Many have followed with trepidation the latest shock waves that have battered the euro currency. There have been well wishers who wrote in favour of buttressing the single currency, while on the other hand a growing family of sceptics count the days for the death knell that will lead to its funeral.
The Economist wrote on its front page last week that the euro must not shoot itself in the foot but try to calm the choppy waters as otherwise the consequences will be fatal for the beleaguered EU project. Imagine the dire consequences of a run on banks and financial institutions in weaker euro member countries and try visualising the massive loss of orders when exporting to such countries by the stronger members such as Germany, Austria and The Netherlands. Yes the pain is real. We have witnessed strong protests by angry workers (some with no job prospects) in Ireland, Spain, Portugal, Greece and Italy (collectively termed PIGS), which make sickly headlines in today’s newspapers. Workers expect their leaders to find the culprits responsible for the sudden drop in their living standards and do not want to drink from the chalice of austerity measures. But the Iron Lady in Berlin, namely Chancellor Angela Merkel, has asserted that the situation is serious and palliatives will not wash. She wants a more robust mechanism put in place to cope with potential miscreants who fail to observe the euro club rules and then expect a hassle-free bailout by default. Some agree with her policy since a no-pain-no-gain attitude could only lead to more failures. Others silently contend that the medicine will impede the chances of a quick recovery and that whatever the sour potion she prescribes, the magic will not work in the short term.
Is this the start of a vigorous anti-euro movement that is gaining strength particularly among euro sceptics in countries outside the euro club? Are the dissenters gaining strength? Nothing is certain except that the cost of rewinding back the 10 years of EMU and euro preparation will be a severe blow to all. The consequences may lead to a dreaded double dip recession in Europe. The BBC has reported that the Gremlins (read business people in dark suits driven in expensive cars) are starting to bare their sharp teeth, cutting to the fabric of the euro edifice. In Germany, the nostalgia for the once strong Deutschemark (DM) is haunting shoppers, with dreams of the glory and strength of the old currency that outshines the fading euro. This new feeling intensified after the Germans found themselves digging deep into their pockets to help in the bailouts of Greece and Ireland. Some are even wary of more demands in the near future if the economies of Spain and Portugal go down the same road. At a political level, can you blame the German voter for feeling that the promises made 10 years ago by politicians, when the euro replaced the Deutschemark, have been broken. Others are more cautious and respond that one swallow does not make a summer. This shows a tangible manifestation of solidarity to help each other as only thus can Germany keep progressing in its successful export drive.
Naturally, economists warn that in a doomsday scenario one cannot avoid the resulting grave political consequences of a ruined euro regime. The 10-year-old currency is more than a yardstick of wealth − it was a symbol behind a monumental project to unify Europe. So the option to divide the 16 members into the have and have-nots is a recipe for disaster … the wise bureaucrat will tell us either we all swim or we sink together. Only as a last resort do we push the dreaded button to eject the euro and split the club apart: namely let the strong economies in the north of Europe have their own DM and cut loose the umbilical cord that ties them to weaker southern Europe. Lovers of the DM may clamour for such a solution saying it is probably the only way of avoiding huge debts piled on European taxpayers. It is no coincidence that in Germany some stallholders at the Christmas markets happily accept DM, wedded to the popular nostalgia for the old currency. It is not so inconvenient for such traders to later exchange the old currency for euro at the banks. Still, any fanciful dreams about abandoning the euro and starting a romance with a new bride is dangerous when one contemplates the pain suffered by countries now undergoing austerity measures. Just consider for a moment the recent drive for public expenditure cuts that has been sweeping across Europe, as governments struggle to trim huge budget deficits. Really and truly, Merkel’s proven recipe for sound recuperation has driven Med countries to tighten their belts to reassure sceptical markets. We notice how only last week, EU finance ministers took the plunge to announce stiff rules, which, if broken, will automatically punish member states. Yes, we all remember that one of the Ten Commandments is not to exceed the annual state deficit by more than three per cent of GDP. This rule has been broken many times and a transitory concession has been agreed for the defaulters to come clean by 2014-15 at the latest. As the main source of the financial malady points to weak banks, they will be subjected to a second and more rigorous stress test. Just stop and recollect how the Irish banks needed an immediate handout to rid themselves of toxic debts accumulated from the bloated property sector. The Irish government asked for a multi-billion-euro rescue package from the EU and International Monetary Fund (IMF) to tackle a banking and budget crisis and got a cool €85 billion. This follows the rescue arranged for Greece. Dublin had, previous to this last bailout, already taken big stakes in the major banks and pledged to guarantee deposits.
Equally painful was the measures taken by President Nicolas Sarkozy to raise the retirement age from 60 to 62 and the full state pension age from 65 to 67.This provoked the ire of thousands of workers and riot police were brought in to reopen fuel depots blocked by such protesters, although the demonstrations were largely peaceful. The fly in the ointment was an extra on per cent income tax on the highest earners. But surely the Cinderella of the story was Greece, which promised to slash heavily its overrun budget deficit reaching a high of 13.6 per cent of GDP. Part of the bailout conditions included cracking down on tax evasion and on corruption in the tax and customs service. Greece will also curb its widespread early retirement schemes. The average retirement age is set to rise from 61.4 to 63.5. More bitter medicine included a plan to slash the budget by €30 billion over three years. One is expecting Greece to scrap bonus payments for public sector workers; freeze public sector salaries and pensions for at least three years; increase sales tax (VAT) from 19 per cent to 23 per cent.
More surgery is prescribed for the Spanish patient. The Zapatero government has approved an austerity budget for 2011, which includes a tax rise for the rich and eight per cent in spending cuts. It aims to cut its deficit to six per cent of its gross domestic product (GDP) next year, from 11.1 per cent last year. But the bitter pill for government workers is that their pay will be cut by five per cent, and salaries will be frozen for next year. The last but not least in the troubled cauldron is Italy. Its government has approved austerity measures worth €24 billion for the years 2011-12. The cuts amount to about 1.6 per cent of Italian GDP. Quite a painful lunch for the Mozzarella lovers.
To conclude, the unthinkable is being thought − and increasingly spoken among euro sceptics in Germany. Before the bailouts and the massive protests mentioned earlier, a small circle of dissenters contemplated the demise of the euro as the common currency of 16 states. Can this heresy be suppressed or do we hear more heretics uttering the mantra that the euro is a bottomless pit that cannot be stabilised simply by richer countries pouring money into it. Logic dictates that if a double dip recession hits Europe, then there will be more casualties in sickbay and the bailouts will be excessively high. Consequently, the 16 spouses within the euro family will start filing for divorce. Certainly nostalgia for the older currency mainly the Deutschemark is becoming a stronger siren call but we must resist its urge, as it is not a sensible replacement for the beleaguered euro. The patient must grudgingly swallow all remedial medicine and even endure some painful surgery to let the euro survive. After the storm, sunshine will greet the healthier patient.
A Merry Christmas to all readers.
The writer is a partner in PKFMALTA, an audit and business advisory firm.
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