Rome became the latest European capital to feel the wrath of the mighty bond markets last week, when a political wobble over austerity measures was punished by a threatened downgrade from the ratings agencies. For ordinary Italians, the result was tax rises, higher health costs and lower pensions.
As the eurozone’s leaders prepare for yet another crisis meeting next Thursday, their room for manoeuvre is limited — not just by how much more austerity the ratings agencies will demand from debt-burdened member states, but how much their own voters will bear.
It’s not just the economics of the eurozone that risk tearing it apart but the increasingly fraught politics. Not only does the Brussels elite need to agree among itself, it has to sell any solution to the eurozone public.
In other words, politicians must convince German, Dutch and Austrian taxpayers that it is worth signing up to some kind of Europe-wide rescue fund — or even a common euro bond — to keep the single currency alive, while persuading the Spanish, Portuguese, Greeks and now the Italians to keep taking the pain.
In the short term, leaders must come up with a convincing solution for Greece. It desperately needs a fresh bailout, and some form of “selective default” on its debts may be unavoidable; but there is still no agreement about who will bear the costs and the European Central Bank still insists that it is unthinkable.
A series of plans, including French proposals to exchange expiring bonds for new loans, and a separate German debt-swap proposal, have so far come to nothing.
Friday’s stress tests of European banks revealed a bumper bundle of new information about the health of the sector; but they didn’t calculate the likely impact of a Greek default.
As Andrea Enria, the leader of the European Banking Authority, carefully put it at Friday’s press conference, “a further deterioration in the sovereign crisis might raise significant challenges”.
At the same time, eurozone policymakers must think about how to tackle the longer-term problem of the unsustainable debt load spread through much of the single currency area.
If they concede that a Greek default is acceptable — and force banks to pay part of the price — the spotlight will rapidly turn to the bailed-out economies of Portugal and Ireland, closely followed by Spain and Italy.
That would probably require a Europe-wide plan, including recapitalisation of banks across the single currency area, and acceptance that many of the investments made in the good years have since turned sour.
“What they should really be doing is to say ‘the public sector needs to take a haircut, the ECB needs to take a haircut’. Only then will we have a chance of resolving this,” says Graham Turner, of consultant GFC Economics.
The logic of the current approach seems to be to delay any default until as much of the debt as possible is held by states instead of the banking sector.
The European stability mechanism (ESM), which comes into play in 2013, does envisage the possibility of default on future sovereign borrowing, potentially providing a get-out clause.
Yet the details of the ESM remain sketchy and there is a cost to delay: as our foreign correspondents discovered when they asked some of the eurozone’s voters last week what they thought of the patchwork of bailouts, cutbacks and frantic summitry. Voters are bitterly divided about what should happen next, who should pay, and who is to blame.
The passage of time — and of one cuts package after another — could increase the chances that voters in either the austerity-hit periphery or the indignant core could decide that enough is enough, and force their political leaders to walk away from the euro.
The view from Europe: Italy
Italian politicians peppered their speeches this week with the words “Greece”, “contagion” and “speculators”, but as the eurozone crisis threatened to engulf Italy the public preferred to point at politicians and utter words such as “crooks”, “idiots” and “fat cats”.
Rather than blaming Italy’s flirtation with financial meltdown on neighbouring Greece and the dithering in Brussels, an Observer straw poll showed most Italians were happy to blame their leaders for Italy’s painful austerity budget packed with pension cuts, higher medical charges and tax rebate reductions, which is designed to keep the markets at bay and will cost the average family €500 a year.
“Greece is just an excuse,” said taxi driver Sergio De Carni. “These cuts have been forced upon us by the usual caste of politicians seeking to keep their own privileges.”
Given that its banks are in good shape and its budget deficit is down, Italy had a right to feel hard done by, as stocks crashed and its bond yields ballooned last week, but it remains hostage to the €1.9-trillion public debt built up by successive governments, the “monster” from the past ready to “devour our future and that of our children”, as treasury minister Giulio Tremonti described it.
And the present crop of politicians has not made things better. When a measure was slipped into the budget to liberalise the cosy world of Italian lawyers — part of a drive to unshackle Italy’s underperforming economy — MPs threatened to sink the budget.
Markets looking to Tremonti to wield the axe were alarmed to see Silvio Berlusconi sniping at his finance minister’s new budget as he sulked on the sidelines following years of doing little to reform the economy and loudly claiming Italy was crisis-proof. To the eight million Italians, or 14% of the population, living in poverty, the crisis is close at hand.
“Restaurants and shops are full of Italians making payments in instalments and eating into the savings their parents built up decades ago,” says Gianni, a government employee who takes home €1 100 a month.
