By Paolo von Schirach
July 8, 2013
WASHINGTON – Back in 2009, at the very beginning of the Eurozone debt crisis, optimists believed that Greece, Portugal, Spain and Italy only needed a mix of extra liquidity and credible public spending cuts to stop the red ink and get back on their feet. The consensus was that all these countries were experiencing a liquidity crisis. With generous financial aid from its better off northern cousins southern Europe would gain the necessary time to fix its public spending, this way signalling to financial markets that there was a genuine healing process underway.
Well, it did not turn out this way. Leaving aside the cumbersome and often rancorous negotiations, the fact is that several years into a huge problem that manifested itself at the end of 2009 there is till no light at the end of the tunnel. It is clear that Southern Europs’s crisis goes much deeper than temporary liquidity. The crisis is unfortunately structural. There is an unhappy combination of dysfunctional and bloated public administration, high labor costs, labor market rigidities and too little investments in innovation. All this makes these countries uncompetitive, while people continue to demand benefits and costly entitlements.
Sure enough, drastic austerity measures imposed by the lenders did not help much. It is like putting on a diet a patient who just had major surgery. Lack of nourishment will simply delay recovery.
No turn around
Still, in the long run all the loans that the weak countries have receive make sense only if these programs will lead to a genuine, self-sustaining economic and fiscal recovery. In other words, markets need evidence that at some point Greece will have a productive economy and a slimmed down and efficient public administration. However, at the moment there is no confidence in any turn around. At the moment the debate is still focused on the modality through which more aid will be disbursed.
Endless bail out?
And here get to the real issue. Is northern Europe willing to accept the cost of keeping alive its structurally weak southern European partners –indefinitely? At present this is the most likely scenario, even though there has been no open and frank debate.
It is quite possible that, after the German elections to be held in September, Berlin will force a serious discussion. But if the Germans do not want to press the issue, then we can expect more of the same. If the Germans, the Dutch and the Scandinavian countries are indeed too afraid of the consequences of any forced exit from the Eurozone we can expect that the bail out out the poor southern cousins will go on and on. For the time being this may appear politically more palatable. But it will weaken Europe even further.