Two and a half years ago, we used to call them jokingly and somewhat affectionately PIGS or PIIGS. Not anymore.
…the coup de grâce was… served… by the financial markets- Edward Scicluna
The predicament which Portugal, Italy, Ireland, Greece and Spain are now passing through is no longer a joke. Each one in turn has tried hard to avoid the limelight and stay off the financial markets’ radar screen. Their exorbitant debts tell of each country a different story. Some debts were of long standing (Italy and Greece), others were a result of the financial crisis and its aftermath (Ireland, Portugal and Spain).
Ireland apart, each country, however, suffered from a common ailment: lack of competitiveness and sluggish growth, which kept festering for a decade protected and abetted by a veil of eurozone respectability and stoked by an undeserving low interest rate. By the end of this month we can say that, over this year, each one of these countries would have shared another common trait. They all would have experienced a change of government in some form or other.
Whatever political hues the ruling party or ruling coalition were, they would have suffered the same fate.
Their leaders would have resigned or been deposed, with many pushed into an election before its constitutional due date.
Most of these bloodless coups occurred around the time parliamentary approval of their respective budgets was being sought. All of them resisted successfully the push from the fiercely fought street protests, criticism from the opposition and from within their own party.
And, yet, the ousting of Prime Minister Brian Cowen and his Fianna Fail in Ireland in late February was followed by the resignation of Josè Socrates and his socialist party in Portugal in early June.
Last week, it was the Greek socialist leader Georges Papandreou’s turn to give way to a respected economist Lucas Papademos to take charge of a unity government while Italy’s Silvio Berlusconi is promising the same to the likes of respected academics such as Mario Monti. Later this month, it will be Spain’s turn to hand over the government to the opposition party after the announcement, last April, that Prime Minister José Luis Rodríguez Zapatero would not stand again for elections.
One could explain this phenomenon as an obvious response to the suffering electorate as a result of the austerity packages “negotiated” on their behalf by their elected government with their eurozone paymasters.
However, a close look at each country will show that this is not the case. Yes, of course, cracks did start to appear along the whole edifice of each ruling party. But the coup de grâce was not served by the electorate, nor by the opposition but by the financial markets.
The financial markets have managed to bring down to its knees any country they do not trust. Once the lack of trust gets translated into a reluctance to buy and support the country’s debt, this then results in raising the cost of capital beyond a rate that makes the national debt burden unsustainable. Italy’s 10-year bond yield rose to 6.77 per cent last week, which translates into a spread (or risk premium over the German nearly riskless yield) of nearly five per cent.
The powers of the European Central Bank to buy bonds from the secondary market of these countries manage somewhat to restrict this widening of these spreads but would not be able stop them.
Beyond a certain point, the political leader of any country, however strong and stubborn, would be unable to resist the tsunami of global pressure that pushes relentlessly towards the country’s default. In that situation the country has no alternative but to ask for a bailout whether from the IMF or, in the case of a eurozone member, a joint IMF/EFSF one.
A bailout means that the indebted country will be at the mercy of its creditors. What these creditors ask is a severe an austerity programme able to cut the outstanding debt as quickly as possible to sustainable proportions. In the IMF annals, many were the countries brought to this situation. Most of them grit their teeth and bear it in a stoic way. Recent examples are Lithuania, Ireland and Iceland. Other countries with Mediterranean blood flowing through their veins do the opposite.
This scares the creditors and sows grave doubts in their minds that the bitter medicine will not be accepted. Creditors do have lots of power over the debtors but they know that it is not in their interest to drive the debtors into a default. So they push and interfere as much as possible in the governance of the country to ensure compliance with their recommendations without triggering a disorderly default. Such scenes of IMF and other leading banks’ delegations visiting a poor “banana republic” are familiar. What is not familiar is that these scenes are starting to take place in the Europe. Chaperons are being appointed for both Greece and Italy. Oli Rhen now even wants the commitment from these countries “in writing”. This attitude will, no doubt, be resented by many a proud country knowing that the alternative is much worse.
Having the opportunity to meet with German Minister Wolfgang Schauble last week I had to ask the question. Austerity programmes for indebted countries are understandable but since Europe is on the brink of a recession surely the creditor countries with surpluses and strong finance can afford to do something about it?
He looked at me with alarming eyes. He said: “Look here, we are under attack! When the markets turn their eyes away from us, to a non-eurozone country such as the… UK or the States then we can breathe easier and talk about public expenditures. For now such words should be unthinkable let alone whispered”.
The message was loud and clear. In the eurozone, at the moment, such words should be considered as economic taboo. Who mentioned growth?
Prof Scicluna is a Labour member of the European Parliament.