Leave it to the World Economic Forum’s annual India conference to reveal some home truths about…the euro crisis.
I was moderating a panel discussion here in Mumbai yesterday on the increasing amount of trade within the developing world, and amid an unrelenting stream of on-the-record optimism from the various panelists, I tried to spark things up a bit.
Look, I said, I’m a born pessimist. For the sake of argument, let’s assume a worst case or nearly worst-case scenario for Europe. I don’t believe the euro zone can survive in its current form, and I think Europe is in for a deep recession, not a short shallow one. What would the impact of that be on India, China, and all the other developing countries, particularly in Africa, whose trade is rapidly expanding with developing world’s two giants?
Forget what the response on the panel was. It was unremarkable. What’s interesting is what happened later, during a coffee break, when I got into a discussion with two senior German executives attending the meeting.
The nature of these meetings is that the hallway chatter is always more interesting that the formal program. Part of the reason why is that, particularly when talking to journalists, the businesspeople or politicians tend to regard those conversations as off the record. So I’ll abide by that here. One of the German execs was a consultant, and the other headed what I’ll call a quasi-official German organization.
They were slightly irritated by the pessimism I’d expressed earlier in the day. “Don’t you realize,” one of them said, “that the cost to us (Germany) of bailing out Greece is far less than it cost us to reintegrate East Germany after the wall came down in 1989?”
I almost choked on my croissant. Yes, I replied, I am aware of that. I lived and worked in Berlin as a journalist in the mid 1990s, when that very painful (economically speaking) process was taking place in Germany. But doesn’t that, I said politely, rather beg the question: Germany integrating their brethren, who’d been isolated and impoverished during the cold war, was a dream come true, whatever the cost. Germans, on the other hand paying to bail out Greece is, to average German, rather the opposite of a dream come true, is it not?
He waved me off. No no, he said, it will be taken care of. The Germans, he said, understood how beneficial to them membership in the euro zone has been. Without it, the gentleman said, the value of the Deutschemark would be 50% or 75% higher than it is under the euro. “German industry would be wiped off the map.”
Here was my ‘choking on my croissant’ moment number two. Most economists would agree with what my friend at the meeting had said; but he seemed either oblivious (not likely) or simply unconcerned (more likely) with the flip side of what he had just uttered. Italy, to take the third-largest economy in Europe, one with a sizeable and modern industrial base, is stuck with a currency — the euro — which is stronger than the old lira would be under current circumstances. But membership in the euro zone means Italy can’t devalue to bring some relief to its exporters.
I pushed back politely. Look, I said, it’s not Greece I’m worried about. It’s Italy. Third-biggest bond market in the world. Bond spreads this morning again heading over 7% (before the ECB intervened this to push them back down again.) Too big to fail, too big to save. Is the government, even one under a new Prime Minister, going to push through sufficient austerity to avoid a default?
Now the consultant perked up, speaking what he too believes to be the unvarnished truth. They have to, he said, because “to be blunt about it, we have them [both the Greeks and the Italians] by the balls.”
And make no mistake – that, in essence, is where the European crisis stands. The Germans — and the ECB along with them — believe (perhaps hope is the better word) that two new technocratic prime ministers, former EU commissioner Mario Monti in Italy and MIT-trained economist Lucas Papademos in Greece, will cast politics aside and force angry populations in both countries to take their medicine, whether they like it or not. Because it’s for their own good, you understand. And besides, “we have them by the balls. They have to do what we say.”
Let’s set aside, for the moment, a couple of important facts: the European Financial Stability Facility (EFSF) remains woefully underfunded (anyone hear the sound of the ‘bazooka?’); the European banks are vastly undercapitalized given their exposure to PIIG sovereign debt (the top 20 banks, according to one conservative estimate, I’ve seen need 370 billion euros of new equity.) And just yesterday, Bundesbank President Jens Weidmann told the Financial Times that under no circumstances would the ECB don its Helicopter Ben propeller hat and act as “lender of last resort.”
Clarity is always refreshing, and what my interlocutor had said is very much the German perception of current political reality in Europe. We have them by the balls.
I nodded and, again as politely as I could, said that given European history, both recent and not so recent, that “reality” seemed “politically combustible.”
With that we bade each other good afternoon, a central point about the euro zone reinforced with a thud on a hot afternoon in Mumbai: The economics of this crisis are bad enough. The politics are worse.