NEW YORK — Europe’s Waterloo will not occur during 2011. The eurozone efforts to tamp down the sovereign debt crisis have been deficient, but not yet suicidal, with just enough bluff to maintain the bloc’s integrity for at least a year.
A day of reckoning looms not far ahead — economists at my firm, Roubini Global Economics (RGE), forecast the possibility of a complete eurozone breakup in the years 2013-2020 at 45 percent. But the surprising resiliency of governments in Greece, Ireland, Portugal, Spain and Italy during the summer of 2010 is deceptive. Their survival stems from EU policies that dialed back rather than defused the sovereign debt time bomb.
But the region’s politicians don’t have the fudge-making capabilities of the European Central Bank or the IMF, which backed earlier bailouts, at their disposal. For these European governments, austerity is a current fact of life, and it is making their lives (via the lives of their constituents) miserable.
Here’s a look at what 2011 will hold for key European governments:
• Eireann goes broke: The debacle that tilted Ireland into the bailout bin along with Greece now appears likely to remake its domestic politics, with the governing party, Fianna Fail, paying a sharp price for leading the country through (and, many voters will note, into) the crisis. The Green Party, which stayed in the governing coalition until November, may also suffer the taint even now that it has bailed out.
Meanwhile, Fine Gael, Fianna Fail’s traditional rival, along with Labour and the nationalists of Sinn Fein, have all benefited. Each has a shot of leading a coalition after the next election, and each would be under intense pressure to increase taxes on corporations (the source of Ireland’s main competitive advantage within the eurozone), as well as increase social welfare spending. Foreign corporations based in Ireland could well bolt if the changes tilt the playing field in favor of larger eurozone economies.
• Iberian tremors: After Ireland’s collapse, global bond traders shifted their sights to Portugal, Spain and even Italy. In Portugal, Prime Minister Jose Socrates, in power with his Socialist Party (PS) since 2005, has launched a last-ditch effort to stave off what many economists see as an inevitable move toward a bailout.
Increasingly, Socrates’ government survives on the willingness of his main opponents, the conservative Social Democratic Party (PSD), to abstain in key votes. Ahead in polls, only the unpleasant prospect of having to govern a nation on a collision course to bankruptcy seems to be keeping the PSD from forcing new elections.
Meanwhile, it’s increasingly clear that markets have priced Portugal as “road kill” on the eurozone sovereign debt juggernaut’s road toward Spain. Unlike Portugal, Spain’s economy is both too-big-to-fail and too-big-to-bail-out.
The effects on Spanish politics, so far, are predictable: Faced with “barbarians at the gate,” many Spaniards — even across bitterly drawn party lines — have rallied to the flag. This means blaming international speculators in the bond markets for Spain’s woes rather than local causes. While this provided a bit of respite for Prime Minister Jose Luis Rodriguez Zapatero and his Socialist minority government, which is dependent on nationalist parties for its survival, the holiday won’t last.
On Nov. 28, voters in the Catalonia region — which Zapatero’s minority government relies on for its survival — ousted his Socialists from the provincial government. While national parliamentary elections are not due to be called until 2012, leaking alliances with regional parties and polls showing the conservative People’s Party of Mariano Rajoy well ahead suggest early elections. Rajoy has been assiduously courting both of the regional parties, offering concessions over the distribution of local tax revenues in their wealthy regions.
Rajoy’s rise would be welcomed by business as he has criticized the slow pace of labor market and other reforms, but he would also be likely to seriously increase cuts in state spending, with short-term downside effects on Spain’s already high jobless number and growth rates.
• Beyond the Pyrenees: It surprised some that Italy, too, felt the sting of bond market selling pressure following the Nov. 28 EU finance ministers’ meeting, which took no radical new action to stave off the crisis. Along with Belgium, which is facing an existential crisis pitting Flemish-speakers against French-speakers at precisely the moment when the country is nearly bankrupt, Italy is both deeply indebted and in the midst of a full-blown political crisis. Urgent action to curb government spending may now be required to keep Italy from losing market confidence.
Yet the government of Silvio Berlusconi only barely escaped collapse on Dec. 14 and now relies on the barest of margins for its majority. Reforms to date have been only piece-meal and the country may not be prepared to legislate the kind of fiscal readjustments bond holders may demand in early 2011.
All of this raises the chance that Italy will become the first G7 nation to face the prospect of a market-driven crisis which, in the worst case, could mean default. The implications of an Italian default would be tremendous and global — Italy remains the world’s sixth largest economy. Given Italy’s chaotic domestic political scene, it may take something that dramatic to dislodge Berlusconi once and for all.
• The cradle of profligacy: Greece, meanwhile, has enjoyed a respite from eurozone scare headlines, but only due to the severity of the storms buffeting its fellow PIIGS. That respite will end in 2011 as the extent to which Greece is missing the targets of its original rescue become apparent. On Dec. 28, Greek reports of a plan for a 2012 “restructuring” — i.e., a managed default — appeared, underscoring RGE’s long-held view that Europe’s least solvent country would be unable to grow and cut its way to health.
Greece is by far the EZ’s most indebted member, with a national debt-to-GDP ratio of 144.2 percent. Yet, for all this, Prime Minister George Papandreou has kept discipline within his socialist PASOK movement in the face of fierce street protests and severe austerity measures. He has been blessed by his enemies: “International speculators,” “Eurocrats” and German bankers make for easy scapegoats. So, too, do his political opponents in the New Democracy movement, who (mis)led the previous government and lied repeatedly about the size of the annual fiscal deficit. Even the anarchists who killed three people, including a pregnant woman, during the May protests, unwittingly aided Papandreou, as he was deftly able to vilify fringe elements opposed to his austerity program.
Ironically, the leader of the country which touched off the sovereign debt crisis appears more secure in office than most of his peers. Unless a credible political opponent emerges soon, it appears unlikely that Papandreou’s government will fall before elections are due in 2012. Greece itself, however, may not be so lucky.