Friday, 4 November 2011

Who is the villain in the eurocrisis movie?

Cannes has seen its fair share of cinematic flops over the years. But this red carpet-laden city on France's south coast has never seen a political flop like the one it witnessed over the past two days. It had all the elements of an edge-of-your-seat political thriller: high stakes, sudden plot twists, personal rivalries and looming global disaster. But who is the villain in this particular script? Today there was plenty of finger-pointing to go around.

The leaders of the world's 20 richest countries intended to come to Cannes to come up with a solution to global economic crisis which is quickly spiraling out of control. But a shock announcement Tuesday from the Greek prime minister that he would hold a referendum on Greece's acceptance of the bailout package worked out last week changed all that. The resulting outcry threw the Greek government into disarray, putting it near collapse - which could have precipitated a global emergency. The leaders of the 20 richest countries in the world ended up working out nothing, spending the entire summit glued to their blackberries waiting for news from a tiny country in the Mediterranean.

The leaders left Cannes tonight with nothing to show for their meeting. No plan to save the eurozone, no funding, and no consensus. Indeed the G20 summit has ended with the world in a worse state than it was in when it started. Europe, and the world, could be just days away from economic collapse if the Greek government collapses tonight in a no-confidence vote scheduled for midnight.

So who is to blame for all this? The obvious culprit, both from the beginning and this week in particular, is Greece. But though Greek Prime Minister George Papandreou's snap decision to hold a referendum may be mystifying, he and his Socialist party have done nothing to create this crisis. Since they came into power they have only been trying to fix what the previous Conservative government did. One would be hard-pressed to not feel a bit sorry for Papandreou, who came into office in 2009 to get the shock of his life when he learned the previous government had been cooking the books.

But Greece is fast becoming only a bit player in this drama. All eyes are now turning to Italy and its beleaguered and reviled leader Silvio Berlusconi. Yields on Italy's bonds rose to euro-area highs this week, prompting fears that the country may be just days away from collapse. Italy is the third largest economy in the Eurozone and it is too big to bail out, so a collapse of Italy's borrowing ability would likely spell the end of the euro and a global financial crash. But Berlusconi, who does not seem to be in full grasp of reality at this point, is almost literally fiddling while Rome burns.

With his black coat wrapped around his shoulders, Berlusconi seemed the ultimate archetypal villain in Cannes. The degree to which the rest of the world's leaders don't trust him was on display today when they forced him to accept IMF monitoring to make sure he actually implements the austerity reforms he promised last week. His deep humiliation over this fact will likely only make his behavior more erratic in the coming weeks.

There are a host of Southern European leaders who are easy to point fingers at in this disaster. But can the real villain be found further north, in the land of lederhosen and beer steins? Reports coming out of Cannes this week indicated that the US is getting increasingly frustrated with Germany because they see them as the real problem that is blocking a solution to the euro crisis.

After all, the EU has the resources and the ability to solve the euro crisis tomorrow if they wanted. They actually have enough money to build a firewall around Italy and Spain to prevent contagion to those countries - if they had backing from the European Central Bank.  The UK, US and France have all been pleading with Angela Merkel to agree to let the ECB put its economic might behind the bailout. And China has also told them this, most notably when they last week declined to participate in the €1 trillion EFSF bailout fund, pointing out that Europe has the capacity to shore it up itself with the ECB. But Germany regards such a move as antithetical to the precepts of the ECB, the successor to the very conservative Bundesbank. They say the ECB must be kept independent, acting only as a regulator of currency and interest rates.

Of course the ECB isn't technically controlled by Germany, although it is based in Frankfurt. In fact the ECB as of a few weeks ago has a new leader, the Italian central banker Mario Draghi. But few are expecting him to assert himself with Merkel. There are thoughts that his Italian background might even make him 'more German than the Germans', given that he doesn't want to expose himself to allegations of perverting the traditional role of the ECB in order to save his home country.

But the fact is that injecting cash in order to shore up an economy is within the remit of a normal central bank - but not a German one. And no solution to this eurozone crisis can go ahead without Merkel's approval. Who has the authority to tell the Germans that they just have to suck it up and let the ECB get involved in the bail-outs?

There is only one such power - the United States. If Barack Obama sat Merkel down and told her she must accept a bail-out role for the ECB, it might be enough pressure to make her accept. After all, he can point out, America came to the aid of Germany in 1948 with the massive injection of cash with the Marshall Plan (which Germany is still paying back). Germany owes the United States, and the world, this sacrifice.

But there is a problem with this idea. European leaders, as well as the European public at large, views the United States as the one who sparked off this economic crisis in the first place. Germans believe the US has lost the moral authority to tell them what to do in this situation because they were the ones who caused the 2008 economic crisis, which in turn sparked the 2010-2011 European debt crisis. The euro project was still being built, they say, it needed more time to develop. But the crisis sparked in 2008 by Wall Street and loose American financial regulation exposed the eurozone to a crucial test too early in its development. Why, many German politicians are asking, should they take orders from the very people who sparked this crisis in the first place?

And that's the scary situation we find ourselves in today. There is no leader in this crisis, and seemingly no country has the moral authority or the will to step in and tell the others what to do. The developing world - who are the only ones with the cash to bail out their struggling formal colonial masters - are conversely not yet in a position to exert leadership in this crisis. And with the US and Japan struggling under their own debt problems and political stagnation, there is nobody left to be the adult in the room.

This movie has a lot of villains, but apparently, it has no hero.


Anonymous said...

Excellent analysis. These are really frightening times. I hope Germany will do the right thing in the end.

Anonymous said...

stop running play, do it something...

Anonymous said...

.....In the beginning, the good God gave to the French the dominion of the land, to the English the dominion of the seas, and to the Germans the dominion of the clouds.
— Jean-Paul Richter

...Had Germany paid the Greek stuff two years ago... but ... but still in the clouds! Len.