Ah, the Stability and Growth Pact. You remember. Joining the STAB, members promised fiscal continence, and in return were allowed to junk their soggy old currencies for a Deutschemark with a suntan. They all promised to keep the gap between revenue and spending to below 3% of GDP, or if they weren’t quite there, they’d get there jolly soon, and never mind if they had to invent the numbers to do so.

So, your starter for 10: which country was the first to exceed the 3% limit? No, not Greece, Italy, Spain, Portugal or Ireland, but Germany. Oddly, there were no calls for austerity measures in Berlin. A decade on, and the game’s up. Fiscal continence in the ClubMed countries is a distant dream, so to save the euro we’re promised the European Stability Mechanism, which looks like the STAB, but without the growth or stability.

It may even serve to get the euro project round the next corner, but it does nothing to deal with the fundementals of this crisis, which is not about liquidity, but solvency. Finding cash to prevent Greece from default does not change its desperate need for reform and devaluation. Getting an unelected Italian government to agree to impose years of austerity does not mean it will happen. The road to Hell is paved with good intentions.

The Germans now seem to be prepared to underwrite the debts of its partners in the zone, up to a point. The residents of London subsidise those in Newcastle because both sides accept England as a single country. Even so, it’s an extremely uncomfortable bargain which decades of regional policy have failed to fix. The eurozone is the same, only more so, thanks to different languages, the reluctance of the citizens to consider themselves European, and the massive, growing gap between north and south. German productivity has raced ahead in the decade of the euro’s existence, while that of Italy, Spain and Greece has stagnated.

To force austerity onto these countries now is highly dangerous; after all, if the Italian government has no democratic legitimacy, another group, say the military, might decide that its own claim is as good as that of the bankers.

The banking crisis was “solved” by massive injections of public money from the shareholders and, when they wouldn’t pay, from the host governments. Now the host governments have run out of the ability to borrow, the European Central Bank and those countries which can still do so plan to step into the trillion euro gap. What happens when their creditworthiness runs out?

Advertisements