For the third time in a row – Greece, Ireland and now Portugal – the continuing Eurozone crisis is being handled badly. A Portuguese bail-out will shortly be arranged among the EU countries, but in practice dominated by the conditions laid down by the most powerful country, Germany. This may seem reasonable given that Germany will make the largest contribution. But more disturbingly, Germany will decide the form of the rescue, and do that in a way that satisfies Merkel’s domestic political interests, not the long-term interests of the Eurozone as a sensible economic and monetary union. Forcing the weaker members into even greater debt at high interest rates will widen the unsustainable divide between core and periphery members and is simply a recipe for the next crisis.
Rather than a straight bail-out with fairly punitive conditions, a much sounder way of resolving a nation’s bankruptcy would be a restructuring of its debts, allowing more time for them to be repaid consistent with its long-term growth rates, plus measures to deal with the causes of the bankruptcy in the first place. In the case of Ireland, and others as well, the latter would involve major reform of the banking sector.
But that is not going to happen in the present set-up, a collection of separate sovereign State dominated by the biggest, Germany and to a lesser degree France, both of which have leaders in Merkel and Sarkozy who want to send messages to their electorates that they’re not throwing good money after bad in rescuing workshy southern Europeans.
The trouble with this short-term patch-up to suit the interests of the dominant power is that experience shows that the let-up from pressure from the financial markets is short-lived. That is already becoming clear in the case of Greece and Ireland, and the same pattern will almost certainly emerge in the case of Portugal.
And is this even the last bail-out? Spain of course claims to be in a much stronger position than Portugal, but its budget deficit is not much smaller, its unemployment rate much higher, and its growth rate much lower. The problem is that unlike the other three, Spain is not an EZ minnow. Bailing out Portugal will cost £80bn, but bailing out Spain could cost up to ten times that.
That’s the point at which the real crisis strikes. The internal contradictions within the Eurozone are then exposed starkly. There was such rush to extend the EZ that systematic and thorough vetting of the candidates and their ability to withstand the harsh rigours of competition with Germany within a single currency was never carried through to the obvious conclusion. Nor were there any considered plans as to how to deal with banking crises, so bail-outs have turned out to be ad hoc and panicky.
At least Brown kept Britain out of the Eurozone when Blair was itching to take the country in. But it is in Britain’s interest now (since we had to contribute to the Irish bail-out and will have to again for Portugal) that a much more long-term, stable and viable future is negotiated for the Eurozone. Long-term it is either political and monetary union or Eurozone break-up. There is no middle way.