Heaven is where the cooks are French, the policemen are English, the mechanics
are German, the lovers are Italian and the bankers, Swiss. Hell is where the
cooks are English, the policemen are German, the mechanics are French, the
lovers are Swiss and the bankers Italian.
- European joke detailing comfortable stereotypes.
The stereotypes that the above joke alludes to are long past their sell-by
dates. For example, some of the best chefs in Europe, if not the world, happen
to be English - Gordon Ramsay, Jamie Oliver and so on. Similarly, in recent
weeks, it has been German investigators who have, with a large degree of
finesse, acquired details of tax-dodging citizens through the simple mechanism
paying for the details, even as English society has gone to bits due to the
failure of policing.
Meanwhile, it is a Swiss bank that has been the epitome of failure across the
European banking scene, even as the Italian sector has avoided the worst of the
banking crisis. Lastly, as major Japanese manufacturers all rush through with
their product recalls, it is a French-run car company that has avoided all the
missteps this far. So thatís pretty much all the stereotypes quoted above that
have gone out of the window.
Some ascribe these remarkable changes to European integration helping to meld
the various cultures, ushering in transfers of expertise across different
countries that engender appropriate behavioral changes. Then again, not every
bit of stereotypical national characteristic has changed since or due to the
integration. Indeed, there is some evidence that some assumed national
characteristics have been accentuated due to integration.
Therein, as the Bard used to write, lies the tale.
The subject of this week's article is not anyone else in Europe, but the ones
who have caused the most recent market conniptions, namely the Greeks. In the
ancient drama Oedipus Rex by Sophocles Oedipus kills his father, falls
in love with his own mother, Jocasta, who then commits suicide. As an
historical footnote, this ended up being one of the most useful talking points
for modern psychologists: "Tell me about your relationship with your mother,"
they say when one is supine on the couch (or so one is led to believe).
In the more modern retelling of the fable, the old country of Oedipus, the
Hellenic Republic (Greece) apparently has developed a similar morbid
fascination for the maternal institution of the euro, and in doing so may be
exposing the entire European economy for the wreck that it is.
Hence the awful pun in the title of this week's article. In any event, all of
that will be the end result of the extraordinary drama that has unfolded over
the past few weeks. There are multiple facets to the crisis, all of which bear
some degree of evaluation before our eventual (and damning) verdict can be
Ever since the European experiment began in earnest just over 10 years ago, the
key question has been whether all the member countries would choose to play
along in their version of blind man's bluff. With archaic rules on budget
deficits and subsidies across different categories that are passed directly to
citizens of various countries by the European Commission, the mechanism for
managing sovereign debt has proved anything but simple.
By embracing an economic union before adopting political measures that could
have harmonized policies, the EU (and with it the euro) has always been an
accident waiting to happen. There is no intrinsic mechanism to differentiate
between the debts of various European member countries, particularly when most
carry very high credit ratings.
Think of what used to happen before the common currency came along - the
Italians issued their government bonds in lira, the French in francs, the
Germans in marks and the Greeks in drachma. Each currency carried its own
interest rate and was subject, from an investor perspective, to attendant
reviews of multiple risks - currency (movement against investor's native
currency), interest rates and lastly credit risks. It is fair to say that under
this situation, the penchant for a German bank to hold Spanish government bonds
denominated in pesetas was fairly minimal.
All that changed with currency integration. Quite suddenly, the above-mentioned
German bank could choose to buy either German government bonds (bunds)
denominated in euro, or Portuguese bonds also denominated in euro. There was no
native currency risk to speak of, and interest rates were harmonized for all
member countries. True, bonds issued by the lower-rated countries carried
higher interest rates than those of higher-rated countries within the eurozone,
but the differences narrowed from 2001 through 2009 in response to a vast
increase in market liquidity.
As with the subprime crisis that was anchored in the easy-money policy of the
US Federal Reserve and currency intervention by the Chinese government,
Europe's burgeoning sovereign crisis is firmly rooted in the widening liquidity
of the period that went unchecked as the European Central Bank (ECB) attempted
to keep policy relatively loose to accommodate the interests of an economic
slowdown in Europe's major exporters since the 2001-02 US economic slowdown.
The easy-money policy allowed countries with higher intrinsic inflation, such
as Spain, Ireland and Greece, to benefit from negative interest rates: the best
recipe for creating an asset bubble.
This week, Germany's best-selling magazine, Der Spiegel, on February 9 (in its
English translation) carried an extensive article on the travails of the euro:
problems facing Greece are just the beginning. The countries belonging to
Europe's common currency zone are drifting further and further apart, and
national bankruptcies are a distinct possibility. Brussels is faced with a
number of choices, none of them good.
... Brussels took a hard line with Athens last week. Greece must cut costs
drastically under close European Union supervision, a sacrifice of a share of
its sovereignty. Risk premiums for Greek government bonds have risen
drastically, and the country has to pay higher and higher charges.
... Accruing debt is becoming increasingly expensive for other countries in the
euro zone as well, among them Portugal and Spain. The southern members of the
euro zone are especially being eyed with mistrust. Speculators are betting that
bonds will continue to fall and that, eventually, the countries won't be able
to borrow any more money at all. State bankruptcies are seen as a possibility.
... EU officials are watching with alarm as the various euro-zone countries'
competitiveness diverges sharply. The differences are especially large between
countries like Germany, the Netherlands and Finland, which are characterized by
current account surpluses, and countries with high budget deficits. Along with
Greece, this second category includes especially Spain, Portugal and Ireland.
These countries' competitiveness has dropped steadily since the euro was
introduced. They lived on credit for years, seduced by the unusually low
interest rates within the euro zone, and imported far more than they exported.
When demand collapsed in the wake of the global financial crisis, governments
jumped in to fill the gap, with serious consequences - debt skyrocketed.
Spain's budget deficit was at 11 percent last year, while Greece's was nearly
13 percent. Such high debt is simply not sustainable in the long term.
In the past, the solution for these countries would have been to devalue their
currency, which in turn would make imports more expensive and exports cheaper.
Such a move would stimulate their national economies and strengthen their
Now, however, these countries must submit to a drastic therapy regime at the
hands of the European Commission. They need to balance their budgets, while
simultaneously creating more competition on the labor and goods markets.
The directives from Brussels translate into difficult sacrifices for the
citizens of the affected countries. Employees will have to scale back wage
demands for years, and civil servants will see their salaries cut. Ireland has
already embarked on this path; Greece and Spain will follow.
... Back in the fall of 2004, Eurostat, the EU body in charge of statistics,
calculated that Greece's officially announced debts of between 1.4 percent and
2.0 percent of gross domestic product between 2000 and 2003 were incorrect. In
reality, the amount was nearly three times as high, falling between 3.7 percent
and 4.6 percent. The statisticians surmised that Athens had whitewashed its
finances in previous years, too. Greece, in fact, would never have met the
conditions for membership in the common currency without such trickery.
But the country was not immediately banned from the euro zone, nor were other
sanctions imposed. Instead, member countries discussed how the statistics could
be improved and made more accurate. Not much emerged from all the talk.
Outgoing European Commissioner for Enterprise and Industry Gunter Verheugen
remembers all too well that, for a long time, the problem with Greece was
simply not something that was talked about. He finds it hard to believe that
this "disproportionate regard" for Greece had nothing to do with that fact that
conservative allies of European Commission President Jose Manuel Barroso
governed in Athens for five years.
Not until last fall's elections brought Greece's socialist opposition to power
did new data arrive from Athens - and new questions and accusations from