Some serious signals get lost in the noise

Despite three high-level multi-national summits, two in Brussels and the G20 in Cannes last week, the European Union and its joint currency union remains trapped on a dangerous rollercoaster of uncertainty. At the same time some danger signals with wider implications than just the economy seem to get drowned in all the noise of market fluctuations and political posturing.

It would seem almost unreal that no commentators of note have yet posed the question why Greek prime minister George Papandreou, for the moment the man in the eye of  Europe’s debts crisis storm, has found it necessary to sack his country’s entire military high command in the wake of his announcement of a referendum on the European so-called rescue package.

His decision, communicated on Tuesday last week in a short emailed statement by the Greek defence ministry that the chief if national defence, army general chief of staff, the head of the air force and navy, along with 12 senior officers had been fired, could have been informed by a personal history.

Papandreou’s grandfather, Georgios Papandreou, who was also prime minister, was forced out of office and subsequently died under house arrest following the 1967 military coup. A period of seven years dominated by a repressive junta followed, during which political parties and trade unions were banned, mass arrests were made and systematic torture was the order of the day.

While there was an angry outcry in Europe and the United States in reaction to Papandreou’s plans to try and bring some democratic legitimacy to the handling of the debt crisis, and he was humiliatingly forced to back down later in the week, he might have been reading the political mood in his own country better than his European colleagues.

What is also largely getting lost in all the noise is the human face of the settlement package that is being enforced on the citizens of Greece.

Human face of austerity

The harsh austerity measures, coupled with a struggling economy, have led to the appearance in Greece of what is called the new poor, a term used to describe those suffering the impacts of social exclusion and rapidly shrinking civic welfare institutions.

Since 2010 ordinary citizens have seen:

• Government raising taxes while cutting pensions and state salaries across the board;
• Last month the Greek government announced it would put 30 000 workers on reduced pay as a precursor to termination and plans to slash pensions of nearly 500 000 public sector retirees;
• A solidarity tax, ranging from one to four percent of income to help pay for unemployment services as well as an additional tax on the self-employed;
• Value-added tax on most goods and services was raised – in the case of food from 13% to 23%;
• The economy has contracted by 5% in 2011, while unemployment is inching closer to 20%;
• The homeless have multiplied and out of 40 children˙i recently examined by an NGO-run polyclinic in Athens, 23 were diagnosed as malnourished;
• Charities are distributing roughly 12 000 meals around Athens daily; and
• Greek minister of health, Andreas Loverdos recently reported that suicides may have increased by as much as 40% in the first few months of 2011.

Motion of no-confidence

Playing for high stakes internally Papandreou seems to have succeeded in forcing the hand of his opposition on the European bailout question and, despite having had to back down on the referendum, survived a subsequent vote of no-confidence in parliament.

He, however has also laid bare the fact that representative democracy in member states of the EU comes second to the protection of the perceived own-interest of the big players like Germany and France, whose major banks would be in big trouble in case of a Greek default.

At a more fundamental level, the reaction of Germany, France and others to Papandreou’s referendum-plan amounts to little more than a vote of no-confidence in democracy when it comes to the management of the financial system. Effectively they are expecting the political head of Greece to deliver a deal while at the same time saying “we do not believe you have the support of the majority of your people.”

In the meantime Greece has been subjected to the greatest fiscal squeeze ever attempted in modern history, without any offsetting monetary stimulus or the tool  of devaluation available to it.

While there is also serious doubt whether the bailout packages for countries like Greece, Portugal, Spain and now probably Italy (where prime minister Silvio Berlusconi’s hold on political power is becoming more perilous almost by the day) will be able to survive a democratic test in Germany and/or France, it begs the question; how long can a European Union divorced from any democratic processes survive?

To this can be added the question how long can social cohesion and stability be maintained in the worst effected European countries?

Judged by the growing consensus that in the end Greece will default anyway and by the markets’ reaction to Italy’s debt situation, it is a legitimate question to ask whether Germany and especially France are not really only playing for time. There might be some hint as to the answer in the announcement last week by the French bank BNP Paribas that it had slashed its holdings in euro-zone government bonds, including €2.62 billion worth of Greek debt while at the same time drasticly reducing its holdings of Italian debt – by €8.3 billion or 40% of its exposure.

Conclusion

It is becoming increasingly clear that a huge mistake was made at the time of the negotiation of the Maastricht Treaty, which brought the euro into being, to create a monetary union without a fiscal union and not making provision for any given country to get out again once in.

The practical implications are seen in the one-way-street the bailout process has become for Greece. In the case of Italy it is not really fundamentally insolvent, but it is in dire straits because it does not have a lender of last resort in a sovereign central bank or a sovereign currency it can devalue to effect greater competitiveness.

The reaction of hedge funds and other players in the financial markets is sending a clear message: The European crisis is far from over. Unless some fundamental structural fault-lines, some of which have been present in the European project from the word go, are not addressed or placed firmly on the agenda, it is unlikely that confidence will return in time to avoid a messy collapse of the project as a whole.