Beyond the point of no return

Cees Bruggemans, chief economist at FNB.

The European crisis isn’t some distant thing passing us by. Our senior policymakers continue to consider it with great suspicion, fearful of a sudden turn for the worse, with the resulting financial market turbulence and the region shifting much deeper into recession reverberating also loudly in our markets and economy (Rand, inflation, growth, jobs, interest rates, stock and bond markets).

Giving an analysis on South Africa's economic trends, Cees Bruggemans, Chief Economist FNB said such caution is understandable, given deep global market skepticism about the entire European project, the many euro-skeptics everywhere and the often only slim electoral majorities in crucial countries sticking with the chosen course of action.

It may be, however, that the Eurozone this year has passed a critical point of no return in its existential crisis, with no easy way back and the only sane alternative a matter of carrying on and bringing things to (some kind of) successful ending.

This crucial point of no return concerns the costs of breaking up (even if “only” jettisoning Greece) as compared with going on. For apparently we are talking of a cost equivalent to a very large percentage of German GDP in the event of failure, in which case continuation is seen as the lesser evil by far (even if it will still costs “some” money).

There was always a sense these past three years that especially the Germanic countries were inclined to hide from their electorates the full extent of losses already incurred and the cost of loans and guarantees granted while wanting to prevent their weakly placed banks, insurers and pension funds from being abruptly confronted by the massive cost of country (and even bank) default (in turn activating the taxpayer bills).

For long it seemed that the preferred choice was to delay the moment of truth when these things needed addressing, buying crucial time, allowing the weakest institutions time to take remedial action and gradually adjust their portfolios or absorb write-offs after which presumably some kind of “orderly” workout, including exiting, might be conceivable.

In the process, the future bill for any cleanup has steadily risen, a point of criticism for many observers. Didn’t the politicians realize what was happening?

That realization was probably always there (for some even in full technicolour), but the market and electoral penalties for taking the bull by the horns advised careful caution rather than reckless courage.

In the process various things appear to have happened, which along the way acquired mythical qualities.

Much of the analysis has focused on the German leader, Chancellor Angela Merkel, being pivotal to the entire process, representing the richest Eurozone country facing the biggest burden of any bailouts.

The coldly realistic interpretation has been focused on self-preservation, both in the broad and narrow sense.

The broad sense involved the nation, not wanting to burden Germany prematurely with massive adjustment costs following failed investments in peripheral Europe (and this so shortly after having had to absorb the – smaller – burdens of re-unification and partly bailing out Russian Communism, something easily forgotten in the hurry of some to keep on bailing).

After all, enough is enough.

The narrow sense focused cynically on the political fortune of Mrs Merkel and her party. Supposedly, nothing was to be done that was to the political detriment of either, potentially undermining their influence and survival chances, in the present and in the next elections to be held in September 2013.

Such self-preservation instincts are probably very true and only naturally to be expected in any successful country or leading politician.

So don’t lose sight of such reasoning.

But events these past few years suggest an even bigger context, perhaps a surprising one, in which Germany appears to have taken the lead in shaping the future Europe.

An integrating Europe used to be mainly a French ideal, and then not primarily an economic but a political one. The devastating wars of the past needed to be prevented from ever happening again and a strong and restless Germany tied down, preventing it from unduly dominating its neighbours.

With Germany in the late 1980s seeking re-unification, it was prepared to do a European deal in return for Europe accepting its re-unification (of itself never a small matter, especially in French and UK eyes, considering the costs of two world wars and the interwar devastation all round, something perhaps too easily too often forgotten today, especially by those never involved in either).

And thus they barreled along, cutting integration deals that turned out to be far too French in their make-up.

When the flaws presented themselves, they turned out to be deep, as predicted by those technicians who do not consider Europe an optimal currency area. In the resulting crisis since late 2009, the natural inclination of those facing hardship was to turn to the richer countries for assistance.

In the process a few things started to come together that have given us today’s muddling.

The flaws of the present monetary union came sharply into focus and needed addressing. Instead of simply handing out yet more money, in effect forgiving past mistakes, a dual approach was taken.

All those countries suffering financially were told to get their house in order. Where things reached breaking point, in Greece, Ireland, Portugal, limited loans or guarantees were provided, along with private writeoffs.

Germanic electorates demanded, and markets feared, that the worst cases (Greece) be ejected or would leave the Euro off their own volition, in the process cutting the ground from underneath the entire Eurozone concept.

Self-preservation on all sides has to date prevented this option. Indeed, European elites appear determined to stick with a least-cost route out of this mess as they see it (even if their critics don’t).

Peripheral basket cases continue to fear an existence outside the Euro more than the enforced austerity inside it (saying something about how these countries rate their long-term survival chances on their own, given historic precedence).

The Germanic deep pockets simply cannot (yet) tell their electorates about the implied losses, which have now become so large that it may cost less to simply proceed with the Euro project, incur (limited) costs in support of countries needing it (Greece, Portugal) while steadily keeping up the pressure on all to reform their finances and economic structures so that financial health and growth may one day return together in union.

Electorates are seen as holding the whip hand. The strain in some peripherals (Greece, Portugal, Spain) may eventually become so intense that electorates will opt for leaders claiming to know another way out.

And yet even then, if such new leadership were to emerge and then be confronted with the real choices, they in turn might opt to stay in, for such is their mess.

