This too shall pass

As may or may not be obvious from the previous post,  I remain extremely pessimistic about the future of the euro and the future of the  "European project"  in general.  It looks like the EU will probably end up becoming little more than a customs union in future.  Which is incidentally what the British seem to have wanted it to be all along,  so they'll be happy,  presumably.

I say this because the responses to the euro crisis on all sides have been marked by selfishness;  by petty-minded,  short-sighted nationalism which consistently places the short-term national interest ahead of shared,  long-term gains.  Germany's  "reform"  plan for the euro is running into trouble because,  despite the desperate situation,  the poorer countries are refusing to submit to such strict control of their budgets and borrowing rights.  Germany,  on the other hand,  continues to refuse any measure which would systematically redistribute some of the financial gains from the euro from the more prosperous countries to the less prosperous ones.  And this is not simply due to the attitude of Angela Merkel or her team.  Reading the German press,  you'll find criticism of the Merkel government's handling of the crisis,  but very few voices calling for a redistribution of euro profits to poorer countries like Greece,  Portugal and Italy.  The process of European unification was based on the principle of give and take,  but increasingly it seems that everyone wants to take and no one wants to give.

None of this should be surprising.  Petty-minded nationalism ruled Europe for hundreds of years before the disastrous wars of the early twentieth century shocked people into taking a different approach.  Unfortunately,  that old mentality has been gradually reasserting itself for at least the past fifty years now.  I don't think the current crisis is going to be enough to force a reversal of that trend. And if it doesn't,  there is simply no way the euro,  or the European project,  can survive in the long term.  The result will be a weaker Europe,  divided upon itself as before,  with its relative wealth and power in the world declining even faster than America's. And every nation blaming every other one for what is happening to them.

Timeline of a disaster

1999-2009:  The euro is introduced. It brings benefits to the stronger economies of the eurozone  (Germany, Holland, Finland etc.)  because sharing a currency with weaker economies means their currency is weaker than otherwise would have been the case,  thus making their exports more competitively priced.  Germany becomes the world's biggest exporter nation in monetary terms.
The weaker economies benefit mainly from cheaper borrowing costs,  with lower interest rates for both private and public borrowing.

End of 2009  -  Stage 1 of the crisis:  Markets push up the Greek government's borrowing costs as doubts arise about Greece's ability to repay debt.  It becomes increasingly clear that Greece will not be able to remain solvent without external assistance.  Calls for a rescue take on increasing urgency due to fears the problem might spread to other vulnerable economies such as Portugal,  Ireland and Spain.
→  The German government,  strongly backed by German public opinion,  refuses any assistance to Greece.  The euro weakens,  making German exports even more competitive.  Germany experiences a minor boom in exports,  assisting the country's recovery from the Global Financial Crisis.  Greece introduces the first of a series of increasingly severe austerity packages.  Despite the austerity packages  (or indeed in part because of them)  the situation in Greece worsens.

Stage 2:  As Greece heads towards inevitable default,  Germany finally consents to a bailout package.  This consists of loans to Greece at interests rates which are high but not as high as the unsustainable rates now demanded by the markets.  However,  the markets have already begun to demand higher rates for Portuguese,  Irish and Spanish debt,  prompting calls for more far-reaching action,  such as the establishment of a common eurozone treasury which could issue shared  "eurobonds".
→  Germany staunchly resists the eurobonds idea,  as it would lead to a minor rise in the cost of German borrowing  (public and private).  Germany also resists expansion of the bailout measures.  The euro weakens further,  thereby sustaining the prosperity of the German export industry. Greece undertakes further austerity measures,  which eventually cripple its economy and cause widespread hardship.  Ireland,  Portugal and Spain also cut government spending.  Unemployment remains above 20% in Spain.

Stage 3:  Germany agrees to bailout loans for Ireland and Portugal but not before default becomes an inevitable prospect there too.  The ratings agencies state that they would give shared eurobonds the same rating as the weakest country in the group,  effectively ruling them out as a solution to the immediate crisis.  The best solution now seems to be to have the European Central Bank to act as  "lender of last resort",  effectively  "printing money"  to fund loan repayments by the vulnerable countries.  Inflation in the eurozone would rise as a result,  especially in the countries with healthier economies  (such as Germany)  but not to damaging levels.
→  Germany staunchly opposes the ECB becoming lender of last resort.  The situation worsens,  with serious fears arising about Italy,  Belgium and even France.  Italy's borrowing costs start to rise sharply.  The euro continues to weaken.  Consequently Germany's exports continue to sell reasonably well despite the loss of demand from the crisis-hit countries,  which are steadily becoming poorer.  Large numbers of young people begin to emigrate from Ireland and Spain due to the lack of jobs at home.  Suicide rates in Greece go from being among the lowest in Europe to the highest in Europe.

Stage 4 (the last few months):  Italy's borrowing costs remain at unsustainable levels despite a change of government.  Germany introduces a plan for reshaping the eurozone to suit itself,  to which the other countries acquiesce with barely a murmur due to the desperate situation they are now in due to Germany's stonewalling,  but which unfortunately offers little to solve the immediate crisis.  France's borrowing costs begin to rise as well and a downgrade in France's credit rating seems imminent.  The euro hits new lows against all major currencies and a recession seems highly likely in 2012 for the eurozone as a whole,  although Germany may escape with nothing worse than low,  near-zero growth,  buoyed as ever by its export sector.

What's next?

At every stage so far,  Germany has resisted the most obvious and cheapest remedies unless and until those remedies became the only possible course of action.  Extrapolating this into the future,  if Italy or France seemed in danger of imminent default,  presumably Germany would finally agree to let the ECB act as lender of last resort.  But will that even be possible now on such a large scale without the danger of double-digit or even triple-digit inflation?  Unfortunately no one actually seems to have a clue what is going to happen.

