Is the Eurozone crisis an excuse for some nations?

London, Asharq Al-Awsat- Last week saw the Greek election and the G20: this week sees various European summits.  A few weeks ago in Asharq Al-Awsat I anticipated the Greek people would vote for a government that is committed to honouring the country’s obligations.  I have more faith in people than some commentators do!

After last week’s events the Eurozone still has many problems but perhaps these are also used as an excuse for other failures in other economies.

Last Friday the leaders of the Eurozone’s four biggest nations met in Rome ahead of next week’s EU summit on the euro crisis and agreed in principle to measures to boost growth equal to 1% of the currency area’s economic output.  The leaders also sought to agree other proposals on closer integration.   German Chancellor Angela Merkel told reporters that growth and solid finances were two sides of the same coin and she stressed the importance of greater political integration.  Friday’s talks had been expected to involve a formal Spanish request for Eurozone financial assistance; however, no mention of a request was made in the press conference following the talks.

François Hollande, the French president, said the four had also agreed to push for a pan-European tax on financial transactions – another of the French President’s election pledges.  There is only one global financial centre in Europe and that is London.  This tax would disproportionately hurt the City of London.  At the same time as the meeting in Rome, EU finance ministers met in Luxembourg for talks over deeper integration of the Eurozone’s banking sector.  Britain’s George Osborne was among them and it seems that they agreed that no financial transaction tax would be applied to the EU as a whole.  It will not happen in Britain unless it was also implemented in other non-European international financial centres.

Earlier I suggested the Eurozone problems are being used as an excuse in other places.  There is an irrevocable link between production and consumption.  Producing countries have failed to make rational contingency plans for the cyclical times when consuming nations use less goods and services.  They have also buried their heads in the sands when considering how their goods were being paid for – with borrowing.  It hardly takes a genius to work out that was never sustainable and it is wrong to only blame Europe for economic contraction due to oversupply.

The US and the EU tend to over consume and as a result are net absorbers of goods from rest of the world.  Counterparties – Germany, Japan, some emerging markets like China and Malaysia export to the US and the EU —giving the financial sector an incentive to go overboard.  It comes as no surprise to me that the latest HSBC Purchasing Managers Index showed that China’s factory sector shrank for an eighth straight month in June, indicating that the country’s economic trough may extend well into the third quarter.

Within the Eurozone Greece is a classic example of the danger of overspending on government social programs.  The fact that Greece overspent is not unrelated to the fact that Germany needs to export.  Other events have also had their part in this problem.  Oil prices were pushed higher earlier this year by tensions over Iran’s nuclear ambitions and a threat by Tehran to close the Straits of Hormuz, a key strategic oil route.  This impacted the costs of raw materials and the costs of finished goods.  In good times this can be absorbed but in a recession there is little flexibility to absorb these higher production costs.

If you take the view that I expressed last week and look at this only from the perspective of those who produce oil you would follow the logic of John Hall, energy market analyst, who this week said: “There is plenty of oil in the market because the Saudis have been pumping to make up for a shortfall from Iran, and there is a lot of concern about where it is going to go because of the economic situation.”  If, on the other hand, you accept the forward looking and positive approach that Saudi Arabia is promoting, and that I wrote about last week, the drop in oil price this week will have a positive impact in global recovery.  Recovery will only happen with a whole series of interrelated positive actions.

Things are bad in the Eurozone, but the Spanish government has reduced the estimate that its banks need in extra capital to €62 billion.  That is better than the provisional allocation of €100 billion that the Eurozone set aside to bail out Spain’s banks.  European leaders are discussing using the region’s bailout fund to buy sovereign debt and bring down interest rates for countries like Spain and Italy.

My sense is the achievements in Rome are more symbolic than actual.  No agreement was reached on the idea of Eurobonds – common Eurozone government debts, which have been opposed, at least in the near term, by Germany.  However, at the end of less than two hours of talks, they did not reach any agreement on the idea of Eurobonds – jointly-backed Eurozone government debts used to finance EU government budgets.

This is an important start nevertheless as it may begin to create confidence but it must also be part of a long and sustained programme of corrections.  The problem is large and not just European.

Given the extent of the adjustment that must be made, governments should be more honest about the size of their debts and young voters would be wise to get politicians to pay them off as soon as possible.  This is the subject of the first of the BBC Reith Lectures this summer to be given by the renowned economic historian Niall Ferguson.  The lecture series titled ‘The Rule of Law and its Enemies’ is exploring the influence of man-made institutions on global economic growth and democracy.

The critics of Western democracy are right to discern that something is amiss with our political institutions. The most obvious symptom of the malaise is the huge debts we have managed to accumulate in recent decades, which – unlike in the past – cannot largely be blamed on wars.

According to the International Monetary Fund, the gross government debt of Greece this year will reach 153% of GDP. For Italy the figure is 123%, for Ireland 113%, for Portugal 112% and for the United States 107%.

Britain’s debt is approaching 88%. Japan is the world leader, with a mountain of government debt approaching 236% of GDP – more than triple what it was 20 years ago.

Writing in 1790, Edmund Burke Political theorist, said, “Society is indeed a contract. The state is a partnership not only between those who are living, but between those who are living, those who are dead, and those who are to be born.”

Professor Ferguson will reflect on the causes of the global financial crisis, and conclusions that many people have drawn from it about the role of regulation.  Professor Ferguson will ask if financial regulation is “the disease of which it purports to be the cure”.  Now there is a challenge!

John Davie is a visiting professor at London Metropolitan Business School and chairman of Altra Capital.