The idea of European Union with a single political economic space and a uniform, neatly organized political ordering of like-minded countries has always been thought of as brilliant; as the embodiment of a long process that has been deemed to be only natural. Up until recently, everything was fine; the union was functioning smoothly and the traditional European model of "welfare state" with large programs for the poor and the unemployed was working well.
Borrowing was always easy and cheap for European governments to finance large budget deficits and build up impressive piles of debt. There was always enough money to feed these monstrously expensive government welfare programs across Europe.
Millions, who could not find work or simply had decided to remain jobless, received regular government perks and benefits. Individual economies across the continent were growing and although unemployment remained stubbornly high, welfare programs and social safety nets were easily accessible to millions of unemployed and underemployed. Life was good; it was beautiful.
It was not until the first waves of turbulence reached the shores of the continent in 2008 that governments, central banks, markets, investors and general people alike realized that the times of easy money and joyful ride is nearing the end. The impressive European model of welfare state, that was created in the prosperous years and decades following World War 2, is now fast becoming a beautiful thing of the past.
The fact is that the European countries can not longer afford the likes of massive social welfare programs that ran all the way until 2008. Sweeping "austerity" measures now are fact becoming the mantra across Europe. What this essentially means is that governments will no longer protect the back of people by erecting extensive welfare programs but instead will focus on balancing their destroyed finances and saving money to pay for the interest and the principal of the debt that governments now owe to private banks and creditors.
No longer sustainable
Over the past three decades, governments throughout Europe have been borrowing lavishly from private banks and international financial markets to finance their ballooning budget deficits and maintain their expensive welfare programs. As economic growth slowed down over the past two decades, governments had to rely more on debt to bridge the gap between what they earned and what they had to spend.
Maintaining and financing these monstrously expensive welfare programs across Europe is no longer sustainable for these governments. This is especially true for those governments such as Greece, Ireland, Portugal and Italy whose sovereign debt levels have already reached unsustainable heights taking into account the state of their economies and their capacity to repay their debts. At least until 2008, governments such as Greece, Ireland and Portugal were able to somehow hide the true state of their economies and their ability to repay the debt they had incurred.
As the global financial crisis hit in 2008, the real state of affairs in these economies and countries became known to all. As sovereign debt of Greece rose to 115% of its GDP and its annual budget deficit grew to become more than 13% of its GDP, the 2008 financial crisis unraveled the extent of Greece's vulnerability. Creditors and investors, most of them foreign banks, went into a state of panic and markets the world over feared that a possible disastrous default by Greece on its massive debt might very well be possible.
Greece's investors and creditors are mainly European banks from France, Germany and other European heavyweights. A default by Greece on its debt would be catastrophic not only for the financial markets but for the future and integrity of Euro as the common currency, European economy as well as the global economy. Greece has already been bailed out once by the International Monetary Fund.
In a historic deal, a significant part of Greece's public assets such as public sector companies and even some of its many islands were bought by private creditors at dirt-cheap prices in compensation for the country's debts. It is true that Greece is a debtor but the way private creditors rampaged through the country and bought up what Greece and its people need the most was evidently cruel and unfair. We wonder if the same fate is not going to happen to Afghanistan if we continue to run up debt in a pace that we are currently doing.
However, the unruly financial condition of Greece, its weak economy, and the predatory behavior of its creditors have forced a second bailout of the country, this time by the European Central Bank which has extended a line of credit to Greece as a temporary measure until powerful European countries such as Germany finalize their plans of a big bailout for the troubled country.
The situation of Greece is similar to those of Ireland, Portugal and Italy. Portugal has already been bailed out in May of 2011 in a €78 billion deal with the European Union and the International Monetary Fund. Ireland too was bailed out in a similar way in November of 2010 in a €85 billion deal.
What is deeply disturbing is that the political clout and influence of banks and financial institutions is becoming so pervasive throughout European capitals as well as in the U.S. that they are heavily influencing and distorting policy decisions by governments and Central Banks across Europe and the U.S. In Europe, the way banks and private creditors were allowed to buy some of Greece's most critical public infrastructure assets was certainly unfair.
More important, safeguarding the interests of the banks at all costs, bailing them out, ensuring that they will recover their money even when they made the mistake of lending in the first place, and doing all these at the cost of imposing painful public spending and "austerity" on common people all go against the very principles of justice and democracy. It is true that European countries' unsustainable levels of public debt means that Europe's impressive model of welfare democracy will be nearing its end.
But, on the other hand, Finance Capital, banks and other financial institutions and vested interests with their pervasive influence in governments would like to see more of this welfare state dismantled and the funds diverted towards them in repayment of the debt owed to them by governments.
In all likelihood, the saga of the European debt crisis will not be over by the bailout of Greece, Portugal and Ireland, Italy, Spain and a few other countries which are now teetering on the brink will be the next in the line to need expensive bailouts.
Even these will be more or less manageable as long as there are financially-sound countries such as Germany and France to come to the rescue of their troubled peers. The real bloodbath will start when countries such as Spain, France and the U.S. will see their time up. Available evidence suggests that over a time horizon of 4-5 years, even these countries will have their financial Armageddon.