Update 10.01.2012:  Oops,  missed something rather important:  the ECB has in fact started  "printing money"  and acting as lender of last resort,  albeit in a rather limited,  indirect and not terribly effective way.  Its loans of 489bn euros to eurozone banks in late December were ostensibly done to reinforce those banks,  but the banks probably will in turn invest anything up to half of that money in eurozone government bonds.  So it's a backdoor way of the ECB buying government debt.  Of course,  the banks might not do entirely what is expected of them,  and in any case it is not a very efficient or even permanent fix.  Ultimately it's a continuation of exactly the course of action we've seen all along so far:  it prolongs the crisis,  prolongs the weakness of the euro and the suffering of the weaker eurozone countries,  while doing just enough to stave off the complete collapse of the currency.  We can probably expect this to continue until Germany's euro reform plan comes into force.

The future of the eurozone is Belgium

... one way or the other.

A couple of well written articles by the BBC's business editor,  Stephanie Flanders,  have got me once again thinking about the future of Europe's common currency,  and the more I do the more I come to the conclusion that Belgium pretty much holds all the answers.

When this crisis first began,  way back at the end of 2009 when it first became clear that Greece would need a bailout,  I became rapidly convinced that the euro would not survive this challenge.  I'm still convinced of that,  and my conclusions are being reinforced ever more by the comments of people like Ms Flanders.

Yesterday,  commenting on a report by the IMF condemning the indecision of Europe's leaders, she wrote the following:

At the end of last year,  Chancellor Merkel and President Sarkozy said emphatically that they would hold it together.  But in practice they have continued the previous strategy of attempting to muddle through.
What has happened in the past week or so is that it has become clear  -  to the IMF,  to the Obama administration,  and to many other interested parties  -  that the muddle-through option is not viable.  Worse that that, it is counterproductive.
Why?  Because in the process of muddling through you create so much uncertainty you actively cause the contagion you're trying to prevent.

The IMF has now stated clearly what has long been clear to many: there are only two ways out of this,  either much greater integration  (fiscal and political),  or the breakup of the eurozone.

Flanders  (the person,  not the region,  more about which in a moment)  still holds out the optimistic possibility that the path of integration could be chosen:

The leaders who will meet in Brussels on Thursday still have the power to decide whether this crisis is going to end with much greater integration and burden-sharing between the governments of the eurozone  -  or a dramatic break-up.  But they are increasingly losing control of the timing.

I would love to believe that the positive option is possible.  But that would require joint European bonds,  administered by a joint European treasury,  which would necessitate tight integration of fiscal policy,  which would in turn also require something like a loose federal government for the entire eurozone. And what would that ultimately look like?  Well, it would look pretty much like modern-day Belgium:  regions governing themselves with as much autonomy as you can have without actually being completely separate countries,  with the thinnest possible layer of federal government over the top.

And anyone looking at modern-day Belgium can see instantly why this is not going to happen.  The people of Flanders  (the region)  are currently agitating with increasing impatience for full independence and the demise of the Belgian federation because they are sick of having to subsidise the poorer other half of the country.  And their attitude,  characterised as it is by petty-minded nationalism,  selfishness,  short memories into the past and short-sightedness into the future,  is depressingly close to the attitude displayed by the Germans,  the Austrians,  the Dutch and the Finns when it comes to these bailouts of struggling eurozone countries.  It seems that anyone who is a little bit richer than the average is dead against the idea of even a cent of their money going to those who are poorer than the average,  for whatever reason and under whatever circumstances,  regardless of the consequences for all in the long term.

So yes,  it would be ideal if the eurozone could end up with a structure like Belgium's.  But what's actually happening to Belgium these days pretty much rules out the chance of it becoming a reality in this Europe.

Doom and gloom Part II; or, why it's a pity we aren't all Chinese

(Continued from previous post)

One of the biggest problems is the basic core dynamic of our civilisation.  Some people are inclined to blame democracy,  but the problem goes much deeper than that.  Even if every country in the world today were a dictatorship,  they would still be struggling against one another for the biggest possible piece of the pie.  Because the core dynamic of this civilisation is competition:  competition between individuals,  between groups,  between nations,  all striving continuously for as much prosperity and/or power as possible;  all intent on bolstering and protecting their own position,  at the expense of others if necessary.  This dynamic has powered our civilisation ever since it first emerged in the cut-throat world of the dying Roman Empire,  and it is what has taken it to the height and breadth we see today.  It is also what makes our civilisation quite unable to deal with the challenges it now faces.

Contrast this with Chinese civilisation,  in which one central authority commanded near-total obedience across more or less the entire civilisation.  If it had been China's civilisation and not Europe's which had spread to encompass the entire world,  the challenges of global warming and an unsustainable economic system would surely be easier to deal with:  a competent emperor,  advised by even more competent mandarins,  would issue a series of decrees to remedy the situation,  and those decrees would be by and large obeyed,  even if the result was increased hardship for most.  Even today,  China preserves much of this culture;  the people of China still demonstrate a willing obedience to and faith in their government which must surely be the envy of rulers everywhere else.  If the Chinese government seriously wanted to reduce its country's greenhouse emissions,  I dare say it could do so very effectively and with relatively little difficulty.  Unfortunately,  China is now well and truly part of our global civilisation and is consequently just another part of the problem,  not the solution.  China is not likely to try to reduce its emissions with anything like the speed or effectiveness of which it is capable,  because that would put it at a disastrous disadvantage against the rest of the world.

Of course,  if Chinese civilisation had been the one to swallow up the rest of the world,  we wouldn't be in this situation anyway,  because we would probably never have reached the stage of industrialisation...  but that's another story.