It is decision time again in Europe. This time, the choices on the menu appear unpalatable. The difference is in degrees. For the most part, in the last seven decades (1945-2015), Western Europe has enjoyed peace and prosperity. That was partly due to the memories of economic suffering and colossal human loss in the previous three and a half decades (1909-45). Resolutions weaken, ties that bind start to fray and differences resurface as hard times become distant memories.
Europe’s commitment to internationalism, to an extent, was genuine and that was partly because of its own history of conflict and conquest. Spurred by a guilty conscience, it had sought to erase its past by being accommodative. However, it may have overdone it, and many European nations have turned appeasers too. There is understandable mutiny in the ranks of the German coalition and among European nations. Italy accuses France of being arrogant. The lesson is that one can always learn a lesson too well. The same mistake has been repeated in the economic sphere too.
Memories of hyperinflation and the rise of the Third Reich have turned Germans into torchbearers of fiscal prudence and anti-inflation crusaders. Not every country in the world can run trade, current account and fiscal surpluses. That is economically impossible. Germany managed to bend Greece to accept such impossible conditions but it probably sowed the seeds for Italians to elect a government that is leery of the Euro project. It may be difficult to do “a Greece" on Italy without destroying the eurozone project irreversibly.
Yanis Varoufakis must be smiling. In his book, Adults In The Room, he wrote: “As the so-called liberal establishment protests at the fake news of the insurgent alt-right, it is salutary to be reminded that in 2015 this same establishment launched a ferociously effective campaign of truth-reversal and character assassination against the pro-European, democratically-elected government of a small country in Europe." The chickens are coming home to roost.
It is not just that there were and are no adults in the room. There were and are no liberals in the room either. Christine Lagarde was particular that Greek pharmacies face competition. Further, liberal economics in practice meant complying with demands from the Brussels bureaucracy to fire sanitation workers who were Greek government employees and retaining, hiring and raising salaries for bureaucrats on secondment from Brussels. “An establishment that used truth-reversal so casually to annul a democratic mandate and to impose policies that its functionaries knew would fail cannot be described as liberal," wrote Varoufakis. Quite.
Recently, Lagarde moderated a panel discussion at the spring meetings of the International Monetary Fund (IMF)-World Bank in April on “Digitalization and the New Gilded Age". The discussion was about everything except the threats of a new gilded age that is already upon us. The surprise, therefore, is not that economic nationalists are now in office in many countries in the advanced world, but that there are not more of them.
Will the nationalists succeed in rolling back the gilded age? After all, advanced nations did not practise free trade on their way to “developed nation" status. Ha-Joon Chang at Cambridge University, author of Kicking Away The Ladder, would vouch for that. Further, globalizers do not have evidence on their side. Globalization, in reality, was transfer of wealth from the workers of advanced nations to capital owners in advanced nations intermediated by the workers of developing countries (“The Distribution Of Gains From Globalisation", IMF working paper, March 2018). Then, there was the role of debt. Touting the economic growth and prosperity of the last 40 years without accounting for the growth in debt that caused it is similar to the case of a fund manager who reports the returns he generated on investments without disclosing the risks he took. The bills for globalization are only now coming due. Once all of them are accounted for, its costs and benefits will look very different.
In terms of economic strength, the eurozone looks brittle. While America’s cyclical expansion is going strong in its 10th year, eurozone recovery has fizzled out. American banks have passed the stress test that the Federal Reserve conducts. European banks remain fragile. That is a reason why the European Central Bank is forced to keep interest rates so low and why it risks keeping alive real estate booms in many European cities. But, when the booms end, banks will be worse off. Eurozone banks have another and bigger vulnerability. An IMF blog post (“An Imbalance In Global Banks’ Dollar Funding", 12 June 2018) points out that European and Japanese banks, and not American banks, dominate international banks’ lending in dollars. These banks cannot easily tap the dollars deposited at their American subsidiaries to fund themselves. German and French banks, in particular, have poor dollar liquidity cover. This is against the backdrop of the Federal Reserve raising interest rates.
Recently, the Russian finance minister dangled the carrot of financial settlements in euros instead of dollars to his European counterparts. The eurozone is not in a position to seize it. Eurozone economic and political developments are not giving the common currency any advantage over the American unit. The euro is a beleaguered currency—and so is the geography that is behind it.
V. Anantha Nageswaran is an independent consultant based in Singapore. He blogs regularly at Thegoldstandardsite.wordpress.com. Read Anantha’s Mint columns at www.livemint.com/baretalk
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