The perfect Eurostorm

Paul Mason
Former economics editor, Newsnight


Sunday night may conjure up a perfect Euro storm. Total political instability in Greece, a new French president elected on a wave of opposition to the Merkozy austerity plan, plummeting growth across the continent and everywhere the rise of non-centrist parties.

The story so far: in December, after the disastrous Cannes summit had unleashed a second euro debt crisis, the EU countries finally committed to a form of fiscal union.

The price Germany and its north-European allies exacted was a new fiscal treaty, signed by 25 out of 27 EU members, mandating balanced budgets from here to eternity, and forcing some countries to slam the brakes on to meet the 2014 deadline. In a word, mandatory austerity for a continent already sliding towards recession.

But they sugared the pill. The European Central Bank, which had always resisted quantitative easing, or itself taking part in the continent-wide bailout, suddenly turned on the taps in the form of a massive, temporary bank bailout known as LTRO: it pumped three year loans into the banking system at interest rates of 1% and a repayment date of three years.

This has been like the sudden connection of a saline drip to a very poorly patient. It removed the immediate threat of contagion from Greece, and allowed the Greek debt write-off of euro 107bn in February to be a) partial b) controlled c) controlled by the European centre, so that it is really a bailout of those who lent to Greece, not the Greeks themselves.

This, combined with the imposition of non-elected governments on Greece and Italy, and the election of a pro-austerity right-wing government in Spain, seemed to calm things down.

So why have they again erupted?

First: the turn to continent-wide austerity seems to have choked off what was left of the EU recovery. Euroland plunged into recession in Q4 last year, is in recession now and looks likely to stay there for at least another three months. Though the banks look safer, it is at the cost of reduced bank lending, and that is hitting businesses and consumer confidence.

Second: the LTRO injection of money into the banks has had limited results. They deposited most of it back at the ECB at interest rates of 0.25. Interbank lending has, from indirect evidence, fallen and bank lending to the real economy is in negative territory.

Third: time has run out for the imposed technocratic government, at least in Greece.

The current Greek polls show the combined forces of the two main parties at 37%, with about 37% for the left (communists, Trotskyists, Eurocommunists and Greens) and the vote for the Christian nationalist right slumping (to 3%) in favour of the outright fascists of Golden Dawn (5%), who only four years ago had disbanded themselves in despair.

One former governing party MP told me the mainstream parties were unlikely to get past the threshold triggering a vote-reallocation mechanism designed to give the largest party stability, meanwhile the fascists are now pretty confident of getting seats in the parliament.

If the Greek election looks, as is likely, to deliver only political chaos then we may see new elections, or some kind of presidential soft coup, or even a left government committed not just to opposing austerity but, technically, the socialisation of the economy.

On the latter two outcomes, this would challenge not just euro membership, but the ability to abide by either the Copenhagen Treaty (which stipulates European Union members must be democracies) or the Lisbon Treaty (which forbids socialist-style nationalisations).

Whatever happens politically, it is then clear that the Greek "deal" to reduce its debt to 120% of GDP by 2020, through massive spending cuts and tax hikes, is a dead letter, and the way for a second default is open, followed by exit from the eurozone, or some form of semi-detached membership of it.

But while painful for the Greeks, the Greek catastrophe is only a harbinger of the problems to come in the rest of stricken Europe.

Spain now has 25% adult unemployment. Its banks are teetering on the edge of another bailout, massively reducing loans into the real economy; and the country may be forced to seek, itself, bailout money from the interim European fund - the EFSF.

So we get to Monday and what? The thought in the financial markets had been that Francois Hollande wins but he does not go through with his threats to renegotiate the fiscal compact; and then the Greek main parties scrape through and a new grand coalition holds things together there.

But the rapid flight of European voters away from the centre is changing things. The political class assembled for decades around the centrist, pro-globalist project can now see, very clearly in some countries, that it is just one crisis away from a political earthquake. The rise of the nationalist right in Holland, Denmark, Finland, Italy etc had always seemed containable within, or excludable by, centrist-coalition politics.

But if the centrist coalitions cannot deliver, or end up making unbearable demands on the nationalist right - for cuts that affect their voting base as with Geert Wilders' Freedom Party in the Netherlands - then one by one European governments are forced into coalitions of the centrist true believers, stiffened by technocrats, wagons circled against the extremes.

Once all the eggs are assembled into the technocratic grand-coalition basket, the situation becomes fragile.

The way out, of course, is to deliver growth. This is what is promised in the original fiscal compact, and what Hollande, and for example the Portuguese socialists (and quietly the IMF) mean when they call for "growth enhancing" additions to the austerity plan.

But that will not happen unless something stimulates demand: either a rapid recovery in the rest of the world (the United States is clearly in recovery), a rapid resolution of the banking crisis, a U-turn on fiscal policy driven by the rising demands on non-centrist voters, or a sharp turn to the kind of free market deregulation policies advocated by the banking lobby, effectively declaring an end to the "social Europe".

Of these, only the external recovery is beyond the control of the Euro political elite, and (possibly not coincidentally) the only one likely to happen.