M ore than a year before Greece began self-immolating, literally and figuratively (a process we can safely assume has only just begun), Jagadeesh Gokhale, a prescient senior fellow at the Cato Institute, peered into the future of Europe and noted, in a report for the National Center for Policy Analysis, that “all European countries have large unfunded liabilities”—health care benefits, social security, early retirement, and sometimes, as in the case of Greece, even two months of guaranteed holiday pay. These, he warned, meant that European budgets are largely “funded on a pay-as-you-go basis.” Worse, he added, “no real resources are set aside and invested each year by government . . . to prefund future expenditures on such programs.” And the costs of such largesse, he promised, would, given Europe’s aging population and limited birthrate, only go way up in the future.
In fact, Gokhale observed, “The average EU country would need to have more than four times (434 percent) its current annual gross domestic product (GDP) in the bank today, earning interest at the government’s borrowing rate, in order to fund current policies indefinitely.”
And guess what? They don’t! They won’t! They can’t! To take one example at the heavily catastrophic end of the scale, Poland needs to
have fifteen times its GDP invested in real assets. Forever. Spain, the eurozone’s fourth-largest economy, needs to have 244.3 percent of its annual GDP invested to keep on going as it has. Its jobless rate has just surpassed twenty percent.
Europe, in other words, is the functional modern equivalent of the old Southern Confederacy: united (sort of) but desperate, drained of resources, prudence, and initiative, with a long-established history of promising its citizens the moon. That tradition hasn’t altered much of late: indeed, translated into the language of cold, hard cash, it’s simply been rewrapped into a glittering one-trillion-dollar rescue package (including $321 billion in potential loans coming from the complaisant IMF), recently patched together by EU member nations both rich and poor.
How taking on lots more debt is supposed to help the debt-ridden is an interesting question few inside the EU have bothered to ask. Why should they? Under the new so-called rules of the rescue package, banks that made idiotic loans to irresponsible nations will not be punished. (Sound familiar?)
Bad risk? Not to worry. It doesn’t matter how much you’ve mismanaged your funds, how poorly you collect revenue, or how flagrantly your citizens scorn the role of government in their lives: austere or spendthrift, you can collect. Profligate Greece, for starters, gets $140 billion as a reward for its history of mendacity and savage fiscal irresponsibility.
P redictably, there are those even within the EU who marvel at this spectacle. Germany, which is the EU’s sugar daddy, will find soon enough its generosity repaid with slowed growth—and it is no coincidence that Finance Minister Wolfgang Schäuble lately dropped an implicit hint that one day or other his country (or some other country, vastly poorer and less fiscally responsible) might have to decline the dubious honor of its highly expensive EU membership. “Should a eurozone member ultimately find itself unable to consolidate its budgets or restore competitiveness,” Schäuble observed as Greece crumbled, “this country should, as a last resort, exit the monetary union.”
This would not be happy news for, say, debt-raddled Portugal or even France.
“And on the less likely chance that Germany signals it is done with the experiment known as the euro, it would be lights out for the single currency,” Black Swan Capital, a currency market adviser, informs its clients.
But some on the continent reasonably wonder who really needs the euro at all. Many of the countries in the European Union are saddled with an elegant currency way too rich for their blood—one that is, moreover, becoming increasingly cumbersome since, despite its recent precipitate decline, it still isn’t cheap enough.
“Why should they stay in the euro? What is the chance that the euro will survive?” asks noted Italian political scientist Franco Pavoncello, who is the president of John Cabot University. “But an even more important question is: Why was the euro created? ” Pavoncello adds significantly. “A fundamental misconception by financial analysts is that the euro is an economic concept. It is not! It is a political strategic concept. It was not created to promote economic progress. It was created to put an end to the European Civil War, which produced sixty million deaths in the first half of the twentieth century.”
You could argue that maybe, in this regard, the EU and the euro succeeded in helping broker a long-lasting and expansive Europeace. And you could also argue that, initially at least, Europe tried to be nominally hard-assed about qualifications for membership. The EU, for example, insisted that a nation could join only if its deficit was less than three percent of GDP and its public debt less than sixty percent.
Except that Europe, after promoting this pretty good idea, then proceeded to ignore it. And not just by giving a pass to Greece, but to just about every nation. Spain, for example, ran a deficit equivalent to 11.2 percent of its GDP just last year, but no one at the time considered ejecting Spain for her profligacy. Shaky Portugal’s deficit is running at 8.5 percent. Ireland’s is expected to rise to twelve percent next year. But the front-runner in the no-one-is-perfect category was, of course, Greece, which in early 2009 claimed that its actual budget deficit was 3.7 percent. Then, later in that same year, it reversed itself, saying—oops!—the deficit was really six percent. And then, by the very end of 2009, yet a third figure popped up: Greece’s budget deficit, a new Greek government conceded, was actually a massive 12.7 percent of its GDP. (Nor will it end there. By the end of 2013, according to Peter Boone and Simon Johnson writing in the International Herald Tribune , Greece’s “total debt-to-GDP ratio peaks at 149 percent.”)
