The agonies of the Eurozone reflects a far more significant hidden deficit

Publicado en el Diario Guardian, el miercoles 24 de febrero de 2010
Por Timothy Garton Ash, profesor en Stanford (Hoover Institution),
catedrático de Estudios Europeos de Oxford, catedrático Isaiah Berlin del St. Antony's

So Antigone had a part in this tragedy too. That's ­Antigone Loudiadis of Goldman Sachs, who ­arranged a complex ­currency swap deal that helped Greece to conceal the scale of its debt, in what the Financial Times delicately calls "an optical illusion", as the country snuck into the eurozone. Pity Greece didn't consult someone as wise as ­Socrates; and I don't mean José Sócrates, the Portuguese prime minister, whose own country the gods – that is, the bond ­markets – are also eyeing leerily.

Joking apart, we need to recognise that this is not just the first great test of the eurozone but also a defining moment for the whole project of a European Union. Since this is Europe, not Apollo 13, failure is definitely an option. More likely, however, is an agonised muddling through, leaving our old and demographically ageing continent even more preoccupied with its own internal problems. And the world will not wait while we spend another decade ­navel-gazing. Call me Cassandra, if you will, but that's how I see it.

No special gift of prophecy was needed to foresee the dilemmas that now face the eurozone. They were extensively debated before it was launched. I wrote in 1998 that monetary union was "an unprecedented, high-risk gamble", and argued that it was the wrong priority for Europe at that time. Subsequently, I was lulled into a false sense of security by the euro's apparent success, and by the practical and symbolic pleasures of travelling around the continent with just one ­currency in my pocket.

Now we have the predicted difficulties. As George Soros observes, a "fully fledged" currency needs not just a ­central bank but also a treasury. It requires a degree of fiscal as well as monetary discipline, linked with the capacity to make fiscal transfers to ­suffering areas (complemented by labour mobility from those areas), as you have in a country like the United States or the United Kingdom.

To survive and prosper, a European monetary union must develop at least a stronger element of economic union, and that in turn requires a stronger element of political union. Which, by the way, was one of the main motives for some of the chief political architects of what was then deliberately called "economic and monetary union", including François Mitterrand and Helmut Kohl. This was not just, as is often said, Europe putting the (monetary) cart before the (political) horse. It was an attempt to use the cart to bring on the horse. It was the last big fling of the so-called ­"functionalist" approach, by which you build a politically integrated Europe through economic integration. Broadly speaking, that worked for half a century, from the 1950s to the 1990s; but in this case, it has not. Not unless this crisis catalyses further steps of integration, as earlier crises sometimes have.

By its mendacious and self-harming profligacy, Greece has precipitated the crunch. Greece is unique, even among the Pigs (Portugal, Italy/Ireland, Greece, Spain), in its combination of massive deficit (an estimated 12.7% of GDP last year) and massive debt (some 125% of GDP and rising). It has not only lived beyond its means; it has used its years in the eurozone to become even less competitive, in starkest contrast to ­Germany. According to one calculation cited by the Financial Times's Martin Wolf, between 2000 and 2009 Greek unit labour costs rose by 23% against Germany's.

Yesterday, the country was hit by the second general strike in two weeks, and we ain't seen nothing yet. Greece has promised its eurozone allies to get its deficit down from 12.7% to 8.7% this year. Oh yes, and pigs can fly. Or call on Goldman Sachs for some more optical illusions. Even if the Greeks let their government do the right thing, such deep cuts, as well as structural reforms, can make things worse before they get better. Meanwhile, it seems the Greek government needs to borrow some €55bn this year, up to half of it within the next three months. What if the gods (bond markets) grow angry, and decline to play?

Well, that third act has not been written. Anything could happen. But my guess is this: through gritted teeth, Germany will agree to some form of eurozone bailout. However, it will only support the minimum needed to ­placate the gods, and only with the most astringent, Creon-like conditions being imposed on Greece. It is an ­important but ultimately secondary question whether this help comes in the form of bilateral loans, loans from the European Investment Bank, purchases of Greek government debt, EU ­spending transfers, jointly issued eurobonds or any of the other mechanisms ­suggested. EU leaders will deny that this is a ­bailout and everyone will know that it is a bailout.

Both Greeks and Germans will then be furious. One well-placed diplomatic observer in Athens suggests to me that, as part of the European supervision of Greece's fiscal discipline, "there'll be a German under every desk". Just don't mention the war. Except that Greece's deputy prime minister, Theodoros Pangalos, already has. Recalling the Nazi occupation, he said earlier this week: "They took away the gold that was in the Bank of Greece, they took away Greek money, and they never gave it back. This is an issue that has to be faced sometime in the future."

To which furious Germans will reply: "They took away our d-mark, and nobody asked us if we wanted to give it up. We were assured, in ­solemn treaties and ­rulings of our constitutional court, that we'd never have to bail anyone out. We took 10 years of painful reform to make ourselves competitive again, while those Pigs lived high on the hog. Now we're being asked to work till age 67 so the Greeks can ­retire at 63." And so on.

Eurozone Europeans are big and grownup enough to get over this, but it will take a large toll of effort, anger and internal strains. In the long run, the ­crisis might even make the eurozone a little stronger, adding an element of what is carefully called "economic governance" (which means different things in French and German).

In the meantime, European economic growth is limping while Asians forge ahead. The always over-ambitious goal of the 2000 Lisbon agenda, to make Europe the world's most competitive knowledge-based economy by 2010, looks ridiculous now, in 2010. And Europe's economic and political ­weakness compound each other.

Behind the monetary lurks the fiscal; behind the fiscal, the economic; behind the economic, the political; and behind the political, the historical. The deepest reality underlying this crisis is that the personal experiences and memories that have pushed European integration ahead for 65 years, since 1945, are ­losing their force. The personal memory of war, occupation, humiliation, ­European barbarism; fear of Germany, including Germany's fear of itself; the Soviet threat, the cold war, the "return to Europe" as a guarantee of hard-won freedom; the hope of restored European greatness.

These were massive biographical motivators, which drove people like Mitterrand and Kohl even unto the euro. Can Europeans go on building Europe without such profound motivators? Are there new ones in sight?