One day historians will obsess over how Europe stumbled into a depression in the 2010s despite, apparently, of the best efforts of its leaders, who surely couldn’t have wanted to bring on an extended economic crisis in the eurozone and more widely. This is not, after all, WW1, where leaders insouciantly went to war convinced of speedy victory, or the 1930s, where economic ignorance crippled decision-making.
The explanation for the staggering ability of the current generation of European leaders to make wrong decision after wrong decision calls for a more complex analysis revolving around forms of communal delusion.
The reaction to the downgrading of France, Austria and several other countries by Standard & Poor’s, and the subsequent downgrading of the EFSF, suggests that some particularly powerful hallucinogen has been introduced into the water carafes and coffee urns inside the meeting rooms of Brussels.
In a remarkable press conference on Monday night our time, the European Union’s senior economic spokesman Olivier Bailly complained about Standard & Poor’s, suggesting the downgrading was “odd” and “strange timing” and that
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“We have more information than the ratings agencies and we think there are elements missing in their analysis … We have monthly updates from member states. We share this information on a confidential basis. The ratings agencies do not have this information.”
In short, ignore what the ratings agencies and markets think, trust the European Commission — it has access to information no one else has. Bailly was then asked why on earth the commission didn’t share this positive data at a time when markets, and for that matter the rest of the world, are desperate for evidence that things are on the improve in the eurozone. Bailly responded with a truly surreal statement:
“We cannot publish every day all the information we have, otherwise we would be commenting on this information and on market reactions every day and I’m sure we have more important things to do. Beyond the daily comments we need to see the [bigger] perspective and this is what we are here for.”
Markets appear to have already priced in the downgrade for France (which easily raised €4.4 billion barely 72 hours later) and there were plenty of suggestions about as much attention had been paid to S&P’s downgrade of France as to its downgrade of the US last year. And a few people haven’t missed the fact that S&P had thrown AAAs around like confetti before the financial crisis, but now seemed just as eager to rip them off everyone in a manner that might be every bit as destabilising as their pre-GFC antics.
But it’s important to step back and understand exactly why Standard & Poor’s, for all their culpability before the GFC, are unhappy with the Europeans. “We believe that a reform process based on a pillar of fiscal austerity alone risks becoming self-defeating, as domestic demand falls in line with consumers’ rising concerns about job security and disposable incomes, eroding national tax revenues”, said S&P. It went on to warn of “further significant fiscal deterioration as a consequence of a more recessionary macroeconomic environment”. It also complained that reform measures such as labour market deregulation wouldn’t be enough either, saying there was a risk of “reform fatigue” and that reform would be opposed by “powerful national interest groups, whose resistance could potentially jeopardise the reform momentum”.
Thus we have the world-turned-upside-down situation of Europe’s leaders — traditionally derided in the Anglosphere as borderline, if not actual, socialists — being harangued by one of the prime agents of market fundamentalism for being too obsessed with fiscal rigour and structural reform, when they should be spending more money.
“The idea expressed by the ratings agency that Europe is pursuing a strategy based on a pillar of fiscal austerity alone is a serious misperception,” Bailly sniffed in response. It took European Council president Herman van Rompuy, a Belgian career politician, to say what needed to be said amid all this, when he observed “we should refocus on growth and job creation. Growth-friendly consolidation and job-friendly growth are what we need”.
But German Finance Minister Wolfgang Schauble responded to the downgrade by again talking about breaking the power of the ratings agencies — not necessarily something anyone outside the agencies would have a problem with — and complaining that S&P had an Anglophone political agenda: “I don’t think that S&P really has understood what we have already accomplished in Europe.” The downgrade also raised the simmering issue of why the UK retained its AAA rating and France hadn’t despite similar levels of debt.
We’re well through the looking glass here, when the Anglophones are ganging up on the Europeans to impose looser fiscal policy. Growth-friendly consolidation may be what Europe needs, but that’s exactly what it’s not going to get. It reflects the iron grip of the fiscal rigour mindset on European leaders and the success of the Berlin-Paris-Brussels axis of austerity in imposing an economic Pax Germanica. Unfortunately, it’s becoming the peace of the graveyard as the eurozone heads deep into recession and pulls adjacent economies such as the UK in with it.
That’s before we even get to the Greek situation, which remains unresolved one way or the other. Europe’s problems are far more fundamental than recalcitrant Greeks. Most of all, they’re in the minds of the men and women who should be leading the eurozone out of crisis.