'Troikanomics' comes with severe political consequences

Mon, Jun 25, 2012, 01:00

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.

Ireland and the other debtor countries now face open-ended austerity, with no indication whatever of a strategy to support the growth component of the debt/GDP ratio.

Not alone is a medium-term growth perspective absent in the official briefings ahead of yet another series of euro zone “crisis” summits, there is also a failure to appreciate the political consequences.

We know from modern European history that disproportionate adjustment imposed on vulnerable economies can build a sense of injustice that subverts democratic institutions.

We know from the Balkan wars in the 1990s that tectonic secessionist pressures can be unleashed so rapidly that they run way ahead of domestic and international diplomacy.

We know from current developments in the Middle East that political contagion, once started, is almost impossible to stop, without enormous suffering.

There is a real concern that the euro zone authorities will opt to regard what is political contagion, stemming from structural flaws and policy failures, as some form of left (or right) wing extremism, to be met with riot squads and political repression. That is what defenders of a paradigm do. It is quite certain that the necessary powers and facilities are in place.

It would be an unspeakable tragic response, putting at risk all of what has been achieved in postwar Europe. But it could happen.

If “summitry” was the answer, the crisis would have been resolved by now. To date, the euro zone authorities have fixated on moral hazard as an excuse for not responding to the need for a historically informed response to what is a crisis in corporate capitalism. That is, to the need for an exit, temporary or otherwise, of member countries, including Ireland, for whom euro zone membership and “troikanomics” are now the primary threat to recovery; transforming ESM-type firewalls that seek to defend a failed system into funding mechanisms for a new deal for vulnerable euro zone countries including debt forgiveness; and a new political engagement on revitalising European solidarity and preserving the single market from economic nationalism.

The euro zone authorities may reject what they see as moral hazard but we have long passed that point. Contagion, and specifically political contagion, is by far the greater danger.


Prof Ray Kinsella lectures at the UCD Michael Smurfit Graduate School of Business

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