Europe in Blunderland

Europe's ship of state is floundering in a never-ending debt crisis. Comparisons to the last voyage of the Titanic are inevitable as even economies of Italy and Spain face threat.

world Updated: Jul 17, 2011 02:26 IST
Dipankar De Sarkar
Dipankar De Sarkar
Hindustan Times

“I fear that a breakup of the euro — and the chaos that would ensue — would be a political as well as an economic tragedy from which Europe itself as well as the very idea of international cooperation would take generations to recover.” — Former British Prime Minister Gordon Brown in his book ‘Beyond the Crash’.

At 12.13pm on May 31, 1911, the ill-fated ship, Titanic, was launched in the docklands of the city of Belfast, Northern Ireland, with pride and proclamations of European triumph.

The appropriately-named Saxon J Payne, assistant secretary of shipbuilders Harland & Wolff, lauded the ship as an example of “the vitality and progressive instincts of the Anglo-Saxon race,” recorded the Belfast Newsletter breathlessly the next day. It added: “and he did not see anything which need give them alarm, regarding the prospects of the future.”

Just 11 months later, the luxury liner sank in the Atlantic Ocean, resulting in the deaths of 1,517 people. A century on from its launch, that tragic moment was recalled in distant Italy as Finance Minister Giulio Tremonti, flailing against a sweeping European financial storm, told the Senate: “Just as on the Titanic, not even first class passengers can save themselves.”

The European ship is sailing in turbulent waters, but its 17 unequal passengers that have signed up to the common Euro currency haven’t a clue where it’s headed. Germany, along with France is a first class passenger that has benefited by exporting to poor members such as Greece and Portugal.

But the recession that hit Europe after a credit boom exposed unsustainable levels of debt, plunging the Eurozone project deep in trouble.

Worryingly, the financial contagion from the sovereign debt crisis in Greece, Ireland and Portugal last year is now threatening to engulf the much stronger economies of Italy and Spain. Many Europe watchers think a Greek default is only a matter of time — and may even be a good thing for Europe.

“At some point we have to let Greece and Ireland default,” said Dr Nicholas Bowen, interim director of the Institute for Contemporary European Studies in London. “There is an expectation that every time there’s a problem, a bailout will come. There’s no moral hazard attached to this, and countries can go on doing not very much at all.” The view from the rich north is that the poorer southern members need to cut borrowing and public sector expenditure, and learn to live with the fallout. Greece, buckling under a debt to GDP ratio of 142.8% last year, is an extreme example of inaction — a country that is so used to lavish state handouts the slightest hint of austerity measures brings out violent street protests.

It is a country where government jobs are guaranteed for life — in the Constitution. But then things start to get a bit surreal: according to a recent report, some civil servants are paid bonuses just for turning up for work on time, others for using computers and even washing their hands.

Around 40,000 unmarried or divorced daughters of dead Greek civil servants are allowed to collect their parent’s pension — at a cost of 550 million Euros ever year, according to the economic website Pension spending is expected to rise by 12% by 2015, compared to 3% in the European Union.

Last year, Greece managed to wangle a Euro 110 billion bailout from the IMF/EU while announcing austerity measures and tax rises. But markets were far from convinced and in July the contagion spread to Italy amid worries about a Greek default and rumours of its impending withdrawal from the Eurozone.

“The structural reforms were necessary but not sufficient — with no plans to boost growth, the debt situation worsened,” said Charles Grant, director of the Centre for European Reform. “Greece needs a Marshall Plan to encourage growth.” The reference to the American post-War aid to combat Communism (Greece was among the first recipients) is timely, as Communists are among growing numbers of protesters that have taken to the streets of Athens.

While Greece has emerged as the basket case of Europe — followed by Portugal and Ireland — it is the prospects of a sovereign debt crisis hitting Italy and Spain that worries politicians and economists most. On Friday, the government of Silvio Berlusconi passed a long-awaited Euro 50 bn austerity package after investors began dumping Italian securities.

The Italian economy is so uncompetitive that, according to ‘The Economist’ magazine, only Zimbabwe and Haiti had lower growth rates in the decade to 2010. The run on the market began when Berlusconi hit out at finance minister Tremonti, the man who has kept Italy on a tight fiscal leash, as “the only minister who is not a team player.”

Italy may have averted a crisis for now, but things are getting rougher by the day for ordinary Italians. “It is no longer a normal life,” said Gabriella Tavernese, a resident of Rome. “People are getting poorer and the middle class has less and less disposable income. This was a terrifying budget.”

Public opinion in debt-ridden European economies, according to Grant, is becoming a “new and dangerous” factor. A poll published in May revealed that 62% felt that the IMF memorandum that Greece signed in 2010 was a bad decision that hurt the country, and 64% felt that the possibility of bankruptcy is likely. Asked about their fears for the near future, the poll showed a fear of unemployment (97%), poverty (93%) and the closure of businesses (92%).

“Greece will default: it’s a question of how long we’ll support it,” said Nicholas Bowen. “Then it will be Ireland. What you cannot afford to do is to let Italy default. We have to sacrifice the weaker brethren in order to rescue the stronger.”

On May 31 this year a single flare was fired above the dockland in Belfast to mark the exact moment of the Titanic’s launch. There was no talk of European supremacy.

First Published: Jul 16, 2011 22:00 IST