And yet, tied to the euro as it is, Greece (unlike Britain, whose deficit almost rivals Greece’s) cannot even numb its pain by devaluing its currency single-handedly, a move that always makes exports, for example, cheaper and prompts money to flow more easily. Greece now finds itself forced—and this has clearly come as a terrible shock to the nation’s citizenry—to walk the grim plank of fiscal probity. Greek citizens must now, sadly, pay twenty percent more in alcohol taxes and six percent more in cigarette taxes. There will also be a new tax on luxury goods, and almost certainly an end to the treasured tradition of two months’ worth of holiday pay. Perhaps—who knows?—workers will no longer even be able to retire at an average age of fifty-three, collecting state pensions that are ninety-five percent of their average pay.
W ho can blame those sixty thousand Greeks for rioting in May, just days before the massive bailout? Life in Fantasyland was wonderful. Euroland—the Euroland of today, with its encroaching forests of thorny, bleak austerity, haunted by German debt-collectors and countries with basically worthless government bonds—is quite a different matter.
“All of us are angry, very, very angry,” screamed Stella Stamou, a Greek civil servant (like fully one-third of her countrymen), emoting in early May on the eve of her country’s bailout. She was standing just a block away from a burning bank and lots of smashed shop windows. “You write that,” she ordered a reporter for the Guardian , “Angry, angry, angry, angry. Angry with our own politicians, angry with the IMF, angry with the EU.”
Nor will Stella and her pampered countrymen’s be the only voices raised in anger. Yes, Portugal is tottering. Yes, Spain and Italy—where French and German banks have plunked $1.16 trillion in private and government debt—are both iffy propositions. Spain and Italy won’t default, at least not according to the latest consensus; but with the newly imposed austerity rules, they are likely to plunge into double-dip recessions. So the promise of a massive bailout, of borrowed billions soothing and rewarding the diminished self-regard of the reckless, will be enough neither to erase memories of sweet entitlement, nor to assuage the fury of the newly dispossessed.
“Can European governments really control the domestic turmoil that the coming deflation and the coming decline of their standard of living will produce in their countries?” asks Franco Pavoncello, the Italian political scientist. No one knows for sure, of course. But with Greece as the first lab rat, we can certainly take a guess.
The current eurozone bailout bears only a slight resemblance to its U.S. predecessor. For starters, the U.S. bailout was infinitely more modest: its actual cost to American taxpayers came to a mere $87 billion. Equally to the point: the United States has a strong, transparent, and integrated federal system for resolving whatever economic woes of its component states may arise. The more rigid European Central Bank (ECB) was originally established with no such powers: in theory, a profligate EU member nation with huge debt was not supposed to be rescued with easy ECB loans. (In practice, however, the ECB did in fact fund lots of Greek government borrowing on the sly).
The question for Europe right now, as the Harvard historian Niall Ferguson recently wrote, is how it views its own identity: “The real choice is between becoming a fully fledged United States of Europe, or remaining little more than a modern-day Holy Roman Empire, a gimcrack hodgepodge of ‘variable geometry’ that will sooner or later fall apart.”
But I’m not certain this kind of ancient Wilsonian ideal is fully exportable to a multilingual continent. In any event, the choice for the United States, the real one, is quite different now that the fairyland dream appears to have evaporated. Whatever hopes we once held, especially after the collapse of the Soviet empire, for a consolidated Europe—that fabled mass wedding festooned with eternal vows of prosperity, probity, transparency, stability, unity—have not, as it turns out, materialized. In other words, we are pretty much on our own.
V ery likely President Obama thought that by begging German Chancellor Angela Merkel, in two separate phone calls, to seal the Eurodeal (and perhaps her own political death warrant in the process), he was promoting world stability. Very likely, the billions in currency swaps we have promised Europe will prove temporarily advantageous to us, economically speaking, rather than unwise.
But as best as I can see, we would have been wiser to stay clear of Europe’s mess and to have leaned on the IMF (we are, after all, its largest contributor) not to comply with a plan that amounts to economic blackmail. What, after all, can we expect down the road? European exports will be cheaper as the euro falls; ours will be more costly as the dollar strengthens. For those Americans who can afford them, European vacations will be more reasonable. And some day or other, with that torrent of American-blessed money flooding the economies of the most reckless and undeserving, we will all suffer from inflation.
And then there’s a final thought: What kind of way is this to run the world?
Let’s say you have a neighbor, a nice guy, but kind of careless and without an ounce of job security. Nonetheless, he splurges wildly on items you can only dream about: long holidays, costly vacation homes, expensive cars. Then one day he knocks on your door, armed with a broad smile and a piece of paper. He wants to take out a big bank loan, he says, pulling up a chair next to yours, to appease a large number of angry ex-wives and college-age children. Problem is, he’s simply fresh out of cash.
Then he offers you the document and a pen.
“Hey, want to co-sign?”
Judy Bachrach is a contributing editor for Vanity Fair.