Last week, the world — both optimists and cynics — witnessed the earnestness with which the leaders of the 27 European Union nations grappled directly with their thorniest financial and economic problems, and made progress — as promised. They unwrapped a complete package of resolute measures intended to bring to an end the global panic over the Euro zone crisis.
If the Euro zone predicament has taught us anything, it is that one should never underestimate the power of European policy-makers. They may dither and delay but, finally, will resolve any crisis beyond all reasonable expectations.
The positive consequence is lifting stock markets from one end of the planet, to the other. Why? The markets now have imperative substantiation that the core countries are indeed determined to do whatever is necessary to keep the Euro zone, intact.
In other words, if Germany is willing to pay up to keep Greece in the system, then it is probable Germany will also do what is takes to keep Spain and Italy in the Euro zone. For now, the fears of investors' seem alleviated. Here is my take on what we should be watching in the days, weeks, and months ahead.
Anger and Blame-Game
First, Europeans, mainly in northern Europe, are very angry about the massive cost of fixing the Euro zone mess. Understandably so. Much of that anger has been specifically directed at those so-called ‘lethargic, reckless southern Europeans' that are seen to have gotten the euro area into this mess.
It's not difficult to find such finger-pointing articulated in the statements of prominent leaders or in newspaper columns, blogs and in the public domain.
But this is of not direct consequence for those investing in, or trading with Europe. There will also be demonstrations and street protests in the crisis-ridden nations of Europe. They have no choice other than to accept unavoidable ‘change'. So, one must not get carried away by these displays.
Free Flow of Capital
Second, while it is known that the euro region's crisis was primarily caused by the massive flow of capital from the north to the south of Europe, what is not understood is that, undeniably, was the main goal of Europe's common currency — financial market integration and easier capital flows. The common currency made it simple and straightforward for investors to get lured to good investment opportunities — a crucial factor in the process of economic convergence, in which less developed countries pull alongside the more developed.
Happily, this had the desired effect — evidenced by relatively high returns lending countries were deriving, an economic boom enjoyed by periphery countries and a rapid convergence of interest rates in the Euro zone.
Systemic Problems
Third, in resolving the systemic problems in Europe, while the immediate plan will act as a ‘liquidity backstop' to a solvency problem, the coming months and years will see tight budgets, stringent austerity measures and firm action to deal with the competitiveness issue in Europe's insolvent countries.
For these, there are fairly clear policy prescriptions and action plans laid out. Let me remind my readers that this is not the first time we have seen a dramatic influx of capital when economies collapse. This occurred in Mexico following the creation of Nafta in the early 1990s, and in East Asia in the late 1990s, when there was a sudden halt in capital flows even when these countries were following all the right macroeconomic policies.
Therefore, the misfortune which hit some European nations were not just caused by budget deficits, but also by the size of the capital flows they were receiving.
Fixing the Mess
In my view, the good thing is that the core Euro zone countries such as France and Germany, which were happy to gain by the common currency when it was to their benefit are now are actively involved in fixing this mess.
Yes, factors that caused the failure of countries such as Greece, Portugal, Italy, and Spain, also has much to do with their wanton fiscal policy, years of unrestrained spending, copious pensions and settlements, uncompetitive practices, generous social welfare systems, inefficient tax collection, and the infamous ‘cooking' of the public books.
These countries should have slashed their budget deficits more during the good years. That will happen now. It needs a crisis to understand the mistakes and correct one's course. The good news is that the governments of Euro zone nations in dire straits now understand economic realities and are taking steps to steer clear of the kind of situation they find themselves in.
Proactive Leadership
The German Chancellor, Dr Angela Merkel, got the approval she needed from the German parliament, which has passed the expansion of the euro backstop fund, the EFSF, which has the munitions to address the problem of any potential financial collapse in other highly indebted European nations.
Europe is now on the right path towards overcoming the debt crisis — thanks to Dr Merkel, who managed to get her way on a number of key issues. The deal in Brussels was, first and foremost, her success.
Dr Merkel comes across not only as a good European but has transformed herself from a leader merely reacting to events to one who now designs and is in command of those events. With her composure, strong conviction, passion to solve issues and tough-minded leadership, she has also built up the confidence of Europeans, which could ultimately pay out in the form of votes.
(The author is a former Europe Director, CII, and lives in Cologne.)