sense of fatalism about the whole thing, even among the Greeks. A recognition that they all sinned and must now pay penance of some sort.
But over the next three to four years expect that almost this entire crop of European leaders will bite the electoral dust. They are not all too blame, but they will have to take the blame.
Europe will probably come out a bit stronger for all this in my opinion. (See Charles Grant’s different take in the FT in the next few days. He argues the divide between Germany and the rest of Europe is potentially dangerous to the European Union.) The European Union will now have much stronger oversight of its members budgetary process – no more olive oil sauté of the books. And there is at least
an understanding that the present fiscal imbalances within the European Union are even more unsustainable than those between the US and China. Some individual countries, if they have sense, will use the crisis to push through badly needed domestic reforms – like Spain’s grossly rigid labour laws (which seem not to dissimilar from India’s).
However, what will be done about the long-term uncompetitiveness of the south European nations is less certain. That would require genuine political union and, right now, I can’t think anyone in Germany is prepared to actually absorbing those verdammt Greeks.