After a year of unremitting financial crisis and political bickering, European unity has never seemed so hollow.
February: Thousands of workers protest in Spain against government plans to cut spending and raise the retirement age by two years to 67.
May: Three people die in Athens as massive Greek anti-government protests turn violent. The victims are bank employees.
October: France burns as millions take to the streets protesting plans to raise the retirement and pension age. Fuel depots are blockaded and refineries shut down for days.
November: University students demonstrate in London to vent their anger at plans to triple university tuition fees. Violence erupts, injuring both students and police.
‘If Moscow sneezes,’ the Cold War-era saying went, ‘Communist Eastern Europe catches a cold.’ Two decades after the collapse of Communism another kind of virus appeared to be raging through Europe in 2010. As the winter’s Big Chill descended on the continent, every government was sneezing. Described forensically as a contagion, the virus transmitted waves of shocks as closely-linked but poorly-regulated parts of the West’s financial sector tumbled in the wake of a global credit crunch fuelled by collapse of the American housing market in 2007.
The world watched with growing alarm as the financial crisis spread across Europe, hitting with particular ferocity the 16 countries that had opted to share the Euro — the so-called Eurozone. With every passing month the mood grew darker. It is clear now, say analysts, that when leaders of the G20 economic powerhouses agreed a $1.1 trillion stimulus package in London in 2009, calling it “a global plan for recovery on an unprecedented scale,” they knew already that the contagion was beyond their control.
The stimulus was merely one of a series of measures that had to be taken, including severe spending cuts entailing joblessness. Having failed to save in credit-fuelled growth years, Europe is battening down its rusty hatches in 2010 while somehow trying to keep calm.
It’s hard not to panic. After bank failures in Britain in 2007 and Iceland a year later, it was Greece’s turn. Locked into a rigid system that did not allow it to devalue its currency and export its way out of trouble, Greece hid the true extent of its debt, egged on by financial firms. When the credit crunch grew, anger spilled over to the streets of Athens.
On March 3, the government announced a austerity programme, freezing public sector wages and pensions. In May, the IMF and Europe came out with a ¤110 billion ($147 billion) assistance package for a bankrupt nation whose public debt was 115% and budget deficit 13.6% of GDP. “If Greece alone engaged in austerity, Greece would suffer and that would be the end of the matter,” according to Joseph Stiglitz, the Nobel-winning economist. “The worry is that there is a wave of austerity building throughout Europe” that could slow aggregate demand and even cause a second recession.
“At the London G20 summit there was a consensus in favour of expansionary policies to counteract the recession but this consensus later fractured when many European nations became fixated about the size of fiscal deficits and shifted their focus to austerity measures,” said Michael Kitson of the University of Cambridge.
To some, Greece wasn’t the surprise: alongside Portugal and Spain, it is part of a troika of ‘southern’ Eurozone members whose economies are thought to be characterised by indiscipline and rigidity, with a love for running large budget deficits even in good times. Northern European economies, on the other hand, are said to be competitive, robust and flexible, with broader tax bases.
So when the one-time tiger economy of Ireland stepped up as the latest problem-child, there was a degree of shock. At 14.3%, its deficit was even larger than Greece’s. But there are vital differences: Ireland’s crisis was caused by a classic property boom-and-bust and an unregulated banking system that allowed the bubble to take place. After weeks of denial, Ireland was forced to eat humble pie in November when the IMF announced a ¤85 billion ($113 billion) bailout. Far from calming nerves, it only spurred further speculation about the fate of two other suspects: Portugal and Spain.
As is to be expected, clouds of political and social tension loom over Europe. The credit crunch has seen governments fall in Britain, Greece and Ireland. More worrying are the prospects of rising social unrest: backed by angry trade unions, millions have marched blaming banks and the financial sector for Europe’s — and their own — troubles. On September 29 a cement truck painted with anti-bank slogans was rammed into the gates of the Irish parliament in Dublin. In Britain, students at 16 universities, including Cambridge and Oxford, have begun sit-ins — called ‘occupations’ — to demand a reversal of plans to hike tuition fees. Whether these protests signify a leftward tilt is not clear — Europe is still months away from feeling the full force of the spending cuts. “There are no options on the Left,” said former Economist editor Bill Emmot. “There have been protests but this is not a social crisis. In order to revive growth, some market liberalisation will be needed — and that is a centre-right solution.”
Experts hope attempts to build a new international financial architecture will lead to tighter banking regulations in the West and capital controls in India and China. Eradicating the cycle of boom-and-bust remains a chimera: far better, suggests Iain Begg of the London School of Economics, to focus on improving the capital adequacy of banks and surveillance of bubbles.