Till debt do them part
Europe’s still in the tunnel and walking a tightrope between austerity and growth.india Updated: Nov 15, 2011 00:38 IST
The resignation of Silvio Berlusconi as Italy’s prime minister is the biggest political scalp to have been taken by the European sovereign debt crisis.
His departure and replacement by Mario Monti, a former European commissioner, has reassured markets that Italy is not in danger of defaulting on its government bonds. A similar technocrat takeover in Greece has also contributed to bringing stability to the world’s largest economic entity. However, it is important to keep in mind that Europe is still in a very long and dark financial tunnel.
The debt has not gone away. Even Germany, the continent’s economic powerhouse, is slipping into recession. And it would not take too much to ignite another round of market doubts about, say, Spain or Belgium being unable to honour its government bonds. Finally, there remains a big question as to whether the massive budget cuts being demanded of the indebted European countries will continue to be politically saleable in the coming year. Trying to walk the tightrope between politically sustainable austerity and economically sustainable growth is the main challenge facing almost all the southern and many of the eastern European governments.
Financial investors who have bought European government bonds are demanding that the governments slash their expenditure and bring their massive debts under control. In this they are being backed by Germany and the thriftier northern euro governments. The red ink governments, however, worry that too much austerity will cripple their economies to the point that balancing budgets may be impossible. One could see this with Greece where austerity measures kept making a hash of predictions of government revenue, causing a vicious circle of austerity leading to more debt leading to more austerity. The installation of technocrats may reassure the markets. But if they have to carry out far-reaching structural reforms, their lack of political skills may make it hard to sell such policies to the European Street.
The fall of two governments in a row and public disgust with the mainstream political leadership means that Europe has won itself a reprieve, one that could last for months. But Greece will still have to partially default on its debt — and the consequences will have to be managed and absorbed. Italy, Spain and other debtors will have to tighten corsets and hope their political ribs don’t crack. A European recession now seems inevitable. The problem is the rebound may prove a long time in coming. Europe has been generous with itself and is now a producer of horrendously expensive quality goods and services.
At a time when China, India and others are reshaping the nature of global competition, Europe may find this legacy an even greater curse than its slipshod accounting.