'Troikanomics' comes with severe political consequences
OPINION:THE EURO zone “authorities” and Germany have consistently failed to understand the dangers of contagion in all its forms.
We are now at a stage where contagion, in particular political contagion, poses a threat not alone to the euro zone and the wider EU, but, as both the IMF managing director and the German chancellor have acknowledged, to the global financial system.
What is now happening in the euro zone as Spain teeters on the brink of a sovereign crisis bears an uncanny resemblance to the collapse of the Bretton Woods system: denial, delay and then a final implosion.
Financial contagion has been primarily transmitted via short-term money markets. It has infected the banking sectors of the peripheral and, increasingly, larger euro zone economies.
Economic contagion is being conducted across trade linkages and the effects are evident in the renewed contraction in economic activity in the euro zone.
Both of these impulses are interacting to further erode policy credibility and market confidence. But there is an even more malign form of “contagion” which is now being transmitted across the euro zone.
In a paper back in 2009 to the Organisation for Security and Co-operation in Europe – a political and security counterpart to the OECD – I suggested that what may be termed “political contagion” represented the greatest threat to the euro zone and the wider European legacy.
Political contagion has been spawned by the terminal policy failure on the part of the euro zone “authorities” and Germany. Policy has been reactive, fragmented and, more often than not, just plain contradictory.
Power has shifted to the centre, emasculating the smaller countries. The overriding policy priority has been to save the skins/balance sheets of German and French banks who, in recycling their euro zone surplus, lent neither wisely nor well.
The markets have drawn their conclusions and the downgrades have gathered momentum.
Now political union is being pushed by Germany as the “solution” to the travails of the euro zone. This is not through any real commitment to union but because it is the last card in the pack.
There has been no preparation, there is no architecture in place, nor is there a mandate across Europe for union.
In the meantime, the political backlash against centre-driven economic repression in debtor countries, benchmarked against an essentially arbitrary 2014 target for conforming to stability and growth targets that never made sense, is gathering momentum.
This backlash began on the streets of Greece, spread to Portugal and is now embedded in Spain. Italy is next. The most visible expression of political disenchantment in the centre was the rejection of President Nicolas Sarkozy by the French electorate.