Europe is juggling five simultaneous crises, all unforeseen shocks in different stages of development: Refugees from Syria, Eurozone periphery debt, a global economic downturn, Russia’s annexation of Crimea and its aftermath and Volkswagen’s crimes and misdemeanours.
Chaos theory’s favourite metaphor is the wing flap of a butterfly that sets off a tornado in another part of the world. An innocuous crisis trigger in Europe has been German Chancellor Angela Merkel’s principled decision to open up Germany to refugees from Syria. Most Germans greeted her decision with exuberance, but she did not prepare her country, and the rest of Europe, politically and logistically for what was to come.
In Berlin and Hamburg, the housing situation is so desperate that the authorities are preparing legislation to confiscate empty privately owned apartments and, in Hamburg, commercial properties too. There have been cases where local governments terminated rental contracts of tenants in social housing to give shelter to refugees. When the public sector behaves this way, xenophobia is only nanoseconds away.
No one in Germany is quicker to notice a shift in the public mood than Horst Seehofer, leader of the CSU, the conservative Bavarian sister party to Merkel’s Christian Democrats. He says Germany will be paying for the consequences of Merkel’s policies for a long time. The chancellor’s once gravity-defying approval ratings have recently come down.
My reading of the situation is that the refugee crisis, perhaps more than any other single event, will end up reducing Germany’s room for manoeuvre. However, that is not the only factor. A further constraint is the global economic slowdown. Its impact on the Eurozone is not visible now, but that might soon change.
As Simon Tilford of the Centre for European Reform, a think-tank, recently argued, there is no way the Eurozone will be able to shrug off the global downturn because its post-crisis recovery strategy rests on net exports.
The Eurozone is headed for a current account surplus of 3.5 per cent of gross domestic product this year. It is generally unwise for large economies such as the Eurozone to depend on beggar-thy-neighbour-type policies. Now that the neighbour — the rest of the world — has fallen sick, there is no plan B.
The combination of an economic slowdown and the refugee crisis will transform the German fiscal surplus into a small deficit, which would be fine under normal circumstances. Germany should be running a modest deficit to support the Eurozone economy.
But Germany imposed on itself a constitutional law that enforces budgetary balance over the economic cycle. Once the surpluses are gone, the political and legal room for discretionary policy action will have disappeared. To put it more crudely: The Germans have decided to spend the surplus on the refugees, not on Greece.
The newly re-elected Greek government will soon pretend to start the agreed economic reforms. At best, it will implement them reluctantly, and incompletely. Once it has done that, the first programme review will decide whether this has been enough. If it is negative, Grexit — a Greek exit from the Eurozone — will be back on the agenda.
At an impasse
However, even if it is positive, the outcome might not be much different. In that case the Greek government will insist on debt relief. So will the International Monetary Fund. The International Monetary Fund (IMF) has already said it will not accept another pretend-and-extend type loan rollover. But this, I fear, is all Germany will want to concede. Things will be at an impasse once again. Long nights in Brussels beckon.
At that time, Europe will be reminded again of the immorality of a bailout agreement that neither side believed in. It could have worked, but that would have required the politically impossible trinity of the right type of economic reforms, less austerity and more debt relief. Greece and its creditors struck their deal out of fear. Merkel did not want to be blamed for Grexit. Alexis Tsipras, the Greek Prime Minister, was scared of a parallel currency, at which point he saw no alternative, but to sign on the dotted line.
All that has changed since then is Germany’s fiscal space, and the Volkswagen scandal will narrow it further. The penalties likely to arise could easily match the hypothetical losses of a Grexit. And these, too, may ultimately have to be funded by the German taxpayer.
One of Merkel’s talents is her ability to break down complex issues into their components, but I fear this will not be easy to do with Europe’s five concurrent crises.
We are in the realm of true chaos. Anything can happen.
— Financial Times