In an intensely personal article, PIMCO’s Mohamed El-Erian vividly recalls the political unrest and all-out war that marked his childhood in Egypt in order to make a larger point about anxiety in Europe.
Writing on the Project Syndicate website on Monday, El-Erian moves from the “war of attrition” with Israel following the June 1967 war, through the war in 1973 and up to the 1979 peace agreement.
“To this day, I remember vividly the sense of general anxiety that prevailed among citizens, accentuated by deep concern about what the future might hold,” he writes. “People were afraid to invest, and many wondered whether they should emigrate in search of a better future.”
He recounts this history, he explains, “not to draw a parallel with today’s Israeli-Palestinian conflict, which, just a couple of weeks ago, resulted in many civilian deaths, overwhelmingly in Gaza. Rather, it is because I see too many parallels with what is happening in the European debt crisis.”
European citizens – particularly in peripheral economies such as Greece, Portugal, and Spain – are anxious, El-Erian notes. Unemployment is “unacceptably” high and still rising. Their economies continue to implode, leading to cumulative contractions that are setting tragic new records. Poverty is on the rise. Not surprisingly, increased emigration to the stronger euro zone countries (such as Germany) has been accompanied by higher outflows of financial capital.
“Admittedly, and fortunately, the parallels are far from perfect,” he concedes. “Europe does not have armed conflicts. Feelings of intense insecurity are not related to bombs and sirens. The threat is economic rather than military. Yet there is a real sense of ‘no peace and no war.’”
The longer this prevails, “the more oxygen is sucked out of sectors that remain relatively healthy. This is for three distinct reasons.
First, he says, the euro zone economy is extremely interconnected. As such, it is only a matter of time until weakness in one part migrates to other parts.
Second, the euro zone’s bailout bill continues to rise. Cyprus is expected to join the other three “program countries” (Greece, Ireland, and Portugal) in requiring considerable official financing; and, of the other three, only Ireland is getting close to regaining normal access to capital markets.
Finally, “adverse contagion” is extending beyond the 17 countries in the euro zone. The region’s debt crisis is undermining cooperation within the larger 27-member European Union, resulting in the spectacular failure of the recent summit on the EU budget.
“This lack of peace would have resulted in outright economic and financial war if not for the critical – and growing–role played by the European Central Bank,” he claims. “Under the bold leadership of Mario Draghi, the ECB has committed to provide as much time as possible for most governments to get their acts together.”
He notes that “some claim” just as Egypt’s war of attrition eventually gave way to a full-scale war and then a peace treaty, Europe needs a major crisis to move forward. But, he concedes, “this is a dangerous notion, one that entails not just massive risks, but also unacceptably high interim human costs.”
“European governments are well advised to use the financial cease-fire that the ECB is willing to buy for them,” El-Erian concludes. “Allowing it to expire without progress toward permanent stability would expose Europe to disruptions that would diminish significantly its prospects for long-term economic stability, growth and job creation.”