Eurozone faces tough choices

Swedish automaker Saab's failed bankruptcy-protection application to a court in Stockholm might seem a mere sideshow, but it is a flashing red light about the dilemmas in dealing with the economic crisis.

At the turn of this century Sweden launched painful austerity measures to curb budget deficits. They worked, though jobs were lost for some years, and Sweden is now seen as a model of sound fiscal management. Saab struggled for a while in the embrace of General Motors, but unsustainable losses since 2007 highlighted the fact that jobs and enterprise do not necessarily go hand-in-hand with national fiscal rectitude.

Nor, if UK car-maker Rover's experience is anything to go by, are Saab's current post-GM hopes of tying up with one or other Chinese manufacturer likely to be a panacea. Nanking Automobile bought the Rover plant and simply shifted intellectual capital or technical skills to China while saving no British manufacturing jobs. The same dismal prospect faces Volvo since Ford sold its Swedish company to China's Zheijiang Geely.

Meanwhile, the China Association of Automobile Manufacturers reckons that auto exports will reach record levels this year (more than the association's earlier 5% increase estimate) to overcome slackening domestic demand arising from tighter monetary policies.

Chinese jobs for Chinese workers, and to hell with any official slogans of solidarity with the world's workers.

None of this offers any pointers towards overcoming the financial and economic crises that are threatening to tip Europe and, to a lesser extent perhaps, the US into double-dip recession. In Washington, President Barack Obama has proposed a $450-billion tax-cut and government spending plan to stimulate employment and boost the economy. But the current US unemployment rate of 9.1% understates the numbers of long-term unemployed.

Across the Atlantic the eurozone countries continue to struggle and lock horns over the problems besetting the common currency. Fiscally sound Germany and the Baltic states as well as a fiscally less-disciplined France want austerity in the troubled Mediterranean countries - Greece, Italy and Spain - in exchange for underwriting budgetary backing by the European Central Bank (ECB) and the European Financial Stability Facility (EFSF). There's a fat chance of Athens or Rome toeing the line.

Only days ago the combined IMF, ECB and EFSF teams, which had spent weeks in Athens trying to unravel Greece's budgetary and fiscal shambles as a precursor to delivering further aid, quit the Greek capital abruptly. Klaus Regling, CEO of the EFSF, was blunt: "The IMF and EU support programme for Greece isn't working." Greece's GDP fell by 4.4% last year and is modestly slated to drop by a further 5% this year. While it remains in the eurozone Greece cannot use the currency devaluation tool to lift its economy.

Spain and Italy are not quite in Greece's dire straits. But in Spain more than one-fifth of the workforce is unemployed and further austerity would exacerbate the situation. And in Rome, the Silvio Berlusconi government has backpedalled furiously on proposals to curb Italy's budget deficit by hiking taxes and cutting spending.

What seems increasingly plain is that, in Europe at least, governments are bereft of ideas for resolving the "Club Med" crises. Investors are showing their disquiet. Athens now faces having to pay an annual 20% interest rate on new 10-year bonds - a clear measure of fears of a default. Interest on Italian 10-year bonds is running at a punitive 5.5%, three times the 1.9% of their German counterparts.

While the EU's leaders struggle to stitch together a deal to bail out Greece, the markets are calling the tune. Finland's Prime Minister Jyrki Katainen has repeated that his country will not back a new bail-out plan for Greece unless it is accompanied by repayment guarantees from the ECB. In Germany this week the Constitutional Court in Karlsruhe tightened restrictions on just how far Berlin can go in using German funds to prop up budgetary-feckless European countries.

There are emollient proposals in Paris, Madrid and Rome for so-called "golden rule" amendments to national constitutions to restrain budget deficits. Madrid's proposal has already brought the unions and the so-called indignadas onto the streets with posters telling government that the people decide on constitutional change. These "golden rule" proposals have been criticised as mere window dressing - why are they needed when national governments could curb deficits without any constitutional changes?

The crisis started as a financial one after the collapse of Lehman Brothers, and that persists.

The IMF's new managing director, Christine Lagarde, has warned of weaknesses in European private-sector banks, most of which remain ultra-cautious on the sort of lending that might boost consumer demand. They and their US counterparts are focused on strengthening balance sheets - read reducing balance sheets by cutting lending and selling non-core assets. Last month a troubled Bank of America raised $8.3-billion by selling half of its shareholding in Construction Bank of China - a sum that helped increase its capital buffer by $3.5-billion.

Not that consumers and households with stretched budgets and worried about employment across the OECD countries are enthusiastic about taking on more debt. They know economies are far from emerging from the crisis despite what the politicians might be saying.