the whac-a-mole approach to fixing the euro

Oisín Mac Giollamóir explains European politicians’ ongoing failure to avert crisis

The great experiment of the European Union has continued its bizarre march into oblivion. I wrote the ‘unhappy economies’ article in the last issue of The Commune in early August, shortly after the Greek ‘bailout’ of 21st July. Since then much has happened… but equally, nothing much has happened.

The German Chancellor and the President of the European Central Bank calm market fears

First, how has the 21st July bailout worked out? Different for different countries. Oddly, for Ireland, things are looking rosy. The interest rate on two-year government bonds is now just over a third of what it was in late July. This has resulted in some bold confident statements from the Irish government about their achievements that are almost certainly a bit premature.

For Portugal, Spain and Italy the story is slightly more complicated. While the bailout was supposed to restore confidence, within a fortnight the decline in interest rates for these three countries had reversed. For Spain and Italy their interest rates were higher in early August than prior to 21st July. It seemed momentarily that the break point had finally arrived. That European Commissioner for Economic and Financial Affairs Oli Rehn’s bushfire was no longer in anyway contained. It had spread to the core. Greece first, then Ireland, Portugal, Greece again and now… Spain and Italy both at once! Not surprisingly, finally after three years of inaction, the ECB finally took decisive action and intervened heavily in the market. And, it worked. The panic ended. But like in a game of whac-a-mole, once one mole has been hammered out of site another pops up.

As mentioned in my previous article, the ratification of the July deal could pose problem and indeed it has. Following the electoral gains of the extreme right True Finns in April’s general elections, the Finish government has started causing trouble. They demanded that Greece post millions of pounds in collateral against the Finnish part of the loan. And the crisis trundled on. Interest rates for Portugal started to rise again. They are now close to where they were pre-21st July. Spain’s rates also rose but have remained well down from previously. And Italy’s also started to climb. As the Italian austerity plan took longer to work out, Jean-Claude Trichet, president of the ECB, insisted that the austerity plan be implemented and swiftly. The market were unimpressed as Ignazio Visco, the Bank of Italy director general, warned that the austerity plans were likely to reduce growth and make it harder for Italy to cut its deficits. The rating agency Standard and Poor’s seemed to agree. They downgraded Italian debt stating the “negative outlook reflects our view of additional downside risks to public finances related to the trajectory of Italy’s real and nominal GDP growth, and implementation risks of the government’s fiscal consolidation program.”

So far so bad, but what about Greece, the country at the centre of the July ‘bailout’:  and here is where it looked worst. In July, the interest rate on two-year Greek government debt was at the ridiculous level of the mid-1930s. To put that in context, the interest rate on this kind of debt for the UK government is currently around 0.5%. Today for Greece, the interest rate is around 70%. These are type interest rates. There is almost nothing that can be said about them. But this is truly fucked.

The situation with the Eurozone is getting worse and worse. And no realistic effort is being made to fix the situation. And given the negative reaction in creditor countries, it is hard to see a solution developing. The longer this is kept on the long finger the bigger the problem gets and the more difficult it will be to deal with it.

Suffice to say, that as it stands unless something drastic is done the Eurozone will not last more than a further year or two. If the Eurozone collapses, the EU will be extremely weakened. Indeed it may wither away. We may see the rise of nationalism, the further dividing up of the European working class along national lines and the prospect of military aggression arise once again on this bloody continent. The something drastic remains more likely than this kind of disaster scenario. But unfortunately, disaster is becoming more and more imaginable.