The poet Shelley once said of an elderly relative that he had “lost the art of communication but not, alas, the gift of speech.” Europeans might be forgiven for applying this rebuke to their politicians who have expended thousands of words in failing to explain—or resolve—Europe’s three-year economic crisis.
The magnitude of Europe’s problem can be vividly seen in the lengthening list of casualties among Europe’s leaders. Everywhere politicians are being swept from office. Since the crisis began, leaders have lost power in Ireland, the Netherlands, Portugal, Finland, Belgium, Hungary, Slovakia, Latvia, Bulgaria, Poland, and, yes, Britain. This month leaders in Greece, Slovenia, Spain, and Italy are on their way out. The rout of finance ministers is almost complete: 23 of the 27 who were in office before the crisis have gone. One of the survivors, the finance minister of Luxembourg, is also the country’s P.M., and so he appoints himself.
As a result of the bizarre events at the recent G20 summit in Cannes, with Barack Obama and others reduced to the role of spectators as governments collapsed around them, a drama that became a crisis now threatens to derail the whole global economy.
Europe’s deep-seated difficulties can’t be explained away as simply the fallout from profligacy in Athens. After all, Greece makes up only 2 percent of the euro zone’s economy; and anyway, Europe’s overall fiscal deficit is half that of the United States. If Europe’s deficits were the sole problem, the austerity packages implemented across Europe would have begun solving it by now.
The truth is that Europe’s crisis is three-dimensional: at one and the same time a banking crisis, a growth-and-competitiveness crisis, and a fiscal crisis, each made all the more lethal because one feeds off the other. To compound matters, each has to be addressed within the confines of a single currency, where a uniform monetary policy is implemented across nations with different economic and fiscal conditions.
The extent of the banking problem simmering in Europe continues to be largely denied. It is rarely mentioned that Germany’s overleveraged banks have liabilities 32 times their capital base, and French banks 26 times. The comparable U.S. figure is 10 times. Europe’s banks owe €40 trillion in liabilities, dwarfing any American, Chinese, or Japanese bank debts. A long process of deleveraging is on its way. In simple terms that means a spate of liquidations. Thousands of European businesses will lose financing and go bust. Last week the new head of the global financial-stability board said that European bank-asset sales could rise to an astonishing €1.4 trillion and may even go as high as €2.5 trillion.
Meanwhile, Europe is mired in intractably low growth even before the full impact of the rising pensioner population, which threatens to cut growth further. Unemployment is stuck at around 10 percent, with average youth unemployment at 20 percent. (The youth of Spain face levels of 40 percent.) The near-zero growth cannot be written off as just a cyclical hangover from the global recession. Stagnant growth is exposing the huge structural shift in Europe’s place in the world. Its share of world output has sunk steadily from a peak of about 40 percent to less than 20. In the next two decades it will halve again as China, India, and others rise. Indeed, by 2020, according to Credit Suisse, Asia will account for as much as 40 percent of world consumer spending, while Germany will have only 4 percent, with France, Britain, and Italy all at 3 percent each. There is no “sit and wait” policy in an economic cycle that will fix this.
Yet Europe’s leaders have failed to produce a credible plan for dealing with its long-term growth issues. Germany, Finland, the Netherlands, and Sweden will for now continue to sell their products abroad. But the continent as a whole is struggling to find vital niches in the export markets of the future. Only 2 percent of Europe’s exports go to China, 1 percent reach India, and just under 1 percent go to fast-expanding Brazil. In total, just 7.5 percent of Europe’s exports go to the countries that will account for 70 percent of the world’s growth.
Against this background, Europe is further constrained by the way its single currency works. While America’s single currency works for all its 50 states, Europe struggles with the most elemental difficulties. No state in the eurosphere can devalue, print money, or unilaterally move its interest rates, and there are limits placed on excessive deficits. While the same is true of states within the U.S., America makes up for these limitations to growth with high levels of interstate mobility, more wage flexibility, and a central-government budget worth 25 percent of GDP that can shift resources to states in difficulty. In contrast, the European Union budget is just 1 percentof Europe’s income.
Because of federal transfers, the divergences between the richest and poorest American states are less pronounced. The wealthiest state, New Hampshire, is 50 percent better off per capita than the poorest, Mississippi. In Europe, Luxembourg is 700 percent better off than Estonia.
If Europe is to limit the damage being inflicted on its poorer regions by the euro, it must begin to fast-track some of the solutions, such as fiscal coordination, which the U.S. has implemented to cure the same problems.
However, a more flexible euro will not in itself solve Europe’s growth crisis. Sustained long-term growth will come only from exporting more to the rest of the world. For when historians look back at this extraordinary period, they will see one clear truth lying behind the turmoil that has followed the financial crash. The truth should become a guiding principle in all global decision making.
Globalization has finally reached every corner of the world, meaning that for the first time in history all continents are to some degree dependent on each other for their prosperity. Asia cannot continue to grow fast enough to absorb its new army of urban workers unless consumer spending power returns to Europe and America. Europe and America cannot recover from low growth unless Asia begins to buy their exports. The truth is that Europe is embedded in a global economy in which the fate and fortunes of the producers (mainly the East) and consumers (mainly the West) are inextricably tied together. Both need trade to expand.
Unfortunately, the G20 were unable to agree on new coordinated measures for more trade. So Europe is stuck, increasingly marginalized in a fast-changing new world. Go to Asia today, where they will talk about Europe in the past tense; and then travel to America, where they’re thinking less about their historic connections with Europe and more about future links to Asia. And Europe must not go the way that Japan went in the 1980s—looking inward, bogged down in internal strife.
Fortunately, there is a way out. The IMF has said that if there were a global growth pact to increase consumer spending in Asia and infrastructure spending in the West, the world economy would grow much faster and 25 million to 50 million jobs could be created. Even now, in the last two months of his G20 presidency, Nicolas Sarkozy should push for coordinated action.
No leaders should be pushing harder for such an agreement than those of Europe. For months, I have been arguing that Europe needed an unbreachable firewall to secure the financing of its solvent but illiquid sovereigns and to prevent the markets from picking off Italy, Spain, Portugal, and Ireland one by one. A €2 trillion to €3 trillion fund would have provided protection while European leaders finally make fundamental reforms to the euro, and the best way of building this was through the European Central Bank, backed up (if necessary) by loans via the IMF from oil states and China. But the markets are sending a message that time is now running out on this option, too.
It was said of Europe’s bungling monarchs of the 18th century that they never learned from their mistakes. If today’s leaders continue to prevaricate, doing too little too late, Europe faces a decade of unacceptably high unemployment and intense social unrest. The route to recovery requires political courage and a commitment to momentous measures. The alternative is a lurch toward a new chapter in the decline of the West.