Just Another Fantasy Friday in Europe

by J. D. Foster

Four developments today capture perfectly the fantasy that is European policymaking.

The first development is that Italy, France, and Spain forced Germany to acknowledge that economic growth outside of Germany really is important. They announced a 130 billion euro growth package. At least, that’s what they called it. But it turns out the package contains only 10 billion euros of new money. That’s how much the sovereigns committed to borrow. They will turn the borrowed funds over to the European Investment Bank, which will then leverage it up to 60 billion euros — by borrowing against it.

So, once again Europe’s solution to its debt crisis is more debt. The rest of the growth package is simply an illusion, such as 55 billion euros in reallocated regional funds. Johannes Hahn, the EU regional policy commissioner, notes that that account is empty. 

The second development is that at least nine European countries have agreed to press forward in implementing a financial-transactions tax. This will be disastrous. To review the bidding: Europe is sliding into deep recession, led by its financial sector, and Europe’s best and brightest think this is a good time to threaten a financial-transactions tax. Either these luminaries are so cloistered they are oblivious to developments in the outside world, or they have taken a vow of poverty on behalf of their fellow citizens.

Development three: Fresh signs that the wolf is knocking on Greece’s door. That nation’s power-grid operator is in arrears to foreign electricity suppliers to the tune of 327 million euros. Consequently, at least four suppliers from Germany, Bulgaria, Switzerland, and Italy have now cut off or reduced electricity exports to Greece. This is what happens when countries cannot or will not pay their bills.

At the end of May the world’s biggest trade credit insurer, Euler Hermes, suspended underwriting new policies on exports to Greece for fear of lack of Greek payment. Athens certainly does not boast the most modern economy in Europe, but even so, the Greeks are going to find it hard to do much at all without electricity. What is the Greek word for “candle,” anyway?

Finally, Spanish borrowing costs were driven to new highs as Madrid announced it will formally seek a too little, too late bailout for its banks on Monday. Spanish interest rates are the market’s way of saying “game’s up, folks.”

What does it all mean after a week of summits stretching from Los Cabos to Luxembourg to Rome? Perhaps it means Europe’s leaders remain firmly entrenched in fantasyland, masters of their imagined universe. It also suggests that markets’ tolerance for empty promises can now be measured either in catastrophic interest-rate jumps or nanoseconds. 

Or maybe it just means Europe’s leaders are not as wrapped up in themselves as they appear. Maybe it means they know it’s all for naught, but in the meanwhile they can visit a lot of top-flight locales, stay in great hotels, and consume five-star meals.

After all, when you know the end is coming, it’s tempting to take Prince’s millennial advice to “party like its 1999.” Next week — the Riviera?

— J.D. Foster is the Norman B. Ture Senior Fellow at the Heritage Foundation