Europe’s problems, which seem suddenly to have caught the world’s attention, stem from trying to make silk purses out of sows’ ears and then trying to convince the rest of the world to buy into this fraud. Greek, Italian, Portuguese, Spanish and Irish (GIPSI) debt were never the same quality as German or even French debt but for the last decade, somehow people took the leap of faith into believing that they were. They had forgotten the basic mantra of you cannot have monetary union without fiscal union and for that you need political union - something that was never going to happen. Let’s remind ourselves of how Euroland got itself in this mess.
In 1993, despite strong opposition from the United Kingdom, the Maastricht Treaty came into force mandating at that time for all European Union (EU) states, other than the UK and Denmark, the creation of an economic and monetary union by 1999. This was the realization of an idea conceived by the EU or European Union’s predecessors since the 1960s so, on 1 January 1999, the Euro was born.
In 2002, notes and coins began to circulate and began taking over from the former national currencies and, in 2009, the Lisbon Treaty formalised its political authority, the Euro Group, alongside the European Central Bank.
In 2011, the Euro’s prospects of survival in its current state began to appear increasingly unlikely as Greek default started to appear inevitable, raising the spectre of a chain of defaults throughout European countries from the ‘Club Med’ periphery to the Germanic core. 2012 RIP Euro?
This is precisely Europe’s problem - by throwing its lot in with the Club Med countries, Germany has profited from the twin turbo boost of a highly competitive currency that has fuelled an export boom and an unprecedented access to borrowing and, therefore, spending power by economies that are now faced with the dilemma of paying it back.
Greece has been in default more often than not in the last two centuries and so that it is in default now should be no shock to anyone, except those who really did believe that the purse was made of silk.
Pretending that Greece, with its 19th and 20th century history of financial profligacy, which markets had determined should only be leant money at interest rates of 30% per year, if at all (plus Ireland, Italy, Portugal and Spain) had the same level of economic risk as Germany was madness for all concerned.
Right now the pain for this folly is being felt by the people of the GIPSI nations. But it won’t simply end there. Remember the domino theory of communist contagion in South East Asia? The economic dominoes of European sovereign financial systems are in real danger of knocking each other over.
When Deutsche Bank chief, Joseph Ackerman talked recently of needing to recapitalize European banks to protect the smaller ones, what he really meant was that the whole system needed shoring up so as to prevent the collapse of Deutsche itself which is rumoured to have almost gone under in 2008 and whose very survival today continues to hang by a thread along with many of the French, Dutch and Belgian banks. No wonder money continues to pour across the borders into Switzerland - people want to park it somewhere they believe that it will be safe and in a currency that they know will still be around in a year or two.
All the problems that I warned about before look like they are now coming home to roost exactly as expected and feared. Yet again, history has been ignored. Previously, I stated that Italy was a relatively young nation that was still struggling to assert a national cohesion that can impose itself beyond the extremely strong and potentially divisive cultures, histories and identities that make up Italy’s different regions.
Just in case we forget, Italy is 150 years old. Putting this into context that means that it was actually called into being the year after Battersea Dog’s Home was founded. Mind you, the high testosterone yapping of disparate alpha dog Italian politicians of all colours since then could easily be confused with the noises that have emanated from South London’s famous canine shelter for the last century and a half.
And yet, Italy is increasingly emerging as the frontline in the battle for survival for the Euro currency, the European Central Bank (ECB), the European banking system, the EU itself and ultimately the European economy.
Italy is the world’s third largest sovereign debtor and, consequently, it was always clear to us that this was where the battle would be fought which would determine the success or failure of the Euro project.
The problem was that while Greek, Irish, Portuguese and even Spanish debts were to a large extent manageable because of their smaller scale and because of the ability of the ECB/IMF/EU/EFSF to bribe and bully the smaller nations, Italy would be a bridge too far.
This seems to be very much the case. And yet a report by the Bank for International Settlements (BIS) last year indicated that this need not be the case. After all, Italy’s problems could be more easily solved than those in many other countries. Whilst its debt levels were too high, it could turn its deficit into surplus simply by: cutting expenditure, increasing taxes, reducing corruption and illegal economic activity, improving transparency and increasing productivity.
Italy could cure its deficit, if it could do all of the above but if it could do these things, it wouldn’t be Italy and it would not have a deficit. It is quintessentially Italian to agree a deal with the Troika to see Italian bonds being bought in return for promises that Prime Minister Berlusconi is happy to renege on within a matter of weeks and then, in the face of EU displeasure, turn and ask China for help instead.
Will Italy buckle down and sort things out? Nah! You might as well ask Italians to stop driving fast cars, wearing sharp suits or eating pasta - all things which are equally as much a part of Italian life and ain’t going to change simply because European, and in particular German, economic survival depends on them. Mama will still be serving pasta next year when the highly efficient technocrats of The Bundesbank are desperately pre-occupied with trying to find a way to avert German national bankruptcy. That is why the Euro in its current form is doomed to fail. And that why a duck will always be a duck in whatever shape or form it comes in.