Europe's Economic Crisis Now Moves Towards Political Crisis

Apr 04, 2013 | Updated Jun 04, 2013

Historians will look back to chaotic financial events in late March/early April 2013 on the tiny island of Cyprus as the start of a new and more dangerous phase in Europe's crisis. Now, after years of mounting debt and economic problems from Portugal and Spain to Greece and Italy, Europe is entering what may be an era of rising challenges to its democratic institutions.

A period of political turmoil could lie ahead. The fundamental cause is a lack of public trust in the ability of elected politicians to revive economic growth and employment, combined with pervasive skepticism about the honesty of many of those wielding power. Unemployment across the European Union exceeds 20 million people and coming months will see the total rise. The outlook for growth -- even from what many experts would consider to be the most optimistic of sources, the European Union's own experts (see table below) -- is so dismal that it offers absolutely negligible hope for a serious rise in employment in any of the major economies and those in biggest current difficulty. No wonder that there is political unrest.

Europe's most powerful governments are in trouble. Prime Minister Cameron in the UK and President Francois Hollande in France are losing public support, while Chancellor Angela Merkel, is worried that her fortunes are flagging as September's elections approach. She may just scrape home, but Germany's economy is also slumping.

Table: Economic Growth in Europe (data and forecasts from Eurostat, the official European Union statistical office).

Country/2012 GDP growth/Forecast for 2013

27-member European Union/-0.3%/+0.1%
17-member "euro" group/ -0.6%/- 0.3%
Germany / +0.7%+0.5%
France/ 0.0%/+0.1%
UK / +0.3%/+0.9%
Italy / -2.4%/-1.0%
Spain/ -1.4%/-1.4%
Portugal / -3.2%/-1.9%
Greece/ -6.4%/-.4.4%
Ireland / +0.9%/+1.1%
Cyprus / -2.4%/-.3.5%

Elections across Europe in recent years have one common feature: the parties in power have been rejected by the electorates -- whether it is the Labor Party of Gordon Brown in the UK, or the conservative government of Nicolas Sarkozy in France, or the coalition led by technocrat Mario Monti in Italy.

Indeed in Italy, fully 25% of the voters rejected all the established parties and supported a new party, the Five Star Movement, whose negative platform called on the electorate to hurl out the incompetent professional politicians and reject corruption. The newcomers to the Italian parliament are in no mood to compromise with the established old parties and so Italy does not have a functioning government right now.

In Greece, a fascist populist party, the Golden Dawn, is ever more in evidence in street protests and opinion polls as it blasts the established political parties for economic mismanagement (unemployment is at 27%), for doing nothing about rampant tax evasion by wealthy Greeks and alleged governmental corruption.

Which takes us to the latest developments on Cyprus. For years, the banking system has been dominated by foreign clients, most of whom have not been required by the local authorities to fully explain where they got their cash. Many of the largest of these foreign account holders have used local lawyers to establish holding companies that mask the identities of the real owners and then shipped funds through these companies into investments in real estate, art, yachts, stocks and other assets in Western Europe and the United States. Yes, vast amounts of cash from business crooks, organized crime, and politicians pocketing public funds, have been laundered through Cyprus.

Although Cyprus is a member of the 17-nation euro currency club, none of its partners complained about the criminal activities in the banking system. Now, the banks are bust and Cyprus has asked its euro partners to bail them out. The Germans and Dutch, for example, opposed rescuing banks that have largely been the tools of vastly rich Russians. Instead, they decreed that all holders of bank accounts in Cyprus should pay. The decision to focus on those who hold bank checking and savings accounts produced turmoil in Cyprus and sent shock waves across the European banking system. After political uproar in Cyprus the decision was slightly modified to exempt people with accounts of $120,000 or less, but the damage to confidence in banks was done.

The decision was so stunning that the world's media is paying more attention to Cyprus than it has done in decades. Pundits have been opining about Cyprus in print and on radio and TV across the international financial media, recounting tales of governmental confusion, a central bank scrambling to save the whole banking system from imploding and imposing capital controls, and on individual citizens who are desperate to get their cash out of their banks.

The message is simple: depositors in all economies in difficulty in Europe should now beware. It is in these countries, which already are in a deep economic slump where the political situation now seems most fraught. The latest moves by the European leaders on bank depositors may well add to public anger over the competence of governments. The door could open more widely for the fascists and the populists to build their campaigns unless the European leaders come together and find explicit ways to address the rising political problems in their midst.

Frank Vogl is author of Waging War on Corruption: Inside the Movement Fighting the Abuse of Power.