I was nine years old when Egypt entered what became knownas its “war of attrition” with Israel. During this period of “no war and nopeace,” underlying tensions festered, and a fragile tranquilitywas periodically interrupted by armed skirmishes.
The war of attrition followed the June 1967 war, in whichEgypt – to the immense surprise of most of its citizens and the outside world –was soundly defeated. Its air force was crippled and its army was virtuallyoverrun, with Israel capturing the entire Sinai Peninsula.
Positioned on the eastern bank of the Suez Canal, Israel’sarmy was just over 100 kilometers from Cairo. And, with Israeli jet fightersstill controlling the airspace, Egypt’s capital and its major populationcenters were greatly exposed.
The official narrative reflected little of this. Whether onstate television or in government-controlled newspapers – at the time, therewas no free press, Internet, or cable news – citizens were reassured that Egypthad regained control of its destiny. But they knew better.
To this day, I remember vividly the sense of generalanxiety that prevailed among citizens, accentuated by deep concern about whatthe future might hold. People were afraid to invest, and many wondered whetherthey should emigrate in search of a betterfuture.
With the underlying issues left unaddressed, the war ofattrition was followed by another full-scale war in 1973 – one that againsurprised most people inside and outside Egypt. This time, the Egyptian armedforces won a number of early battles and secured a cease-fire that regainedpart of the Sinai, setting the stage for the 1979 peace agreement with Israel.
I recount this history notto draw a parallel with today’sIsraeli-Palestinian conflict, which, just a couple of weeks ago, resulted inmany civilian deaths, overwhelmingly in Gaza. Rather, it is because I see toomany parallels with what is happening in the European debt crisis.
European citizens – particularly in peripheral economiessuch as Greece, Portugal, and Spain – are anxious. Unemployment is unacceptablyhigh, and is still rising. Their economies continue to implode,leading to cumulative contractions that are setting tragic new records. Povertyis on the rise. Not surprisingly, increased emigration to the stronger eurozonecountries (such as Germany) has been accompanied by higher outflows offinancial capital.
Admittedly, and fortunately, the parallels are far fromperfect. Europe does not have armed conflicts. Feelings of intense insecurityare not related to bombs and sirens. The threatis economic rather than military. Yet there is a real sense of “no peace and nowar.”
Europe’s economic peace remains elusivefor a simple reason: governments have still not found a way to generate thetrifecta of growth, employment, and financial stability. The longer thisprevails, the more oxygen is sucked out of sectors that remain relativelyhealthy – and for three distinct reasons.
First, the eurozone economy is extremely interconnected. Assuch, it is only a matter of time until weakness in one part migrates to otherparts. Witness what is happening in Germany, a well-managed country oncethought itself immune from the troubles around it. After a period of record lowunemployment, economic growth has slowed markedly,
reaching just 0.2% in quarterly terms in July-September. Oncurrent trends, the fourth quarter’s growth rate will turn negative.
Second, the eurozone’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, ofthe other three, only Ireland is getting close to regaining normal access tocapital markets. With Spain also requiring billions more to recapitalize itsbanks, the contingent claims on taxpayers in the core countries continue tomount. Indeed, this is one of the factors that contributed to Moody’s decision– following Standard & Poor’s – to strip France ofits AAA credit rating.
Finally, adverse contagionis extending beyond the 17 countries in the eurozone. The region’s debt crisisis undermining cooperation within the larger 27-member European Union,resulting in the spectacular failure of the recent summit on the EU budget. Ithas also contributed to the economic slowdown in China, raising concerns (whichI believe are exaggerated) that the country’s new leadership may have problemsengineering a soft landing for an economy accustomed todouble-digit (or high single-digit) growth.
This lack of peace would have resulted in outright economicand financial war if not for the critical – and growing – role played by theEuropean Central Bank. Under the bold leadership of Mario Draghi, the ECB hascommitted to provide as much time as possible for most governments to get theiracts together. And it has done so by relying on innovative measures thatsubstitute its elastic balance sheet for those of over-extended governments, gun-shy private investors, and fleeing bank depositors.
Yet it would be a grave mistake to assume that the ECB candeliver lasting economic peace. It cannot. If governments continue to dither and bicker, themost that it can do is delay the war for a while.
Like Egypt’s war of attrition,the eurozone’s underlying economic, financial, and social ferment continues. If governments continue to stumble from one patchwork remedy to another – aprobability that remains uncomfortably high – the delay in implementing acomprehensive solution will eventually overwhelm the defenses that the ECB hasso courageously put in place.
Some say that, 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 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 financialcease-fire that the ECB is willing to buy for them. Allowing it to expire without progress toward permanent stability would expose Europe to disruptions that woulddiminish significantly its prospects for long-term economic stability, growthand job creation.
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