The pain in Spain falls mainly on…well, on a lot plains and on a lot of people. As so it also goes with Greece, Italy, Portugal and, of late, France. It’s the gathering austerity storm and there is worry the consequences could have far reaching impact on the folks on the factory floor, on energy markets, and on President Barack Obama’s elections chances.
Can any western European democracy cope with one in five jobless rates that has been the result of enduring Europe’s tough measures to cut its debt? It would seem not much longer and that is what the crisis will come down to: the jobless worker who will decide not on political visions of the greater good, but on their own individual well being.
“We have nothing to lose,” said one Greek woman, as quoted by the New York Times, on her future prospects in a country at the eye of the debt storm. “We have no fear.” If that sense of nihilism grows, the great of unwinding of the Euro may be at hand.
The New York Times columnist Paul Krugman has been predicting Europe’s unraveling for some time because of what he sees as a wrong headed policy of imposing deep cuts to e regain the confidence of the bond market. “Suddenly, it has become easy to see how the euro — that grand, flawed experiment in monetary union without political union — could come apart at the seams,” he wrote in a recent column.
But now he is not that lone grumpy voice in the wilderness; there is a growing chorus of people calling the end of the EU as either inevitable or even preferable. Author Andrew Roberts wrote in the Financial Times about the “coming dismemberment” of a Europe that is now in its “endgame.”
But as individual ache in the ailing countries will drive the changes, the pain may be spread on a macro level. Stock markets and oil markets are gyrating lower on concerns that countries such as Greece will soon reject the idea they can cut their way to prosperity. In mid May oil, sometimes seen as the canary in the coal mine, looked as if it was ready to duck under $100 a barrel after peaking above $125 just a few months ago.
Why? Because the investors who had been eager to prop up oil with any signs of economic expansion, know there will be little to support the froth if Europe restructures. “If policymakers were unable to stem the contagion following Greece’s exit from the Euro, it could potentially lead to a chain reaction where other countries have few options but to opt out of the currency union as well,” according to a BofA Merrill Lynch Global Research report.
Merrill Lynch predicts that that a Eurozone breakup could see the continent’s oil demand contracting by 2 million barrels per day, based on a scenario where economic output would shrink by 10 percent. Globally oil prices would beat a sharp retreat as a forerunner of a global downturn. (Lower energy prices will eventually sow the seeds for recovery, but a decline of that magnitude would first foreshadow deep economic woes.)
And all this could well upend the Obama campaign, which was only just beginning to feel some economic headwinds. Obama can explain away the economic malaise of the Great Recession as something he inherited and dealt with, and arguably better than Europe which chose austerity over stimulus. But if Europe implodes now and the shock waves wash over to America, some will argue that the debacle happened on his watch and that he did not provide the leadership that should have showed Europe the error of its ways. With the G8 meeting in Chicago, the Obama team was doing just that, perhaps belatedly, talking up the need for growth. Much will rest on whether a change of course will be accepted by the Germans, who are escaping much of the hardship thank you very much.
(As an aside: should the American voter turn from Obama, will they be ready to embrace the Republicans and its own message of austerity and tax breaks? From presumptive presidential candidate Mitt Romney to budget guru Paul Ryan, the GOP has been calling for huge cuts in government outlays and tax breaks, a mixture that a number of economists and commentators has led to a painful contraction in Britain).
Whether Europe goes through a structuring many fear now is all but inevitable, the movement will be led by the plain folks in the most pain. The Greeks get to vote again in June and if an extremist party holds sway, the country could be the first of many to head to the exits. And the pain may well be felt far and wide.