The end of Europe (as we know it)?
- By Dan Steinbock
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E-mail China.org.cn, March 28, 2016
Since 2010, European leaders have been deferring the hard decisions. Occasionally, there have been political reasons for delays. Yet, times of crises cry for leadership.
Economically, procrastination has sustained the semblance of continuity in the short-term. Politically, it has maintained the status quo of "integration without common institutions", which is unsustainable. Strategically, it has resulted in misguided military policies that threaten to undermine what is left of the unity of the region.
Time is out and delays are no longer an option.
From cyclical contraction to secular stagnation
The numbers are not encouraging. While the Eurozone (EZ) is amid a fragile cyclical rebound, it is barely breathing as quarterly real GDP growth is at barely 0.3% and inflation close to zero. After half a decade of economic pain, the region will struggle for 1.5% growth. In the coming decade, that will slow close to 1%.
When the global financial crisis hit Europe, its core economies - Germany, France, the UK and Italy - relied on relatively generous social models for cushion, but structural challenges were deferred. In spring 2010, the European sovereign debt crisis was still seen as a liquidity issue and a banking crisis. As Brussels launched its €770 billion "shock and awe" rescue package, it was expected to stabilise the EZ.
However, Brussels and the core economies failed to provide adequate fiscal adjustment, which made mass unemployment a lot worse and continues to penalise confidence, demand and investment. Today, unemployment has decreased to 10.3% n the EZ (and to 8.9% in the EU, respectively). But underemployment remains prohibitively high and youth unemployment amounts to 23% in the EZ and is far higher in crisis countries, such as Greece (48%), Spain (45%) and Italy (39%). In the future, Europe must cope with a 'lost generation.'
Initially, the small crisis economies (Greece, Portugal) were seen as "exceptions" because they were each less than 3% of the Eurozone GDP. As the crisis spread to Italy and Spain and the ailing economies accounted for almost 30% of the EZ economy, bailout packages were no longer a viable option. But while the urgency for structural reforms has increased dramatically, they continue to be deferred.
How has deleveraging succeeded? Well, it hasn't, despite the rhetoric of austerity. As percentage of the EZ GDP, general government gross debt soared from 70% to 93% in 2013. It remains at threat levels in Greece (169%) and Portugal (130%) and excessively high in Italy (135%) and France (135%), even Spain (98%).
If Brussels had faced head-on its threats - fiscal, monetary, liquidity, banking and competitiveness challenges - in 2010, it would have been better positioned to do so. The EU was still stronger economically, more united politically and wary strategically. Now that it must face still new challenges, it is weaker economically, polarised politically and assertive strategically. And that does not bode well for the future.
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