The impression is created of a very unstable frame which is yet condemned to carry on, given the alternatives.

And what matters here are not the siren calls (default on your debts, reintroduce your old currency, devalue 95%) as the fear that this will not solve anything but only plunge such countries into deeper despair, given their historic proclivities.

Amongst all this deep-seated anxiety on all sides (for raw fear is the real common currency du jour), what has crystallised out is determination to complete the job, if only technically in parts (but sufficient for now).

The main wish is to remain politically relevant as a region at the global level even if fast fading individual countries are being overtaken by so many other upcoming emerging ones.

Europe wants to remain relevant, sit at the top table, neither be dominated by a self-interested America or a self-interested China, but indeed balance out that potentially confrontational relationship in crucial ways (reinforcing Western values where necessary, but going with China when self-interest advises so, something that was never possible with America post-WW2 as the sole serious player and the Russian brute the alternative).

In order for the fading individual European Greats to turn themselves into one new modern reconfigured global Great, a few crucial things need to happen.

If they cannot turn themselves into a FULL political union (at this early stage), politically fully submerging their individual parts in a greater whole, they will need to go at least part of the way in creating institutions strong enough to be seen and recognized as one.

See this as Kissinger’s Test. Who will speak for Europe? There needs to be one voice, even if backed up by councils of equals quibbling among themselves, but having tied themselves irrevocably to the common mast.

They already have a monetary union with a viable central institution (the ECB). What they still need are much better functioning rules about government fiscal behaviour, oversight over banks and greater convergence among economies so that the structural strains over time remain bearable.

It all sounds far too ambitious and farfetched for one lifetime, yet that is what the Eurozone 17 (and aspiring future members) are committing themselves to.

The adjustment pains for mature democracies are enormous. Giving up cherished rights and privileges, providing support for others even when feeling little community feeling, having to absorb transition costs of jobs lost and assets written off. It is a long list.

Yet daily they are sticking to it, imposing fiscal austerity and labour market and other regulatory reforms, agreeing to banking union oversight, and creating sizeable lifeboats with which to address future crises.

The failing reform efforts (in Greece) will probably require more support, which will be grudgingly given at eleventh hours. The total bill is already too high, and any breakup costs on top of that along with the wider ramifications (for who else would fail domino-like?) simply far too high for any other approach to be politically acceptable.

And so they soldier on, with individual politicians (like German Chancellor Angela Merkel, Italian finance minister Vittorio Grilli) encouragingly talking about the reformed Europe that is slowly taking shape and whose full strength and relevance will take 10-15 years delivering.

If this makes you think of the squirrel in the Ice Age films, with undiminished tenacity pursuing his dream of a hoard of acorns through all kinds of slapstick adventures big and small, one is not far off the mark.

If Europe often surprised these past 60 years in putting so much together and progressing so far, even if often deeply flawed, the remainder of the mission remains as challenging and likely as happenstance.

But it is the determination to hang together rather than assuredly hang separately that needs to be fully appreciated in the execution of this great Project.

The aim is to thoroughly clean up national finances and the banks so that the equivalent of a fiscal union, with Euro bonds, may eventually materialize as an acceptable fact, in a region structurally reforming sufficiently so that growth can resume and the convoy (eventually of more than 20 ships) can maintain a higher average SUSTAINABLE growth speed than seen so far.

And in doing so getting closer together, sufficiently for a single European voice to start emerging even if timbered by many accent contributions in council.

Eventually Henry will get his one telephone number to call, even if it is only Angela’s unlisted one, and the US and China won’t alone dominate for a generation in the early 21st in the way the US and Russia once did in the mid-20th century.

Europe wants to retain its seat at that table, no longer as many quibbling fading Greats, but as a region better in tune within itself, though still in council.

In this they will be thumbing their noses as much at Napoleon and Hitler turning in their graves, as giving notice to superpowers old and budding that Europe may be “old” (in old Rumfeld’s terminology) but not played out.

In this, old Europe will far outachieve old Japan out on its lonely limb and will ultimately match rapidly ageing old China, as they all confront vigorously rising “young” India, Brazil, Indonesia and powers like them (including African and Turkic ones), with the US likely eternally young in the 21st because of a Latino reverse takeover keeping her juices flowing throughout.

And this even if, for instance, a David Owen doesn’t see anything in any of this, preferring to keep his Old England separate and pure (if insignificantly small) as China may not turn out to stay a coherent continent indefinitely and therefore not to be feared so deeply.

Be that as it may.

There is much going in all of this for Europe to get its act more fully together. The French ideal of simply tying German down in knots has been replaced by an apparent German wish to lead a reinvigorated Europe in its image, all of it voluntarily arranged.

It may sound unnatural, and is incredibly costly to arrange, but don’t underestimate the wish and deep determination of those elites so engaged.

It likely will make the teens decade (2010s) another great global reform era, if totally different in texture from its 19th century predecessor which tried to things more hamfistedly, only in that costly and unpromising way paving the way for reform that would give us the world we know today with all its promising potentialities.

The immediate relevance for South Africa appears to be not another wrenching European crisis with its growth and financial downsides, even as global central banks will likely remain generously supportive throughout all these great reform efforts, assuring us balance of payments and market support way beyond our own ability to generate this decade.