Elections overnight (AEST) in France and Greece raise the prospect of the collapse of the Eurozone and a consequent world recession; voters in those countries might be pleased with themselves, but the rest of us should worry. This could get very, very ugly.
I would begin my remarks today with an observation: nobody really likes or enjoys economic austerity; only a masochist believes that slashing government spending to the point it begins to kill off economic activity is the prizewinning formula on a permanent, ongoing basis by which to govern.
But that observation is tempered by a reality: around the world, in liberal democratic systems of governance, electorates that are politically aware but mostly economically ignorant vote time and again for predominantly left-of-centre governments who engage in profligate spending, accompanied by exorbitant taxation and/or foreign debt.
Eventually the consequences of such governments must be addressed and the damage repaired, but in 100% of cases the same electorates will vote for a return to the spending-based model at the earliest opportunity — irrespective of whether such activity is sustainable or not.
And so it has come to pass in two constituent countries of what is increasingly the basket case that is Europe; in France, a new Socialist president — whose economic pledges essentially boil down to a promise to “let it rip” — has been elected in Francoise Hollande; in Greece, elections have resulted (at this stage) in the election of nobody in particular in a popular revolt against financial measures designed to stop that country from defaulting and going bankrupt underneath a mountain of self-inflicted government debt to other nations.
Back in August last year, in an article entitled “Gathering Storm Clouds,” I examined the very real prospect of world recession in the foreseeable future, and with specific reference to Europe, said this:
“One of the greatest acts of economic lunacy in the late 20th century was the Euro: a currency founded on the noble but idiotic belief that it is possible to federate a couple of dozen disparate countries into an economic and political union and — among other things — give them the same single currency to spend….many of these countries, whose currencies were rapidly appreciated to qualify for entry into the ERM and then the Euro, were left with nowhere else to go except the path of high sovereign debt to compensate for the fact there was less money in real terms to run their economies as a consequence.”
Clearly, those words are more applicable now than they were then, given Greek voters appear determined to throw off the shackles of forced financial restraint, and given the new President of France has essentially promised to spend up with reckless abandon.
In an early (and typically knee jerk) response, share markets across the world — including here in Australia — have recorded sharp losses today, as markets are swept with panic by the prospect of the collapse of Greece and, conceivably, of the Eurozone with it.
It is true that such movements on share markets are sudden, reactive, and often quickly reversed; but on this occasion, some consideration of the wider ramifications of the French and Greek votes should be given.
The immediate problem is Greece, a country known for decades as a byword for slovenly governance, mismanagement, corruption and official incompetence; indeed, at the time the first bailout packages were being devised for Greece last year, this critique extended as far as talk of the “lazy” Greek workforce, its abominable culture, and virtually non-existent work ethic.
It is one of those countries that should never have been part of the Euro project; not because there is anything wrong with Greek people of course, but because its economy was one that was so comparably weak, and its drachmas worth so little in comparison to other European countries, that Greece was hit extremely hard by qualification to join the Euro — and the consequences of that are now being seen all too clearly.
For Greece to collapse — as seems distinctly possible — becomes very tricky on a wider basis, as monies from across Europe (and including from the UK, which isn’t a part of the Eurozone at all) have been poured into Greece in the billions to attempt to stabilise that country.
Remembering that other countries such as Portugal, Italy and Spain also find themselves in debt problems of their own, economic collapse in Greece — not least as a direct consequence of an election result — will rightly make the likes of Germany, France and the UK think twice before throwing good money after bad in additional potentially ill-fated rescue attempts.
And should that occur, the Eurozone as a whole will likely collapse; the tiny handful of economically secure countries in Europe will leave the remainder to fend for themselves under their restored former currencies, but with the final result that Europe as a whole will sink into deep and sustained recession.
Interesting to watch in the context of all of this is the UK. Whilst not part of the Eurozone, it nonetheless counts itself (misguidedly, in my view, where the Euro or the EU generally are concerned) as a financial partner of Europe.
The UK is itself lumbering under £1,400 billion of debt — the legacy of 13 years of borrow, tax and spend Labour governance under Tony Blair and Gordon Brown; whilst the harsh austerity measures put in place by the present Conservative government will eventually fix the British economy, the pain is such that every opinion poll in Britain indicates that the British public would, at a hypothetical election held this week, opt for a return to Labour in a landslide and to its discredited and destructive economic management regime.
The UK is already teetering on the brink of falling back into recession as a result of the current government’s austerity measures; monetary collapse and economic malaise on the continent would suck Britain right into the vortex with it.
Yet this must now be viewed as more likely than not. The new French president is set to repeal those austerity measures in France set in place by his unpopular but competent predecessor, Nicolas Sarkozy; indeed, Hollande promises “growth and prosperity” — both of which can only be delivered in the immediate term by sloshing borrowed money anew through his country’s economy.
Further, he has pledged to renegotiate European deals to bail Greece out from its woes, and to withdraw from agreements (especially with Germany) on binding austerity measures across the Eurozone.
Greece, for its part, has effectively delivered the rest of Europe a one-fingered salute at the ballot boxes over the weekend.
So where will this lead, and what are the consequences here in Australia?
Any collapse in Europe and resultant recession will automatically take the UK, the USA and many other countries with it; the prospect of economic depression across the world emanating from malaise in Europe is one that must be taken seriously.
The so-called GFC may have had its roots in the US, and the contagion from that is an obvious factor — but not the underlying cause — of Europe’s woes; but having precariously navigated that event, developed economies are far more fragile, and far more susceptible to another severe financial event afflicting the global system.
Here in Australia, it is highly likely that we, too, would succumb.
Elements within the Australian public — and, it must be said, among its circles of governance — labour under a pretence that our trading relationships with Asia, and with China especially, will shield us from any sustained world economic slump.
This is a myth, and one which conveniently ignores the fact that whilst China is an important trading partner, so too are the US, Europe, and other markets that would be hit hard by adverse events in Europe.
Australia’s present debt ratios may be low by current world standards, but they are rocketing: by $A100 million per day over the past four years.
It bears remembering that even with the mining sector running on high, the overall Australian economy is patchy, sluggish, and hardly growing at speed.
Yet despite my complete aversion to unnecessary deficit financing and budget deficits born from the sort of mismanagement the ALP in Australia typically engage in and has done in its present manifestation in government, plans by Treasurer Wayne Swan to rip $40 billion out of the economy in one fell swoop in tomorrow’s budget — to meet an arbitrary promise of a budget surplus in time for an election year — are dubious at best, and downright dangerous at worst.
Clearly, there is much at stake, and much for ordinary folk — not just in Australia, but in western democracies around the world — to worry about, and quite literally.
France and Greece have elected new regimes with the promise of inflicting great damage on themselves, and on hundreds of millions of people across the globe who did not have a vote at yesterday’s elections.
It is to be hoped that politicians in those countries are adept at breaking promises; for if they don’t, the consequences will be far-reaching, and nothing short of disastrous.