PIGIS: the backlash of Euros' ecstasy

Europe is in the midst of a three-fold “heritage crisis”. First of all, the US mortgage-driven subprime crisis has crossed the Atlantic through the interbank refinancing market. European banks have had to swallow the cost of reserving against billions of dollars of losses on derivatives and securitized products in their balance sheets. Second, the European debt crisis has shed light on the pitfalls of an incomplete currency union that lacks fiscal and political integration. For years, a number of countries, mainly in the Mediterranean Europe, have lived beyond their means behind the cozy protection of the Euro. Today, banks must grasp the cost of refinancing bond issues from countries that have been hammered by endless rounds of downgrading. The last element of the heritage stems from the very management of the 2008 crisis. Governments, on each side of the Atlantic, have lost any firepower on both monetary and fiscal fronts. Rates cannot drop below zero, liquidity injection boils down to throw inflationary fuel on a fire. And little can come up from China that does the utmost to achieve a soft economic growth landing contrary to its reactivation program of 2008.

Despite the consensus among policymakers and scholars that the crisis can be fought with a traditional combination of national budget and monetary tools, this global crisis is different in many respects. In Germany, Angela Merkel calls for drastic policy measures to “slash public spending, shrink debt and boost competitiveness”. But the “protestant ethics of capitalism”, i.e., dynamic savings and restrained consumption for boosting productive investment” works only in a healthy economic environment where a country’s economic stabilization policy has little impact on its neighbors’ trade, production, and employment. Otherwise, in an anemic growth region such as Europe, Mrs. Merkel military tone ends up into negative sum game, i.e., exporting deflation. In fact, the German Chancellor advocates exactly what the IMF implemented in the wake of the 1997 Asian crisis, with a ruinous consequence on regional growth. The global system, indeed, has become an echo chamber which amplifies and propagates the spill-over effects of economic and financial imbalances. In the global kettle economy, market bubbles, volatility, animal spirits and speculative herd instinct combine to create recurring financial crises whose social costs gets higher and higher. Globalization, that is the worldwide extension of the capitalist market economy, is a new phenomenon with deep consequences on each country’s margin of socio-economic policy maneuver. Solidarity, whether concerted or imposed, is a fact nowadays.

No wonder then that the social utility of market finance is under scrutiny in light of the ongoing drift away from the original task of finance, namely efficient intermediation between savings and productive investment to boost sustainable economic growth. Since the 2007 global crisis, a number of scandals involving greed, conflict of interest, and lack of transparency, led to a public protest that “this time, this is enough!” The combination of economic liberalization, market globalization and the new technology revolution was to pave the way to a new sustainable economic order that would disseminate the Western socio-cultural values as well as material progress worldwide. The End of History would see the triumph of the capitalist neoliberal values combining democracy and wealth. In fact, what has emerged is Hyperfinance with its two-fold emancipation; of the economic sphere from the political sphere, and, more recently, of the financial system from the economic system. Increasingly, “free wheel” Hyperfinance flutters independently from the underlying production of goods and services in the real economy. The global financial system gets neither time nor social horizon. Its only rationality is profit and stockholder value maximization. Markets do not behave like deus ex machina which instantaneously allocates resources efficiently. Myopia has thus prevailed in both academic and political circles as nobody bothered reading the 2007 BIS Annual Report which sent warnings of mounting financial risks: “Clear signs emerged that excessively optimistic expectations might have been boosting the recent growth in activity. In the fast growing mortgage market, securitization has often led to an erosion of credit standards.”[1].

Today, the question that Europe must tackle is simple and daunting: Will the Euro survive the centrifugal forces of the debt crisis? The socio-political and economic crisis that currently strikes the so-called PIGIS (Portugal, Ireland, Greece, Italy and Spain) undermines the credibility of the Euro as a reserve currency, and of the EU as a regional economic union. The crisis can be perceived as a modern remake of a French fable, namely the famous de La Fontaine's "The Grasshopper and the Ant". After years of easy going, when the winter came, the grasshopper who sang all summer turned to ants for help... but this time without getting any feedback.

There are growing signs of social fragmentation in Europe, intergenerational, cultural and also based on growing wealth gap within and across countries. Europe is no longer a unifying dream nor even the base of shared cultural identity. Europe discovers that it is increasingly on the side-line of the globalization and no longer an illuminating centre of ideology and cultural values. The rampant social crisis in Europe has little to do with the political turmoil that destabilized the Maghreb countries recently. In the latter, one finds a young population without jobs nor any socio-political rights with nothing to lose to fight repressive and corrupt regimes. In the former, the youth faces a darker future marked by declining social mobility and eroding purchasing power and job opportunities. In other words, there are those who want to get out of poverty and repression with a strong appetite for future, and those who fear tomorrow given that the future is no longer what it was.

This social crisis summarizes the challenge that Europe faces today. Europe is at the cross roads to rebuild an economic and social integration based on solidarity, exactly as it did to launch the union back in the mid-1950s. This original philanthropic approach was intended to forge a common destiny for a handful of countries, based on a sort of Robin Hood's principle: wealth redistribution for the common good, by taking from the rich to give to the poor. But all this requires common values, and not only a common budget! Happy beneficiaries, instead of becoming laborious ants using this providential money to develop a sustainable economy preferred to invest into cyclical sectors and social programs without much governance. The rise in living standards in the PIGIS resulted in little innovation and weak institutional and structural frameworks, i.e., no resilience. On the opposite, Germany funded its onerous and protracted reunification process on its own. Today, no wonder that Germany is reluctant to continue funding the development of countries that gambled instead of investing. Germany wants to restore the predominance of “politics” over “markets” whereas there is no unified economic, social or budget policy in the EU. Worse, there is a deep value split between the northern austere “protestant ethics” and the Mediterranean “enjoyment ethics”, which resists swapping today’s individual restrain for public well-being tomorrow.

All in all, what is at stake today is the very future of Europe, and not simply that of the Euro. Philanthropy is over, now is the time of realpolitik coupled with strong governance. And if Euro is to survive its deepest crisis, it's a safe to bet that future candidates will have to accept tougher conditions to join. If they are offended, or refuse, the answer will be simple in de la Fontaine’s words: "Well, keep dancing and so be it!" Or in those of Benjamin Franklin: “Either Europeans should all hang together or they will all hang separately”. The hanging rope is not the Euro; it’s a lack of common political will.

[1] BIS, Annual Report 2007, page 1 & 9.