Only cutting the right head off the Eurozone Hydra will kill this crisisPosted on November 11, 2011
Appropriately, the key to understanding the EU’s continued failure to solve the Eurozone crisis lies in Greek mythology. The second of the Twelve Labours of Hercules was the slaying of the Learnean Hydra – a many-headed beast that had the nasty and inconvenient habit of growing two new heads every time you cut one off.
This meant that many who tried to slay the Hydra ended up exerting themselves only to make it even more ferocious and threatening. Hercules eventually triumphed because he discovered that one of its heads was mortal – only by cutting off that one could the Hydra be destroyed.
So it is with the Eurozone crisis. Politicians, observers and – most sinfully – the markets are so desperate for all the effort going into each “solution” to be worthwhile that they convince themselves that just cutting off one more head will solve the Euro’s problems.
Time after time, though, they have chosen the wrong head.
First, simply announcing no Eurozone country would go bust or could go bust was meant to do the trick. It didn’t.
Then bailing out Greece from its short term liquidity crisis would solve all of the problems. It didn’t.
After which, Greece’s austerity package being voted through their Parliament would provide a panacea. It didn’t
Then bailing Greece out again was going to put the crisis to bed once and for all. It didn’t.
Then the “bazooka” deal would unite Europe in defeating the fiscal threat. It didn’t.
Last week, only George Papandreou ditching his referendum proposal and resigning would bring the nightmare to an end. It didn’t.
Now, they have seized desperately on the idea that Berlusconi’s resignation will calm the markets and stop the carnage.
It won’t, and it won’t for a very simple reason: Berlusconi is not the problem.
Of course, he isn’t the solution, either – he’s a clownish figure who lacks the authority or the desire to solve Italy’s problems – but any idea that he is the only thing that stands between Italy and fiscal stability is a fantasy as deranged as his self-perception of being God’s gift to women.
The sad thing is that there is such desire to believe that cutting off each of these Hydra’s heads will end the crisis that the markets briefly buoy when each one approaches, only to fall back further when reality intrudes again.
With each false hope and every false promise, the credibility of the next “solution” is reduced, the panic becomes deeper and the cost of borrowing rises. For a stark illustration of this problem, just look at the trouble the EFSF is having raising money from the international markets. As Liberal Conspiracy point out, it is now paying 4 times as much to borrow as it was in June. It isn’t just Greece and Italy that international lenders such as China view as too risky to lend to - it’s the supposed solution mechanism for the crisis.
The underlying problem – the true mortal head of this economic Hydra – is that membership of the Euro has straightjacketed these economies from defaulting or devaluing to address their sovereign debt problems. But political leaders find this so unpalatable in their world of “ever closer union” that they turn a blind eye to it, and keep lopping off other heads, increasingly bewildered at the sprouting of more and more in their place.
Let me make a prediction (which is a risky business, but hey). If Berlusconi does resign, the markets will briefly rise only to dip swiftly once it becomes clear that weeks of political wrangling or even a General Election will be necessary to even form a new Italian Government, still less implement a viable austerity plan. This will radically increase the cost of Italy’s borrowing even further, leading perhaps to a crisis in other Eurozone banks and further bailouts in Benelux and France and almost certainly to an attempt at direct budget control by the European Commission.
Even Hercules was not strong enough to keep chopping off the wrong heads indefinitely. To find the right head and dispatch this Hydra before being eaten the Eurozone countries need to get on to the real issue quickly, and escape their state of denial.