Peace prize is for more than avoiding war but achievement is under immediate threat

The award of a Nobel Peace Prize to the EU comes at a crucial time. Some critics of the EU regard the reward as absurd because war between its member states is inconceivable and would, the critics say, remain inconceivable even if the EU broke up. The contrary argument is that the EU has been so successful that it has not only prevented war but made it seem inconceivable; and this despite the fact that brutal wars were fought just outside EU frontiers in the 1990s. In addition to avoiding war, the EU has hitherto enabled conflicts to be sorted out within an institutional framework, becoming a possible model for areas of conflict.

However, though there would be no immediate or foreseeable danger of war even if the euro zone breaks up, the EU’s status as model for the institutionalisation of peace is under immediate threat from a possible break-up of the euro zone, particularly if such a break-up occurred in a chaotic way and was accompanied by an increase in the acrimony between EU member states that has already been seen between Greece and Germany in particular. The visit of Angela Merkel to Athens on October 9th, to meet members of the Greek government, appeared to have been constructive despite hostile demonstrations, but whether it actually was so will only be confirmed if the next tranche of the euro zone/IMF financial facility is soon released (although Germany is crucial this also requires the agreement of other countries).

In June, Greek voters gave a narrow but clear majority to the three political parties that not only wanted to stay in the euro but also committed themselves to continuing with the most severe programme of austerity imposed in any EU country since the Second World War. It would be a tragic failure if Greece’s euro zone creditors cannot agree with the government on a moderate alleviation of the extent of continuing spending cuts over the next two years. This surely is the moment where tightening the squeeze on Greece could just fall slightly short of the current harsh demands. That does not mean that the troika and other euro zone countries should not put pressure on Greece to introduce other measures, such as radical clampdown on tax evasion, effective laws and sanctions against corruption, privatisation of state assets where feasible, compiling a land registry, and action against restrictive prices which have kept prices high while wages have drastically fallen. But it is partly the fault of the troika and the creditor countries that these issues have not been addressed with the same urgency as expenditure cuts and tax increases; and proof of effective action will necessarily have to wait until after the next tranche of  the loan facility is released.

There is also increasing cause for concern about what is happening in a much larger country, Spain. Generally in Spain, the large demonstrations, and the encampments in Madrid, have been more peaceful than in Greece. The near 25% rate of unemployment (double that for youth unemployment) has been regarded as less alarming than the headline indicator would suggest because of large scale unregistered employment and the fact that similar unemployment percentages were recorded in the 1990s. However, signs of social stress have recently increased, one being that the Spanish Red Cross is this year for the first time devoting funds collected on Red Cross Flag Day (October 10th) mainly to helping support the destitute in Spain, rather than in developing countries.

As worrying is the rapid development of a crisis affecting the future unity of the country. Until recently, the regional Catalan political parties, unlike the Scottish National Party (SNP), had not demanded independence but this has changed quite dramatically in the last two months. The main reason for the change is the question of how to share the pain of austerity. Unlike Scotland in the UK, Catalonia as one of the richer regions makes a substantial net contribution to Spain’s overall budget. It estimates that it sends the equivalent of 4% of its GDP more to Madrid than it receives back. While it is true that Catalonia is richer than the Spanish average it is also very severely affected by unemployment and despite having to make severe expenditure cuts, the regional finances have plunged into deficit. Because the deficits of Catalonia and other regions are the main reason why Spain is likely to overshoot its 6.5% of GDP general government deficit target this year, the Popular Party government led by Mariano Rajoy, has been putting pressure on all regions to cut their deficits. By effectively treating Catalonia which makes net contributions (without which its budget would be in surplus) the same as Andalusia which is a net beneficiary it has riled opinion in Catalonia, which in the present economic circumstances feels that Catalonia would be better off on its own.

No country has yet broken up while being a member state of the EU (although several broke up or broke away before becoming members). If a settled majority of public opinion in a region comes to demand independence, there is a strong case for allowing that such democratic wishes should be fulfilled but that independence should take place in well-planned way in agreement with the country it is leaving with the minimum of economic disruption. But a sudden lurch to independence in defiance of the central government, both resulting from and exacerbating an economic crisis would be serious blow to the political stability which the EU member states have hitherto been able to claim.

