Post-apocalyptic Europe

In movies, the end of the world tends to be the aftermath of nuclear bombs, meteors or some zombie-producing monkey virus. Hollywood has yet to produce a dystopian theme borne of an economic meltdown — perhaps for lack of an adequate benchmark. Maybe if the Great Depression was more cannibalism and less soup kitchens it would have cut the mustard. Then again, the seeds of the Second World War are said to have been sown during that recession. Radicalism is often an externalityof desperation.

Should the world then be worried about current events? Following the second-most debilitating recession in modern history, Europe has double-dipped. The Arab spring came and swept away entire governments. London went anarchist for a week, and now Occupy protesters are perched in city squares the world over. There seems a complete loss of confidence in the capitalist system, and exacerbating the sentiment are the woes of the European Monetary Union.

Germany seems to be in the thick of it every time the world faces an apocalyptic economic scenario. Thoughts will undoubtedly turn to the 1920s, when the Deutsche Mark had become less valuable than firewood. Hyperinflation is a genuine fear. Warren Buffet, a revered value investor, once described the creation of the single European currency as countries effectively handing over their credit cards to one another. He wasn't far off.

Today Germany holds in excess of $700 billion (about Dh2.5 trillion) in sovereign bonds of five countries (Portugal, Ireland, Italy, Greece and Spain — or PIIGS); more than a third of that is owed by the Spanish alone. These problematic economies have soaring deficits but they are not able to dictate their own interest rates. Fiscal and monetary policies go together — it is not efficient to man the pedals while the passenger steers. The US, Britain and Japan all have high levels of debt but have endowed themselves the tools to control its pace and direction.

Devalued euro

Europe's nations cannot even print their own money. Had the European Central Bank (ECB) indulged in a spot of quantitative easing in accordance with the requirements of the weakest linksin the EU chain, this crisis wouldn't have been as dire. Onlyproblem is that the euro would then devalue.

The latest round of crisis talks bore fruit in the form of an inflated European Financial Stability Facility (EFSF) bailoutfund — which has been quadrupled to the tune of aroundone trillion euros.

This is music to the ears of the afflicted countries, who believe they can spend their way out of trouble. After all, spending galvanises the economy, which in turn increases the money supply, thus increasing demand and adding inflationary pressure. Germany is concerned that if such are the financial needs of these countries, the bailout fund will turn into a perpetual, bottomless pit of cheapening euros, which brings us back to German paranoia about history repeating itself.

Dangerous consequences

The Eurocrats in the mix are touting a fiscal union, where budgetary powers are also centralised — effectively transforming Europe into one big country. Anyone with a faint knowledge of the history of the continent or modern politics will realise that this is a highly improbable and flawed idea. But in the current sociopolitical climate, the radicals are out in full swing.

Plus, if memory serves correctly, there was once a German man who preached something similar to a unified Europe in the form of a thousand-year Reich. John Maynard Keynes, in his book, The Economic Consequences of the Peace, accurately predicted the rise of Nazism on the back of the Versailles Conference — where the powers that were placed enormous debt burdens on Germany. Similarly, politics right now are dangerously tied to economic ramifications.

There is a bright side to this, in the form of rosy historical precedents. Post-Second World War, US debt was well over100 per cent of its GDP. Over the following decades the country grew into the world's superpower. Europe too was in a shambles following the Great War. For the most part, the continent evolved to house nations that are considered the closest things the world has ever seen to perfect societies. Who's to say that won't happen to Greece or Portugal?

So what of abandoning the union altogether? If Germany leaves, so will France — the two strongest members — and the minnows will have to fend for themselves. A parting gift would surely be on the cards; perhaps the conversion of sovereign debts into long-term loans over the next half-century or so (similar to those provided to European nations after the Second World War). A 50 per cent haircut on Greek debt has already been agreed, though some bondholders, mostly in the private sector, would call it more of an amputation. All this, however, is not enough.

The fact remains that Greece and other PIIGS countries are in this situation because they joined the euro in the first place, enjoyed robust growth, and weren't able to control the budgetary swelling that came with it. Breaking up the union would be like pulling the rug from under them. No bailout money and a brand new domestic currency worth less than the acorn.

Germany would pull through unscathed — if the continent's caretaker had only itself to look after, it would fare better. The only worry is that a strong German currency would dent exports to its fledgling neighbours — the largest consumer of German goods. Germany, though, knows better than anyone not to abandon an ally in times of economic strife — for who knows what fascist upshots await. Angela Merkel herself voiced this view during crisis talks — she said, "No one should think that another half-century of peace and prosperity is assured… if the euro fails, Europe fails."