Al-Ahram Weekly Online   27 October - 2 November 2011
Issue No. 1070
Published in Cairo by AL-AHRAM established in 1875

Gamal Nkrumah

EU on edge

Sunday's euro zone high-stake crisis summit's make-believe avowal that Europeans are all in this together may seem a bit hackneyed, avers Gamal Nkrumah

Take a deep breath, former European colonial masters, it's time for onetime colonies like India and neo-colonies like China and Brazil -- the emerging markets, nicknamed BRICs -- to repair European economies and financial markets that need fixing. Disgruntled European economists, much to their horror and chagrin, are darkly muttering and conceding openly this emerging trend.

Click to view caption
Germany's Chancellor Angela Merkel gives her back to Greek Prime Minister George Papandreou at last weekend's summit in Brussels. Germany, swimming in cash, holds the key to saving the euro and erasing the Greek default

European political, financial and economic leaders squirm as they face grilling criticism concerning the euro's performance, or lack of it. European bigwigs met in Brussels on Sunday to debate the euro zone's sovereign debt crisis. The grim mood in Brussels was infectious even as the European policymakers put on a brave face.

The European honchos will have to hold their nerve. The 17-nation single currency policymaking clique is contemplating turning to China and other emerging nations for funds. There may still be a constructive outcome. But the bottom line is that the planks fell far short of expectations.

There is considerable financial volatility as it is and quite enough economic instability that the European fiscal and monetary policymakers may have to get one of those rigorous and methodological BRIC types to mend the deplorable state of European affairs. It is tempting for the Europeans to do altogether away with their own pontificating gurus and turn to the Rising Sun for succour. The tension was palpable between German Chancellor Angela Merkel and French President Nicolas Sarkozy. They both conceded that private creditors must be brought on board.

The world's eyes were on the Belgian capital Brussels over the weekend where three items topped the agenda. The first is the Greek sweeping default as fears mount that the Mediterranean country's 350 billion euros of outstanding government debt will never be repaid. The second item on the Brussels summit's agenda was what to do with Europe's increasingly undercapitalised and overextended banks.

Last but not least is the morass the European financial stability facility (EFSF) finds itself in. "Given that the EFSF is limited overall, it makes sense also to limit the purchases in the secondary market for each country," warned Michael Meister, deputy parliamentary leader of the ruling Christian Democratics (CDU) of German Chancellor Merkel.

The 440 billion euro EFSF is supposed to be a capital-raising facility but has degenerated into an underused fire-fighting instrument of the European policymakers.

When the euro was launched in 2002 amidst much pomp, fanfare and ceremony, hopes were raised that Europe will become an economic powerhouse that will emerge as a new force on a global scale. Today, Europe is being reduced to a crisis-ridden continent where tiny oil-rich Qatar is now being cited as a potential saviour of European banks.

European leaders are bickering over the continent's economic future. An infuriated Sarkozy told British Prime Minister David Cameron to "shut up" after the latter offered unsolicited advice. Cameron had urged the Europeans to work harder at "making the market work" and focus instead on not interfering in "people's everyday lives". Sarkozy, the first practising lawyer to ascend to the French presidency in contemporary French history, surely knew what he was talking about from a legal perspective.

Britain, at any rate, is not a member of the euro zone and therefore Sarkozy reasoned that Cameron had no right interfering in the decision-making process determining the future of the euro. Cameron is facing a political crisis at home triggered by his barging in on the Brussels summit. More than 80 of Cameron's MPs voted against the official Conservative government over its refusal to allow a referendum of EU withdrawal. This is a prickly topic that has long been ripping Britain's Conservative Party apart, and instigated the downfall of several Conservative Prime Ministers that included the redoubtable anti-Europe Iron Lady Margaret Thatcher herself.

European policymakers are determined to avoid at all costs another lost weekend of fruitless brainstorming. The key country in the euro crisis is Europe's economic powerhouse, Germany.

The Germans in particular are concerned that the euro debt crisis is not simply one of a liquidity crisis, rather it is the very nature or the structure of the monetary union that is aggravating the crisis. Another serious concern is the lack of leadership in Europe. "The most glaring manifestation of this lack of leadership is the EU policy consensus that this crisis will eventually be self-correcting, and that a robust liquidity backstop is all that is needed," wrote Wolfgang Munchau in the Financial Times. The liquidity versus leadership debate continues unabated.

German politicians were very supportive of their iron-willed Merkel. The German Chancellor's conservative bloc's chief whip Peter Almaier "made headway" during the Brussels summit. "The Chancellor negotiated well in Brussels," Almaier insisted. "She showed strong leadership," he quipped.

"The French president says he sees things just like Angela and I see that as progress," concurred Volker Bouffier, the conservative premier of the central German state of Hesse, the country's financial centre. However, other German politicians were less optimistic. "There is a high risk that this crisis further escalates and broadens," German Finance Minister Wolfgang Schaeuble grumbled gravely.

"On such important questions it is good if parliament gives the chancellor broad backing during her negotiations in Brussels [with other European leaders]," countered Merkel's Christian Democrats (CDU) floor leader Volker Kauder.

Kauder also stressed that no decision concerning the euro could be taken without approval from the German Budestag Budget Committee. Small wonder then, that the euro edged lower on Tuesday but still hovered around an unprecedented six-week high hit on Monday. This no doubt reflected market expectations for European leaders to come up with broad measures to contain the euro debt crisis in Brussels. Buoyed by a steady euro improvement, the Indian rupee and other currencies of emerging markets rose on equities.

The stealthy infiltration of European financial life by the emerging market heavyweights has reached new heights. But neither China nor India is particularly eager to see a moribund old Europe in the economic quagmire.

What is especially galling for the Japanese as a Toyota manager recently observed was that: "The Germans are obviously swimming in cash. It is one more problem for us." Neither China nor India nor even wealthy Japan could play the part of the silver bullet for the euro crisis. Yes, China according to some estimates holds some $900 billion in euro zone sovereign debt, but it is not necessarily in China's national interest to continue to keep buying euro zone sovereign debt.

The Japanese have reacted to the euro crisis in an unexpected fashion. "We need to try and make more products that have a euro cost base," noted Sony's Executive Vice President Kazuo Hirai. Japan's Finance Minister Jun Azumi said on Monday that Japan would take decisive action on excessive and speculative forex moves. The US dollar last week hit a fresh post-war low against the Japanese yen.

Against the backdrop of the euro crisis, Kazua Hirai indicated that Japan would shift more manufacturing and procurement to Europe in response to the euro's decline. China's euro bailout highlights the growing gap between Asia and Europe, a continent whose economic performance is disappointing, lurching from crisis to crisis. This is not a moment for euphoria on the part of the BRICs, but it is imperative that Europe must now look to Asia and the BRICs for lessons in fiscal and monetary management. Europe, indeed, is on the edge. And worse, Europe it now seems is at the end of its tethers.

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