It might be desirable that EU institutions or a team from other EU countries should try to mediate between Madrid and Barcelona.  The Spanish government should recognize that both the historical and cultural status of Catalonia and its net contributions to the Spanish budget mean that its government should be treated with diplomatic respect, rather than on the same level with Murcia or Andalusia. For its part, the Catalans should appreciate that the post-Franco order in Spain has provided the region with the conditions to become prosperous and to restore the cultural identity. It would be highly irresponsible rapidly to abrogate their financial contributions deriving from the position as a richer part of the Kingdom of Spain at a time of crisis.

Equally important, however, is that the euro zone countries in less dire financial straits stick to what they agreed at the June European Council, rather than trying to backtrack the moment the financial market pressures on Spain and other countries look a bit less threatening in the short term, as they have done in early October.

Writing from the UK, a country of which not very much is being asked, it should be said that it would be helpful if the prime minster, David Cameron, could be a little more consistent instead of berating his euro zone partners for not acting and as soon as they do act, veto the agreement, whether on a fiscal pact as last December or a banking union now under discussion.

Greek crisis is no side-show

While much of the news in the second half of September has been bad news involving Spain, where the prime minister, Mariano Rajoy, has floundered despite the strong political position given him by a decisive victory in the late 2011 election, there is reason for even more concern over what happens in October over Greece. The decline in the standard of living of huge sections of the population in this country over the last five years is an order of magnitude worse than in any other country in the euro zone, or than the experience of any other OECD country since the Second World War, and is comparable with the effect of the economic depression which hit Europe and the US in the 1920s and early 1930s. Real take-home earnings in the public sector and of pensioners have declined by nearly a half, taking into account both pay cuts and tax increases on the pay itself on the sale of goods and on property. A walk through Athens will show that much of the private retail sector has closed down, with an inevitable impact on other private sector companies further down the supply chain. The only obvious growth sectors are soup kitchens and similar charitable or voluntary activities such as improvised health centres to relieve the suffering. Although the economies of the more popular tourist areas remain in tolerable shape and greater social and economic cohesion in smaller towns has in many  cases kept their economies going, the economic and social situation of Athens-Piraeus and Thessaloniki, where more than half the population live, is dire.

Following the political instability of the first half of 2012, the June election—the second in three months—just produced a majority for the three “pro-Memorandum” parties which were willing to accept the need for the continuation of the swingeing austerity necessary to prevent financial chaos and keep Greece in the euro. These parties have accepted further expenditure cuts and tax increases of €13.5bn, about 6% of GDP, on top of the unprecedented austerity already in place but are asking for a spreading out of the timing for some of the measures to 2016 instead of 2014. As tense negotiations with the troika (European Commission, European Central Bank and IMF) take place, it looks as though the governing parties find themselves in a position where their remaining domestic political credibility could be broken by giving in to the rigidly hard line which the troika are taking. If this were to happen, the withholding of the next tranche of lending and consequent inability of the Greek state to service its debt might cause Greece to be the first country to exit the euro.

Earlier this year, the euro zone institutions and the other member countries, in effect told the Greek population that a vote for the anti-Memorandum political parties would lead to the withdrawal of the financial support necessary for the Greek economy to function within the euro zone, and that the rest of the euro zone was ready to withstand the shock waves that would result. However, if Greece were to be forced out of the euro now, the shock waves would be even greater because it would be unexpected and because it would have happened despite a hard-won parliamentary majority in favour of the Memorandum, the document committing Greece to continued austerity. A country, where a majority wanted to stay in the euro, despite having suffered the most severe economic pain of any developed country in recent times, would have been broken by the ever harsher conditions being imposed. The message to other troubled euro zone countries would be that even political support for harsh austerity is not sufficient to keep a country in the euro, with the result that the existing reluctance of financial markets to provide support for these countries would intensify and public scepticism over the ability of apparently moderate and responsible political leaders to keep these countries in the euro would weaken, and support for other parties, including those supporting leaving the euro, would  rise.

The negotiators of the troika in Athens are international civil servants, technocrats with a low public profile, but what they are willing to agree is likely to be influenced by the politics of the euro zone and in the creditors countries, of which Germany is the most important, though not necessarily the most hardline. The newly chosen German chancellor-candidate in the scheduled September 2013 general election for the main opposition party the SPD, Peer Steinbruck, has called for a degree of flexibility to be allowed to Greece. This shows political courage given the still prevailing stereotype in Germany of the Greeks as lazy, feckless and pampered, but it remains to be seen whether it will lead to any change on the part of the government of Angela Merkel, which has hitherto taken a hard line with Greece, and even if it does it would remain to be seen whether such a change will be sufficient to prevent a potentially catastrophic breakdown in the negotiations between the troika representative in Athens and the Greek coalition.