Bill Emmott - International Author & Adviser


The facts are awful. But Europe must face them
The Times - November 7th 2011

Nicolas Sarkozy has made it perfectly clear that he is not keen on more lectures from the “I’m alright Jacques” Brits about what needs to be done to prevent the eurozone from causing the next Great Depression or, for all we know, the next world war. Yet he and his fellow eurozone leaders could do with borrowing a couple of traditional English traits, even if in truth we display them less often these days ourselves.

One is, despite that reference to world war three, our preference for understatement. It is better to say “we’re in a spot of bother, chaps” than to describe the situation frankly, for to do so would, at least in a family newspaper, require too many asterisks, exclamation marks and displays of emotion—but we all know what you mean, Carruthers. The other, in apparent contradiction, is our liking for stiffening moustache-laden lips and facing the facts.

Until last week, France’s President Sarkozy, Germany’s Chancellor Angela Merkel and all Europe’s lesser leaders had done the opposite, on both counts. They pledged, constantly, to do “whatever it takes” to save the euro, arguing that the currency’s demise would bring a cataclysm, while with their actions they implied it was all just a storm in a Greek coffee-cup and that anyway there were strict (if different) limits to what either France or Germany was prepared to do. Meanwhile the Greek debt default and possible departure from the euro that everyone with a pulse could see coming were both described as impossible, inconceivable, impermissible.

George Papandreou’s sudden announcement, and then renunciation, of his plan for a referendum on Greece’s latest bail-out terms may be explicable only by a rush of blood to his head, given his failure to consult even his own cabinet on the idea, but he nevertheless did Europe a favour. He finally forced the facts out into the open. The question now is whether France, Germany and the others will stiffen their lips and face up to those facts, or resume their attempt to deny them.

At least on exit from the euro, it will be a tad tricky (more English understatement) to get the chat back into the sac. If, as President Sarkozy angrily declared, in a referendum the Greeks would have had to choose whether or not to remain in the euro, it cannot be either impossible or impermissible to leave.

Moreover, as the financial markets have already concluded, it is not only the Greeks who are capable of making that choice. If the Maastricht Treaty that set up the currency can be broken to permit national bail-outs, it can also be broken to allow—or even force—nations to bail out.

For the time being, as long as a government of national unity can be formed, before or after elections, Greek politicians look like choosing to stay in. But Mr Papandreou’s moment of panic, or perhaps high-stakes political gamble, shows that this choice cannot be relied upon as definitive. The pressure from the streets, amid a feeling that other options have been exhausted, could soon bring the issue back.

One rather awkward exception to the fact-facing trend in the past few days has been Silvio Berlusconi, the Italian prime minister who long ago merged his political and personal lives in a sort of TV unreality show. After the Group of 20 summit in Cannes, at which he had agreed to submit his country to monitoring by the International Monetary Fund, he declared that the markets’ desertion of Italian government bonds was just “a passing fashion”, and that Italy was in fine fettle, for “the restaurants are full”.

This more or less guarantees that the fashion will not pass, for it confirms that he is not serious about implementing the vague promises of economic reform about which his coalition government has been arguing, for if all is fine they can hardly be necessary. So banks, insurers and pension funds will continue to conclude that none of them will be criticised by their shareholders for owning too few Italian bonds, and the country’s borrowing costs will continue to rise.

Yet perhaps Mr Berlusconi, like Mr Papandreou, is thereby doing Europe a favour. Hiding from reality again by trying to muddle through and to avoid explicit choices is not going to be possible. Unless Mr Berlusconi’s political party and his coalition allies, the anti-foreigner Northern League, decide to do without his bribes and favours and bring the government down, an Italian financial crisis looks to be just around the corner. With Italy owing the world’s third-largest sovereign debts, of 1.9 trillion euros, no one will be able to dismiss this as a storm in an espresso-cup.

As that storm approaches, it is surely time for Chancellor Merkel and President Sarkozy to accept the logic of their own positions. The euro can survive in its full, ambitious form only if its members agree to take collective responsibility for their debts. But Germany insists that to do so would just encourage more feckless borrowing, and France resists anything that will threaten its own credit rating. Nationalistic political trends in both those countries, as well as the Netherlands, Finland and several others, suggest that this not only will not, but cannot, be changed.

If so, there really are only two options. One is to abandon the currency altogether, which would cause mayhem and probably a Great Depression, given the integration of Europe’s financial systems. The other is to return the currency to its original conception, that of a mechanism run according to strictly enforced rules, but adding one further enforcement method, namely the threat of expulsion. This should begin, as it should have done a year ago, with Greece’s departure from the euro.

This would be painful not just for Greece but also for the remaining euro members, which is why Mr Papandreou’s referendum was also a threat, in a sense. If one country can leave, then all other countries that investors suspect of being unable or unwilling to obey the rules will have to carry a risk-premium on their debts and, more painfully still, on their banks’ borrowing costs. Speculation surrounding that possibility, and about the solvency of banks if it were to happen, would be chaotic, costly, highly damaging, and hard to contain.

It is a terrible option. But the reality facing the eurozone leaders is that the alternative is even worse. Stiff upper lips, chaps.




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