by Foivos Karzis. Originally published on 2013/06/04
The undoing of Greek bondholders and Cypriot depositors saw the emergence of a new factor at the European negotiating tables: a consistent northern bloc of countries aligned with German views on the need for unwithering fiscal discipline. Rock-solid in recent Eurogroup meetings, this front is much weaker and more vulnerable than it looks, because the policies it champions bear the seed of its own destruction.
Swarming around the German sermon for one-size-fits-all austerity, one can count at least Austria, a traditional ally, the Netherlands, often outbidding the German calls, and, most notably, Finland, a relatively recent addition to the party with an eagerness fomented by self-assertion. These countries not only subscribe to the German-inspired starve-to-death diet but are claiming “ownership” of the doctrine, adopting the relevant policies as an economic vademecum at home, along with their enforcement on others.
One after the other, Berlin’s allies are starting to savor the bitter fruit of their own policies. The national interests of Berlin’s followers, however important to them, are hardly taken into account when the Germans decide without consultation on fundamental euro-area issues. Being faithful to the German lineup does not pay off, nor does it render the lesser allies of the northern league immune to side effects of policy decisions that hit hard at the core of their strategic and economic interests.
Not-so-faithful Austria is the weakest link. Even before the recent turn of events, Vienna’s support for Angela Merkel was politically fragile due to the power sharing between Social Democrat Chancellor Werner Faymann and right-wing Finance Minister Maria Fekter, frequently expressing starkly diverging views on the management of the euro crisis. The abrupt awakening for the Austrians came in the wake of the Cyprus decisions they so staunchly supported, as their cherished banking secrecy is now being targeted. Thus, they find themselves to be the next piece in the domino effect they helped to initiate.
After Cyprus, Luxembourg was swift to succumb to pressure from Berlin to radically diminish (and in due course abolish) banking secrecy, the cornerstone of a banks-only economy. Though Luxembourg without banks amounts to little more than a nice plot of European land, Prime Minister Jean-Claude Juncker announced in a state-of-the-nation address that “automatic exchange of information” (on European citizens keeping accounts in Luxembourg banks) will start on January 1, 2015. Austria alone is, until now, beating a desperate retreat but few have doubts about the impact on Austrian banks, when inevitably Fekter bows to German Finance Minister Wolfgang Schauble. Over the medium term, Austrian bankers will simply cease to offer their German peers the kind of competition they had managed via their expansion in Central and Eastern Europe, clearing the ways for Berlin’s financial dominance in a region it views as its backyard.
But there is more hardship to come for Austrian banking, which already qualifies as future collateral damage for the German-inspired new European financial architecture. As we have come to know, five full years into the financial crisis, when one country falls, the markets immediately ask the same question: “Who’s next?” And, after Cyprus’s fall, the most probable answer is Slovenia. Its sovereign debt yields are reaching the now typical tipping-point of 7 percent (on March 27 they leaped to 6.31 percent for a benchmark 10-year dollar-denominated bond). Austria is one of Slovenia’s three main trading partners, accounting for about 9 percent of both imports and exports. Moody’s recently invoked the danger of a “renewed downturn” in Central/Eastern European economies, including Slovenia, to account for a “negative” grade on the outlook of the Austrian banking system.
Things are not much brighter for the Dutch pioneers of austerity. Despite implementing this policy on a lean state, enjoying political consensus, a flexible labor market and an economy as open as any in the world, it still does not deliver. According to most recent data, the Dutch economy contracted by 0.4 percent in the fourth quarter of 2012, double the official forecast. On a yearly basis, the gross domestic product contraction stood at 1.2 percent, again far exceeding expectations and marking a triple-dip recession since 2009 for one of the healthiest European economies. The Dutch are bound to ask themselves whether the current recipe serves all open and outward-looking northern economies, or if it is tailor-made to maximize the value of an economy based on the massive export of know-how to the emerging Far East, especially China. In other words, they will wonder if the current course is only good for the Germans.
That leaves the Finns. The most unlikely to join in the first place, they are also the least likely to drop the alliance since their allegiance is founded more on shared principles than a community of interests. Until, of course, some political power in Helsinki raises the question why, uncoerced and by choice this time, Finland is opting to be finlandized again but this time by Germany rather than the Soviets.
These are the coming critical tests for the “northern bloc.” It will not be long before looming cracks become evident, though it is quite unlikely that they will materialize politically before the German elections in September (unless there is a dramatic downturn in Italy or Spain precipitates the course of events). But then, when the real discussion on the future of the eurozone unfolds, take no one for granted.
Foivos Karzis is a journalist. The views expressed in this article are his own.