A continental recession is bad enough, but it is not the same as dissolution and chaos.
FROM THE ATLANTIC | FEBRUARY 8, 2013
After a pleasant lull over the past six months, panic over the fate of Europe has flared once again. Just weeks ago the elites of Davos exuded confidence that the crisis had passed; the events of the past weeks showed how ephemeral such certainty can be.
But the easy resumption of dark prognostications is just that: easy. The siren call of Euro-pessimism should be ignored. It was wrong in 2010, and it will be wrong now. Europe faces hard years with no clear path, but that is not the same as dissolution and chaos.
So what changed? The British government of David Cameron spoke with atypical candor about the possibility of Great Britain leaving the Union. Scandals rocked the Spanish government of Prime Minister Mariano Rajoy, and Rajoy himself was accused of accepting illegal payments. In Italy, one of the larger banks, Monte dei Paschi, revealed that it had lost close to $1 billion in hidden derivative transactions. More worrisome, looming parliamentary elections that have seen the incredible (for anyone outside of Italy) resurrection of former Prime Minister Silvio Berlusconi, who has managed to surge in the polls even while on trial for paying an underage woman for sex. The prospect of Berlusconi's return coupled with a crippled Spanish government have raised the prospect that neither country will continue their long march to structural economic reform.
The reaction of financial markets has been swift and predictable. Bond yields on Spanish and Italian debt jumped after months of calm. Soaring costs of borrowing led to a sell-off in Europe's stock markets. Said one analyst: "Investors are once again being spooked by political uncertainty from both Spain and Italy as both countries ... could derail ongoing and future reform." As we saw in 2010, 2011 and again in 2012, once that cycle begins, it can deteriorate quickly. Now, Cyprus has asked for financial assistance from Europe. While Cyprus is even smaller than Greece, even that was enough to further unsettle an already unsettled situation.
The sudden reemergence of Euro-fear says something about how easily the financial world and its media slip into pessimism about the current and future state of the world. Signs of stability and the ebbing of crisis are viewed instead as false dawns and head fakes. Hints of crisis and deterioration, however, are given oracular weight and accorded the greatest respect.
Yes, unemployment is eye-blinkingly high in Spain, with official figures at 26 percent and rising; Italy still feels more complacent than urgent; France more sourly perplexed, and Germany still adamant about fiscal rectitude above all. The government of the European Union remains more toothless than it should be about pressing matters such as pan-Europe banking regulations, and more powerful than anyone wants about minutia such as sports policy. Few who have been intimately involved in the various summits, high and low, over the past four years have departed feeling enlivened about the future prospects of European leaders arriving at bold answers and will then be actively endorsed by their various publics.
Euro scorn is thoroughly in vogue, in the United States and throughout Europe. You will find no greater dismissiveness than on the streets of London. And when the EU was awarded the Nobel Prize last October, Greeks derided it as a cruel joke. We're in the midst of economic war and being turned into a colony, scoffed one politician. On Wall Street, I regularly hear traders snicker about the fate of Europe - when they're not in full panic mode. In Europe itself, the mood is often far darker.
And yet, the union prevails. The point of the Nobel award was to highlight how remarkable an achievement this has been, and what better time to highlight that than at a dark hour. Seventy years ago, European nations were annihilating one another, and they had been fighting bloody wars almost without respite for centuries and centuries. Now, worst-case scenarios have Greece returning to the drachma; Catalonia becoming independent; and London taking leave of an organization of which it has never fully been a part. Today's worst-case scenarios would have been yesteryear's dreams.
Even those scenarios appear unlikely. Analysts all have opinions here, and they are just that. The Citigroup economists who boldly predicted last year that there was a 75 percent chance that Greece would depart the EU by Jan. 1, 2013 also just had an opinion, however numerically expressed. Yes, the European Union with the euro as a unified currency is fraught to the point of existential angst in its current form. But as has been true at each juncture over the past years, there is no way out of the current impasse except through it. There is no exit strategy, no Grexit strategy, no viable path to unwind the union or the euro except at such monumental cost that the pain of trying to move forward is a better trade than the agony of dissolution.
And that, truly, is the only litmus test for what will happen: Which alternative is worse? That is not the stuff of dreams, but it is often the axis of struggle. The European Union was born of hope for security and prosperity sealed by common bonds of currency and government. It has achieved that. Now, all are searching for the next formula for a different demographic and global future. It's a hard struggle, but a worthy one.