A couple of days after the EU cobbles together a package of loans to arrest the Euro crisis, Portugal calls a national strike against the austerity measures that are a central feature of the Euro project for an overborrowed country in the zone. It could scarcely be worse timing for the Euro’s cheer leaders. The markets did not like their package earlier this week, marking Irish, Greek, Portuguese and Spanish government bonds down. They will like political disccontent with the core policy of budget deficit reduction even less.
So why isn’t it working? The origins of the current stresses and strains lie in the way the Euro was set up. They created the federal institutions, a Central Bank, a single currency, a single market, and a lot of common law codes. They did not offer a single language for an informed European political debate or a fully operational single labour market. They did not put in place sufficient transfer payments from richer to poorer areas. They did not back up the need for proper controls over how much each country could borrow with a binding central budget to limit the overall totals of Euro denominated sovereign debt.
Now, belatedly, they are trying to impose a new discipline on member states, to curb their appetite for more borrowing in the common currency. It is a bad time in the economic cycle to do so, when unemployment is high and electorates are worried about wage and salary cuts and spending cuts. Their critics may be right in saying in some cases if the cuts are too big without a good private sector recovery the cuts can make the problem worse. The UK can benefit from its devaluation of sterling and the private sector recovery now underway. Greece does not seem to be able to do the same without a devaluation.
The idea that loan packages for Euro members in trouble on their own will solve the problem is foolish. If most or all the loan comes from EU members, it just adds to the balance sheet and deficit strains in the healthier member states. They can take those strainms for one or two small states, but cannot afford the strains for other larger countries on top.
The Euro is imposing exactly the same kind of economic torture on the peripheral countries as the ERM imposed on some members when they tried that. When the UK left the ERM economic recovery followed swiftly. The problem with the Euro is that it is an ERM that countries cannot get out of. That is what makes this rolling Euro crisis a tragedy. It is the triumph of politics over commonsense. There is more bad news to come, as there are apparently no limits to the pain they will inflict in the name of the single currency. People in underperforming Euroland economies are goign to have to get used to pay cuts and job losses as a necessary price to pay forsharign a bank account with the neighbours. Electorates of western Europe are n ot sufficiently enamoured of the political union to want to pay higher taxes to send sufficient money to countries and regions that cannot compete successfully at the common exchange rate. So the only answer offered is more cuts.