The euro crisis is now deadly serious. Where are the leaders to save us? (and yes, I mean you Dave)

By Simon Heffer
20 April 2012

Europe has been on the verge of economic meltdown so often in the past few years that to warn of another one seems like the boy who cried wolf. However, the wolf is now very much in the sheepfold, and it is drooling.

The euro, shored up in December by a fiscal stability pact — the one Mr Cameron refused to sign up to — is now under intense pressure again.

It has tumbled against sterling, which is good news for those taking trips abroad, but is indicative of the fragility of Europe’s currency union.
Warning: Directors of the IMF at their news conference in Washington, duting which they said it is possible that the euro will collapse

The reason for its weakness is that the economic conditions some countries must meet under the pact are politically and socially impossible.

The leaders of the International Monetary Fund, meeting this week in Washington, know this, which is why the IMF has said — for the first time — that it can envisage the euro collapsing.

It is also seeking more money, and has been offered almost £10bn from Britain for a bail-out fund — something the Government should have resisted at all costs, for it will be throwing good money after bad.
Austerity: Spanish Prime Minister Mariano Rajoy is imposing swingeing cuts on the country

Europe’s leaders are desperate to avoid the break-up of the euro, because more than a currency is at stake. The whole credibility of the European project — and of its political leaders —depends on the euro’s survival.

It seems the rest of Europe will do almost anything to preserve the currency union.

There have already been bail-outs for Portugal, Ireland and, most notably, Greece, primarily underwritten by the Germans. Italy is in trouble, again.

But the biggest problem is Spain. It elected a new, conservative, prime minister, Mariano Rajoy, last November. Quite fairly, he blamed the country’s dire economic state (exemplified by an almost 25 per cent rate of unemployment) on his socialist predecessor.

However, to meet the demands of the European Central Bank, its German paymasters and the European Commission, Mr Rajoy must make even deeper cuts than his electorate expected.

He has undertaken to cut his deficit by more than three percentage points this year, from 8.5  per cent of gross domestic product to 5.3 per cent. In money terms, this means taking as much as £52bn out of the economy.

He can only do that by sacking tens of thousands of state employees.

This means cuts to regional health, education and welfare budgets.

The political implausibility of this has already registered with the markets, which have driven up the price of Spanish debt to unaffordable levels this week.

The truth is nobody thinks Spain can sustain such an austerity programme.
Unsustainable: Spain has already been brought to a halt by general strikes in protest at the Government's measures

Unsustainable: Spain has already been brought to a halt by general strikes in protest at the Government's measures

Nobody, that is, apart from the head-in-the-sand lunatics in Brussels, Frankfurt and Berlin who wish the political project of a federal Europe with a single currency to be driven ahead, whatever the price.

The only realistic solution to Spain’s problems is to allow it to default on its debts in an orderly fashion, and re-establish a devalued peseta, which would eventually allow it to export its way out of trouble.

For the moment, that is not allowed.

If difficulties were confined just to Spain, the project would be hard enough to support.

But they are not. Italy, despite its Brussels-imposed ‘technocratic’ — in other words, undemocratic — government, is also teetering on the brink. With the country in recession, Mario Monti, its unelected prime minister, announced this week that Italy could not keep its promises about deficit reduction. Its debt is an unsustainable 120 per cent of its GDP. It, too, would benefit in the long run from leaving the euro and re-establishing the lira: but again, that course appears to be unthinkable.

The timing of all this is frightening, for the tectonic plates of Europe’s politics are also about to move. Tomorrow, France holds the first of two rounds of its presidential election.

Opinion polls show the incumbent, Nicolas Sarkozy, is trailing his socialist rival, Francois Hollande.

Mr Hollande has threatened to tear up last year’s EU fiscal pact, and with good reason. He knows that, after the election, France will find it politically impossible to keep to the EU’s stringent fiscal rules.

The election campaign has been characterised by denial on both sides about just how grave the country’s economic problems, and notably its deficit, are.

The presidential contest has a second round on May 6, where the two remaining candidates go head-to-head. That same day Greece goes to the polls.

Anti-austerity candidates look likely to win in Athens, leaving Greece’s future compliance with the fiscal pact — and therefore its future membership of the euro — in serious doubt.

These elections bring closer the moment of truth for Europe.

So does the Spanish problem. Its economy is six times the size of Greece’s, and if it starts to collapse it may be beyond the means of the rest of Europe to save it — even if Brussels decides to do so.

Worse, Spain is a country riven by political unrest. There was a general strike last month accompanied by violent disturbances in several cities.

It is only 31 years since an army officer fired a gun into the ceiling of the Spanish parliament, hoping to trigger a coup d’etat.

Could something similar happen again? Certainly, the King is unpopular, not least for recently abandoning his destitute people to go elephant-hunting in Africa.

Another large rise in unemployment could destabilise the whole country. For all these reasons, it is deeply irresponsible of the Commission, the ECB and, indeed, the EU’s puppet master Germany, to put the continuation of the political project above the stability of individual states. It is not purely that unrest could be averted in several countries if they were helped to have orderly defaults and devaluations: it is that such a move is the only feasible way for countries such as Spain, Greece and Italy to revive their economies.

One man who must see this is David Cameron. He was at the Treasury as Norman Lamont’s special adviser during the calamitous events of Black Wednesday in 1992, when Britain was forced to devalue the pound by leaving the exchange rate mechanism.

Within a few years our economy was booming, and the value of the currency had recovered.

Mr Cameron has been much criticised lately for the incompetence of his administration, and rightly so.

He will need a much surer hand on the tiller if — or rather, when — the euro becomes unsustainable, because the collateral damage to British banks, financial institutions and export businesses would be severe.

That is why Mr Cameron should be taking a much more proactive role in trying to manage the potential disaster that is the eurozone, not least because we are being asked for money to bail it out.

There are few more statesmanlike acts in which he could engage now than touring the chancelleries of Europe, trying to persuade his peers that the game is up, and that a sensible exit strategy must be devised without delay.

Certainly, there is no easy way out. The eurozone will either end painfully, or very painfully.

In the interests of at least securing the former, those responsible need to act now.

Mr Cameron’s message — which he should deliver to Angela Merkel, the German Chancellor, Jose Manuel Barroso, the President of the European Commission, and Mario Draghi, the President of the European Central Bank — should be that since the end of the euro as we know it is inevitable, it had better start being handled properly.

Such an appeal may well fall on deaf ears. Brussels’s utter disregard for political and economic reality has had to be seen to be believed.

Do they not know that only this week the IMF stated it was now very possible the euro would implode?

Someone has to take political action to avert this. The alternative, without exaggeration, is economic meltdown, widespread civil disorder, and years of destitution.

Mr Cameron needs to persuade his fellow European leaders that if the collapse of the economic project in Europe is properly managed, the EU, in some form, might survive.

But if Europe’s leaders go on ignoring the obvious until everywhere goes up in flames, they and the EU will be finished: and the economic consequences of their stupidity and arrogance will be felt around the world.