Is there a way out of the abyss?

Last October, the UK’s business secretary, Vince Cable, issued a dire warning to the EU: Europe will descend  into war if the eurozone collapses. Noting that the consequences would be “incalculable” for Europe and “awful” for the UK, he said there was “no automatic guarantee” that Europe would not disintegrate into conflict.

Six months on, and the situation in the EU continues to deteriorate. In early May, the founder of the euro, German finance minister Oskar Lafontaine, proposed a break-up of the single currency to let southern Europe recover. The current course was “leading to disaster”, he said.  

Billionaire investor George Soros has also called for an end to the single currency, expressing concerns that the southern nations are “being pushed unwittingly into a long-lasting depression” and Germany’s austerity programme “cannot actually succeed”.  

In the UK, the push to leave the EU has gained momentum, with former chancellor of the Exchequer Lord Lawson joining the debate. He recently claimed the EU had passed its sell-by date and become “a bureaucratic monstrosity”.

The UK’s planned referendum on the issue in 2017 has sparked criticism from European Parliament president Martin Schulz, who said the UK’s hostile approach could break up the EU. Raging debate among EU leaders, and increasing hostility between northern and southern states, make a collapse of the EU model not only possible but also increasingly probable, say experts.

For economists, the reason the EU is in such trouble is because its model was built on misinformation from EU leaders. European Parliament Economic and Monetary Affairs Committee member and financial economist Godfrey Bloom says false information has affected the model for more than 60 years.

“In the mid-1950s, when the idea for the EU came about, it was supposed to be a no-nonsense, no red tape, no borders, free trade environment on the basis that if you trade together you are less likely to go to war with each other. There was no question of political unity at the time. It was not sold to us as the political union that has since been adopted. Nobody thought it would be centralised or that we would be told what to do by the Brussels commissioners in almost every aspect of our lives. There is no political remit for the EU as it stands,” says Bloom.

Institute of Economic Affairs director general Mark Littlewood argues that EU leaders have little choice but to continue to support the EU model. “Clearly, European leaders need to show the market that they are serious and confident about solving the issues with the eurozone and making sure it doesn’t fall apart.”  

He continues: “All of the underlying structural problems remain. So, although I think the Germans have effectively put a sticking plaster over the wound, the blood pressure remains dangerously high. All the crucial problems – lack of productivity, lack of economic growth, crippling debt and too much spending –  remain. I still can’t see an obvious way that we don’t end up with a  debt write-off. It is conceivable it could happen, but that would have political problems if we went down that route.”

Post-crisis dangers

We have stored up an extraordinary collection of pledges and promises that I think will be difficult for us to meet.

Mark Littlewood, director general, Institute of Economic Affairs

The immediate crisis affecting Cyprus and Greece may have been averted, but serious problems remain both for the eurozone and the EU. International Hotels Group director of corporate risk Danny Wong says the rolling debt issue and looming threat of EU breakdown is gaining momentum as a serious risk issue on the agenda of any risk manager operating in the region.  

“It started with Greece, now it’s Cyprus,” he says. “We’ve been monitoring the situation, and our activities around the crisis have increased. Cyprus is not a key market for us, but the crisis team has worked out where we are most exposed in that region.”

Wong says risk managers also need to look beyond the immediate crisis to the bigger picture. “We are also exploring macro indicators, and not just because of Cyprus and Greece,” he says. “We have seen there are macro performance numbers that are slightly lagging but indicate where things are going. We are working out the key dates or decisions that need to be made in terms of renewal of financing.”

Another EU issue that experts say is set to be the next big risk for businesses in the region, as well as individuals, is public sector pensions. Not only will it affect the EU immediately, but it is also likely to have an impact on future generations of employees and could lead to greater political and economic instability in years to come.

Littlewood is realistic, but says it is an issue that needs urgent EU-wide attention to stop further erosion of the EU model. “We don’t need to pay all of the public sector pensions promises we have made today, tomorrow or next year. But we have stored up an extraordinary collection of pledges and promises that I think will be difficult for us to meet. We are, yet again, kicking the can down the road.”

He continues: “In the EU, an average of 70% of 60- to 65-year- olds do not work, but longevity is increasing all the time. When the lifetime pension concept was first brought in, the life expectancy for men was 48, so it was not much of a promise. But we are now seeing people retiring at 60 and living until the age of 85 or 90. On the face of it, it is a good thing but we have definitely not budgeted for it.”

Bloom suggests going one drastic step further and that the EU model may be already broken. “I would argue that you cannot have any form of empire – and empire is what the EU is – in the modern world, which has no political will, is corrupt, is bound to fail or is already failing.

“The euro was the final nail in the coffin, when it was quite clearly going to sink the Mediterranean economies. The whole edifice is crumbling – but then, empires do, don’t they? Nobody wants this outside the political class. I suspect it will end in the same way as other empires through history.”

Littlewood concurs with this. “I remain of the view that the possible outcomes for the eurozone range from bleak to apocalyptic,” he says.

Bloom paints a grim picture of the immediate future for Europe, and says he believes the situation will need to get worse before it can get better.

“We need to see a complete and total breakdown before it will improve,” he says. “We are heading towards the collapse of the single currency and the collapse of the banking system. With that, the bureaucracy will hopefully tumble down too. Then we may see a phoenix from the ashes.”