“The lawyers elected to Parliament are taking care of themselves but if this budget means I have to stop spending money, how will the economy pick up?” he says.
As the shutters come down on thousands of small family-owned high street stores up and down Italy, they are being replaced by slot-machine parlours, with hard-working Bergamo now boasting 7 000 slot machines, up 40% on last year. The new gambling licences are a cash machine for the government, but gambling addiction is soaring as Italians seek to turn their last few euros into a fortune. In the region of Lazio around Rome, 70 000 Italians are believed to be in hock to loan sharks.
“Parliament is full of rascals and the future is grim,” said Emiliano, a tarot card reader on Rome’s Via del Corso. “People are scared, which means business is up for me, but the questions I get asked are different. They used to be about love, but now all they want to talk about is work and money.”
Compared to most of the rest of Europe, Germany is booming. Its export-driven economy is set to grow by 3.2% this year, according to the IMF, and the high unemployment level is almost down to post-reunification levels. Yet the mood is far from celebratory. The latest polls show that the ruling coalition’s support is eroding. And there is widespread unease at the fact that the country, the biggest and richest in Europe, is now being asked to contribute the lion’s share of the funds to bail out Germany’s profligate neighbours. Germans want to know why they have to rescue spendthrift nations when they have been so prudent themselves.
Mathias Böhmers, a 56-year-old self-employed electrician from Berlin, doesn’t see why Germany should be forking out to help Greece and Portugal. “I take responsibility for myself without needing to have the state help me,” he says. “I could go for us helping really needy people in a country. I don’t think we should help an entire country — rescuing an entire country is a bit too much.”
Student Nico Lang says he doesn’t mind that Germany is helping out other EU countries. “But they do need to get their house in order. I feel sorry for what they are going through, but they brought it on themselves.”
Jacqueline Ruge (44) a bookkeeper from Berlin, says she understands the need to help out Germany’s neighbours, but this generosity should not be abused. “When I think of my own family, I have to be responsible for our finances. If I can’t afford something, then I can’t afford it.”
Jonas Bröcke, a 20-year-old heating fitter, thinks Germany can afford the bailouts but has a problem with countries that have not dealt properly with their economies. “What you hear is that there’s all these people doing work under the counter and things like that. Well, I have to work myself and I pay taxes, rightly so.”
Rudi Böhm, a pensioner from east Berlin, reckons the southern European countries were offered favourable conditions to join the EU. “They got cheap credit and lived off this. The governments there have botched it but it’s the ordinary people who have to pay for it.”
While tens of thousands have protested against the austerity measures imposed by the ECB and the IMF, there has been little or no violence on Irish streets compared to Greece.
Dublin-based novelist Ed O’Loughlin says that perhaps one reason why the Irish are proving so docile is that for the first time in centuries the British can by no stretch of the imagination be blamed for their problems.
The author of the political satire Toploader adds: “The lack of clearly stratified classes — as they have in England — breeds insecurity, a fear of losing caste, of being pushed outward. To protest at the rules of this game would be an admission that you no longer have a hand to play in it; that you are a loser and a sucker.”
At times of mass emigration, just staying in the country was felt to be a victory in itself, although often a pretty hollow one.
“The fact that everyone’s class system is centred exactly on themselves tends to make people, naturally, very self-centred. The Irish term for this is ‘mé féin-ism’, or ‘myself-ism’, a play on Sinn Féin, or ‘we ourselves’. Mé féiners do not stand together for the common good. They are not good citizens.”
Dublin barber-shop owner Arthur McGuinness said he could see no end in sight for the recession, despite the billions pumped into the Irish economy from the ECB and IMF. McGuinness added that the republic was better off when it had its own currency, the punt.
“At least when the punt was around we could control our own interests.
When our boom started we were still using the punt. I don’t think being in the eurozone has worked for Ireland. I and other small business people wish we could go back to the punt. The British were right to stay out of euroland.”
John Kearns, who went abroad in previous recessions and now works in Dublin’s Irish Writers Centre, says it is too early to rule out social unrest. “It’s quite possible there will be Greek-style riots. The cuts are affecting people now. People are having their utilities cut off. I know of families, a mother of two, who had their electricity cut off. People can’t take that lying down.
“And there is still a mortgage crisis coming down the track with increasing interest rates that are coming later this year.
“I can certainly see social unrest ahead, although I don’t see what can be achieved by it. It’s strange that the main demonstrators so far have been pensioners and students rather than industrial workers. The workers so far have been far quieter,” Kearns said. – guardian.co.uk