Europe’s futureDec 31, 2011·Alasdair Macleod
Now the New Year reviving old desires,
The thoughtful soul to solitude retires.
The Rubaiyat of Omar Khayyam
We are at the threshold of a New Year and accordingly should accept Omar Khayyam’s recommendation, and as our thoughtful souls turn to Europe we might observe two entwined problems – economical and political. The economic problem is that spendthrift Europeans have run out of money, and their ability to print more is broadly restricted to saving the banking system. The political problem is that the whole future of the European Union has been thrown into doubt by the debt crisis.
Starting with economics, we see European budget deficits that are now likely to increase further as the mirage of economic recovery fades. Furthermore, there are large amounts of government debt maturing in the coming months, which need to be rolled over by persuading holders not to redeem existing bonds. According to UBS, in the next three months eurozone sovereign funding will total €234bn. The support from the banks is bound to be limited, since they face their own lethal debt trap of bank runs and maturing loan liabilities. This is the primary reason the European Central Bank made funds available to the banks through the long-term refinancing operation (LTRO), not as some thought to allow the banks to simply refinance sovereign debt.
The result is that individual governments will face a new escalation of their funding crisis. They are already raiding captive pension funds and other sources of capital available to them. This will not be enough to stave off considerably higher interest rates, with the possibility that these higher rates might act as a deterrent to outside lenders increasingly nervous of the risk of default, instead of being attracted by high returns.
We have little idea how this will play out, but it is worth remembering that when Britain faced similar conditions in the Seventies, interest rates increased to double current European levels to free the funding log-jam, and that was with the Bank of England’s freedom to print money.
Short-term political problems arising from this serious funding crisis become mere detail. However, we are probably witnessing the death-throes of the European Union in its current form, as “the project” to gradually replace national governments and currencies has hit a brick wall. The stark choice between massive government spending cuts and full-scale default are likely to make governments inward-looking and protectionist, and the real fear for the “Eurocracy” is the eventual collapse of the union.
The social consequences do not bear thinking about.