Raul Elizalde - Friday, November 11 2011
History would often make you believe that humans are spectators instead of protagonists. People act sensibly and yet catastrophes materialize, seemingly out of nowhere. Only in hindsight one can see where people got it wrong.
How will history judge 21st century Europe? As the euro experiment got under way at the turn of the century, even naysayers started to believe that the experiment was a success. Interest rates in different countries converged, peripheral economies thrived, and Germany became the largest exporter in the world. What started as a political gamble was on the way to becoming a macroeconomic triumph.
Twelve years on, the same politics that gave birth to the euro now threaten to destroy it. Growing nationalistic pressures in Germany and the Netherlands, exacerbated by economic failures and political unrest in Greece, Spain and Italy pose a fatal risk to the eurozone future.
Where people went wrong has now become apparent. European banks have become huge and are bloated with government bonds. Germany has amassed an enormous bill against its neighbors. Large swaths of private debt have been or will be transferred to the public. Unemployment is soaring. As these problems grow out of control alarms go off and expert help is summoned to the rescue.
Enter Mario Monti, the future Italian prime minister (that is, if Berlusconi steps down) and Lucas Papademos, his counterpart in Greece.
Monti is credited with the “Klein-Monti Model” to describe monopolistic banks and has written papers for publications such as Mathematical Methods in Investment and Finance. Papademos is an MIT graduate with degrees in physics, electrical engineering and economics, and recently co-edited a book titled “Enhancing Monetary Analysis.” Monti taught economics (including fifteen years at the University of Turin) and worked at the European Commission. Papademos taught economics (including nine years at Columbia University) and worked at the European Central Bank. These impeccable credentials have pleased the bureaucrats in Berlin and Brussels.
But the fact that these luminaries are thought to be the right people to convince masses not to smash building facades for material to hurl back at riot police speaks volumes about the emotional fatigue of Europe’s ruling political class. Unable to steer the continent back to course, they have called the technocrats for help. This might well be the biggest blunder of all. Technocratic expertise alone will be insufficient to tackle the current challenges.
What is urgently needed is political skill precisely to permit the implementation of highly technical and unpopular solutions. As the Financial Times recently noted, successful politicians are those who master the art of the politically feasible, not those who start their speeches with words like “liquidity facility.”
Pushing austerity down the throat of populations where unemployment approaches 50% (such as among the youth in Spain) or forcing a brutal shrinkage of the state where one third of the workforce is employed by it (such as in Greece) may make sense to those who teach macroeconomic theory. The masses will remain unconvinced.
Politicians may well have concluded that they have little to gain playing the statesmanship card: an attempt to get public buy-in for the rescue plan in Greece caused such an outcry in the eurozone core that it cost the prime minister his job.
This may lead some to think that democracy should not get in the way of solving Europe. This would be wrong. Success will depend on the public accepting unpalatable choices today for what the technocrats insist will be a better future. Without skilful politicians to sell this message, the chances of success might be quite bleak.
Italy
Greece
Raul Elizalde | raul@pathfinancial.net
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