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There is an implicit acceptance that Spain may yet turn out to be more problematical as its economic weakness and credit downgrades take effect and the same applies to Cyprus though their problem is the scale of debt exposure to Greece – both have huge bank stress issues. Meanwhile German appetite for continuing to take the lead in saving the EZ is wilting and this is not helped by fractious relations between Germany and France where the latter is reversing many of the austerity measures of Sarkozy. In short, the political and economic attitudes of the two nations are drifting apart on the choppy waters of self interest.
The mantra still being heard in Brussels and Berlin is greater integration, mutualisation of debt to allow a Eurobond to take effect and a single EZ bank governance model. In 10 and certainly 100 years time this period will be looked back upon as either a period of giant political folly and weakness or of enlightment as Europe steps back from the brink of structural long term failure.
At a functional level there are some key dependencies needed for a fiscal pact or any other form of worthwhile and effective integration to work:
- Central fiscal control
- Central monetary control
- Budgeting across all nations from the centre
These are mutual dependencies and it's only out of political expediency and panic that they are being glossed over as central to decisions. But of course they were ignored 12 years ago when the Euro came in too. Will it be different this time?
Quite apart from the practical issues of attempting to govern Europe centrally to good effect (it's very difficult on a sovereign scale today – it will get close to impossible in the federal context) there are two other factors essential for integration to work:
- Central political governance, leadership and decision making i.e. each state has to give up sovereign authority.
- Regional and sustainable electorate acquiescence to the above... The German and French electorates are showing decreasing enthusiasm or anything approaching this concept.
Put even more simply; it is impossible to have economic governance and accountability without matching economic and political authority. Today's technocrats need to stand a long way back from the spread sheets and messages from credit rating agencies to appreciate the veracity of this concept.
If the fiscal pact gets pushed/fudged, through then the pain of regional economic failure and electoral dissent will be far worse and long lasting than today's regional debt and austerity issues. If the regional economic failure were to embrace Italy and Spain, it would likely lead to political extremism as we are seeing in Greece. In Italy this could be very potent and the now feared economic contagion would turn into political contagion taking in France and to some extent Germany. This is a prospect that the EU leaders must consider seriously. Meanwhile, political and electorate support for the Euro is slipping. Crucially, Germany sees the greatest resistance to the Euro with 39% wanting out.
To close on my headline questions on the potential Eurozone break up.
Can it? Yes, but at massive cost both short and medium term but within 2 years this would stabilise. Bear in mind that the EU crisis is already 4 years old...
Will it? No, the political courage and unity is simply not in evidence. There will be a fudge, hopefully that will include the expulsion of Greece and maybe other PIIGS which would bring huge confidence back to the currency.
Should it? Yes, if the decision makers were free to be judged on the ten year impact. Until then there will be a lot to fear from the break up and some suffering but after that the type of EU prosperity that was enjoyed in the 80s should return.
Without a large scale or full Eurozone breakup, the GDP of Europe will decline slowly but inexorably.