By Patrick Johnson
Europe has come a long way since July 2012. Gone are the beltway media headlines espousing the impending doom; gone are the skittish dives in the stock market that predict a monumental collapse of the Eurozone. Gone even are the collaborative talks held by groups including this Journal’s spring “Connect” event that attempted to understand the ‘Euro Crisis.’ In the collective social consciousness, the Euro Crisis that peaked in July of 2012 has completely disappeared.
But, it’s still far from over.
What happened in Europe that has eased these fears? By and large there has been a series of promises and pledges by forces within the European Union that have eased investors’ fears of Europe’s collapse. Foremost among these pledges was that made by Mario Draghi-head of the European Central Bank- that the ECB would grant short-term loans without limit to Eurozone countries. Essentially the ECB became the ultimate lender of last resort.
With this promise, the world took a collective deep breath and began the important process of investing and growing. Other promising signs followed: Greece’s export levels are back to pre-crisis levels, Ireland has balanced the checkbook and successfully came out of its banking crisis, now with the added benefit that firms became more efficient to survive the crisis and are more competitive. Most recently, the Economist reported that government bonds are trading more cheaply throughout the periphery-an excellent sign that investors have faith in government debt.
The Eurozone Crisis sparked some long overdue reform. First, the ECB now has ability to supervise national banks, a huge victory for transparency and accountability. Also, just as Irish firms became more competitive in the crisis, on the whole, southern European countries have cut costs to regain export competitiveness. Governments have begun to chip away at the elaborate social spending programs that are threatening to upend the budget. All very good signs, so why distress?
All of this encouragement dangerously belittles an insurmountable truth: that the root issues that plunged the Euro into this past crisis have not been resolved, and with the easing of global and media pressure on the ‘Eurozone Crisis,’ political leaders have little incentive to enact painful but necessary change.
Here is what concerns me:
First there are the unresolved issues of Spain, Italy, Greece, and Portugal. As of the new year all three have government debts over 100 percent (as a share of GDP), and all three economies contracted in the last quarter of 2012. Spain’s unemployment rate remains above 26 percent. The lack of domestic demand and increasing taxation (to deal with the aforementioned debt) makes for a bleak economic climate, and the public resentment of austerity is reaching a breaking point. These problems are nothing new to those who have been following the Eurozone Crisis. However there are impending events that threaten to destabilize this already precarious situation.
Now there are the new found woes of France, long seen as a pillar in the Eurozone economy: 11 percent unemployment, meager predicted growth for 2013, and flat consumer spending for the last third of 2012. People aren’t spending, and the economy isn’t growing. In an attempt to explain the ‘chasm’ between the French and (still prosperous) German economies, Reuters magazine suggests that French businesses are hampered by incoherent government economic policy. Suffice to say not only are the peripheries of Europe still lagging, but the core engines of the European economy are also flagging. Even Germany has had a rough end to 2012, contracting in the fourth quarter and now expecting a very slow amount of GDP growth in 2013. Although recent statistics predict a German bounce back, the growing gulf between the French and German economies is sure to create fractured political objectives. Without providing a united leadership, it is unlikely that the Eurozone members will be able to pass further policy for reshaping their economy.
These current issues are exacerbated by upcoming political elections that will potentially expel Europe’s most dogged leaders of change. In Italy, upcoming elections (February 24th and 25th) have the serious potential to bring the center-left Democratic Party led by Pier Luigi Bersani. Bersani’s Democratic party has strong ties to the powerful labor unions in Italy, and many market speculators fear he will be obliged to repeal some of the reforms implemented by Mario Monti’s technocratic administration. Monti’s reforms have been subtle and structured (despite opponents’ accusations of them being German-centric), attempting to change the entrenched system of social welfare without taxing citizens so much that all growth stalls. Given more time Monti could potentially be effective in this endeavor, but the impending exit date has severely hampered his ministry’s efforts. Very soon we will see if Monti will have a position in the next administration, but regardless it is virtually impossible for Italy to elect a party that is both stable and reform-minded. Underlying this uncertainty is the devastating possibility that Silvio Berlusconi will return to office, a development that would surely undue the reforms of Monti and pull Italy (and Europe) back into the crisis.
Similarly, in Spain, a recent corruption scandal implicating (and denied by) Prime Minister Mariano Rajoy has shaken investor confidence in that administration and caused bond prices to drop. Although Rajoy does not face an immediate election as Italy does (and will not resign over the scandal as opponents command him to do), his ability to reassure investors and continue to push through reforms in Spain is contingent on his personal integrity. It is a poor development that it is coming under fire at this unstable hour.
In a recent Foreign Affairs article, Roger C. Altman outlines the parallel experiences in the American and European recessions, and emphasizes one major point: Europe’s recovery will take much longer. To be sure, both will indeed recover, but the crisis faced by Europe struck three years after the United States went through their own (who four years down the line is still experiencing slow growth, despite continued optimistic predictions from economists). According to Altman this means that a further four to six years are required for Europe to fully regain its pre-crisis stability. This analysis, coupled with the new destabilizing political developments along the southern periphery of Europe and France’s unexpected downturn, predicts that a European recovery will take even longer than Mr. Altman suggests. At the shortest, Europe will need six more years of recovery. Between now and then any number of disturbances and setbacks could plunge Europe back into the crisis. The long and short of it being: don’t hold your breath.
Altman, Roger C. “The Fall and Rise of the West.” Foreign Affairs Magazine.January/February 2013: 13-18. Print.
Blackstone, Brian and Emsden, Christopher. “Europe Woes Deepen as Economies
Contract.” Wall Street Journal. 14 2 2013: 1. Web. 21 Feb. 2013.
Bruce, Andy. “Chasm Opening between Weak French and Strong German
Economies.”Reuters. Thomson Reuters, 21 Feb. 2013. Web. 21 Feb. 2013.
Conley, Heather A and Melino, Matthew. “The Italian Job: Elections, the Euro, and Silvio Berlusconi.” Center for Strategic & International Studies. 12 Dec 2012. Web. 21 Feb. 2013.
Greene, Megan. “Italian Election Can’t Produce Both Stability and
Reform.”Bloomberg.com. Bloomberg, 20 Feb. 2013. Web. 21 Feb. 2013.
“Merkel Wounded.” Economist. 26 Jan 2013: n. page. Print.
“Taking Europe’s Pulse.” Economist. 05 Feb 2013. Web. 21 Feb. 2013.
“Time to Celebrate?” Economist. 19 Jan 2013: n. page. Print.
Thompson, Mark. “Investors Fret Over Italy, Spain Politics.” CNN Money. 04 Feb 2013: n. page. Web. 21 Feb. 2013.
Photo by President of the European Council