Weekend Economists: What Goes Up....June 1-3, 2012

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122. A European Cold War?

http://elpais.com/elpais/2012/06/03/inenglish/1338725698_465027.html

Europe is the world's most important economy. It is the second-largest trading bloc on the planet, the largest donor of aid, and a military superpower. Its aggregated public deficit will be three percent of GDP this year. Its welfare state has been a beacon for decades. It continues to exercise enormous cultural and social influence around the planet. It is the birthplace of democracy, and is also a major international financial center. With the exception of the Turkish invasion of Cyprus, and the conflict in the Balkans, it has enjoyed peace for more than 60 years. None of which is to say that it doesn't face a range of serious, deep-rooted problems. What's more, along with the United States, it is in the midst of a slow decline in the face of Asia's unstoppable rise.

The euro crisis has already cost the EU five years of growth, which will end up being a lost decade or more if the continent doesn't start working together to find solutions to its many problems. The first of these is that its power base is now completely fragmented, robbing it of any decision-making capacity both domestically as well as internationally, particularly at the fiscal level. The second problem the EU faces is the lack of faith that the peoples of Europe have in it, something that will be very hard to overcome. And thirdly, and perhaps most importantly, is the reality that the EU is still very much a work in progress; despite its name, it is far from being a union, and remains largely an economic community. What is missing is political leadership, and that absence is leading to a new cold war between Greece and Brussels due to their seemingly irreconcilable differences.

Brussels regards Greece as the source of the current crisis throughout the euro zone; a financial, economic, social and fiscal crisis, and one that like all crises, is now above all else a political problem - one that is fast spreading what former British Prime Minister Gordon Brown has called "moral bankruptcy." In short, Greece is a time bomb: its political parties have been unable to form a government in the wake of its elections less than a month ago, and the electorate will now have to vote again this month. Some of the parties that have taken center stage in Greece following the elections are threatening to abandon the agreements signed over the last two years by the previous government with Brussels and that have seen unprecedented spending cuts, which in turn have led to a depression. Brussels says that it is not prepared to renegotiate the agreements, and is threatening to cut off the cash that is keeping the country alive - just. In short, things have narrowed down to a cold war style standoff, and a growing number of pundits now say that this will lead inexorably to the break up of the euro and mutually assured destruction.

"The two sides, Athens and Brussels, both have the nuclear bomb; if Greece pulls out of the euro, it will spark a cataclysm; if Europe cuts off funding, then chaos is assured," said Alexis Tspiras, the leader of the left-wing party that looks set to win this month's elections in Greece, and which will be key to the future of the euro single currency.