Bright spots or black hole?

Published: Mar 2014

The euro crisis continues to fester. Nevertheless, those with an optimistic mindset can see some glimmers of hope. For instance, at the beginning of 2014 the Eurozone private sector registered seven successive months of expansion. On the other hand, French economic activity continues to contract and the Spanish jobless rate continues to soar. Italy, too, is ailing and the Greek economy has contracted by 25% compared with 2007. Overall, the Eurozone economy has shrunk by 3% over five years.

The key question facing the markets is, do bright spots signal better news ahead or do they gloss over a widening black hole that will eventually devour the economy?

Quartet of challenges

According to Loukas Tsoukalis, Professor of European Integration at the University of Athens and President of the Hellenic Foundation for European and Foreign Policy (ELIAMEP), Europe faces four challenges: growth; cohesion; governance; and legitimacy.

It goes without saying that growth is a problem. Two factors that act as a drag on growth are debt mountains and zombie banks. Axel Weber, Chairman of UBS and former President of the Bundesbank, recently said, “I expect some of the banks not to pass this (asset review) test.” The CEO of Total added, “I think Europe should be reclassified as an emerging country.”

The debts can be tackled in three ways: growth, inflation, and/or debt write-downs. As indicated, growth is anything but buoyant. Alleviating the debt burden through higher inflation is not really an option as Eurozone inflation is at an all time low. So what about the third method: writing off bad debts? This has been done to some degree, however, not sufficiently to allow economies to breathe a sigh of relief. In any case, this is almost a political taboo in the Eurozone ‘core’.

How big is the problem?

Equally moribund is the cohesion that will be necessary if Europe is to overcome its problems. Take the widening gap between Europeans who benefit from globalisation (and Europeanisation) and those who feel left out. In the first group, we find well-educated professionals who are unafraid of open borders. The second group largely consists of the squeezed middle classes, who see jobs disappearing and who are unwilling or unable to leave hearth and home in search of new challenges abroad.

In a very different position are those with little or no education; people who can work all over the world – as cleaners or labourers for example – and who hope to find a better life in richer countries. While they avail themselves of the opportunities of a globalised world, they are mainly driven by despair. The abyss between these disparate groups is growing ever larger.

European member states are also growing apart. ‘Anger’ is a word that people use more and more when they express their feelings about Europe. A large majority of Europeans have lost all faith in the European Union (EU) and national politicians.

Another obstacle to defusing the crisis is the current lack of institutions, structures, and instruments needed for an effective approach. A banking union is needed and, over the longer term, a fiscal and political union. This requires robust organisations, which do not currently exist. At the moment, Europe relies on rickety constructions that are reactive instead of proactive.

‘Anger’ is a word that people use more and more when they express their feelings about Europe. A large majority of Europeans have lost all faith in the European Union (EU) and national politicians.

Combined with mutual distrust and a reluctance to change existing treaties, this has led to a perception of Europe as complex and obscure. The risk is that the EU could become an undemocratic institution with little focus or prestige – its constituent parts all wanting to go in different directions. As it attempts to avoid democratic interference and legal wrangling, Europe is becoming more complicated and less democratic.

Negativity surrounds Brussels

The legitimacy crisis may well be Europe’s biggest headache. Many picture the EU as an undemocratic and bureaucratic ‘ogre’ that meddles in affairs that are not its business and does too little when it should take action.

Until a few years ago, a ‘permissive consensus’ existed. Citizens were willing to accept European integration, not so much because they thought that the project was worth pursuing in itself but because everyone seemed better off. Now it is no longer a matter of dividing up the spoils but of spreading the financial pain. This has shown up the weaknesses of the “permissive consensus” as a foundation for a united Europe. Presently, the EU no longer serves to bring countries closer together. Instead, it creates discord. The gap between winners and losers is growing.

Not surprisingly, the winners, eg the elite, have a much higher opinion of the EU. Every survey on the advantages of EU membership indicates that the elite takes a more positive view of this issue than the masses. Increasingly, extreme left-wing and right-wing parties appear to represent what the mainstream thinks. In such a climate, it is very difficult to strike a ‘grand bargain’ between the member states, with the aim of making the EU profitable for the men and women in the street and to reinforce Brussels’ legitimacy.

Reform not forthcoming

Europe is nowhere close to achieving its lofty aims of sustainable growth, strong cohesion, sound governance, and broadly supported legitimacy. Promising data that pops up here and there is subsequently quashed with negative news. Northern and southern Economic and Monetary Union (EMU) states are still suspicious of each other. They do not see eye-to-eye on who will foot which bills. Governments can no longer boost their economies. Insiders fear the outcome of the asset reviews and stress tests at the banks. Meanwhile, populist parties seem headed for massive gains at the European elections.

In short, Europe has weakened in many respects compared with 2007, owing to economic pressures and political constraints. It has become more introverted, inequality is increasing and reforms are erratic.

Europe is unlikely to recover strongly in 2014. This would require many reforms at national and European level, which is not (yet) feasible, for political as well as social reasons. For the moment, Europe will have to make do with a patchwork of stopgaps, adjusted gradually, in incremental steps. Admittedly, this approach has kept the Eurozone afloat in recent years. Other positives are that a lot of political capital has been invested in the European project and that its underlying goal is to further peace. In addition, two other factors lead us to believe that Europe may manage to keep its head above water, via reforms on the back of new crises.

First, many Europeans are sceptical about Brussels but a large majority are even more fearful of the alternative – no euro or EU. Anxiety could be the glue that keeps Europe together. This is how political scientist Gary Marks sees the referendums of 2005 in the Netherlands and France on the European Constitution. At the time, voters could easily reject the Treaty because this did not have any direct negative implications; nothing really happened. Yet, should a referendum take place on the very survival of the euro or on EU membership, something tangible is at stake. Voting will no longer be non-committal, so fewer people will be prepared to take such high risks. Fear may well win the day.

Europe is nowhere close to achieving its lofty aims of sustainable growth, strong cohesion, sound governance, and broadly supported legitimacy. Promising data that pops up here and there is subsequently quashed with negative news.

Second, a demographic trend could contribute to Europe’s long-term continued existence: young people are considerably more pro-European than their elders.

The biggest danger is that the European elite will not pay heed to the electorate and will simply push through reforms, then present them as a fait accompli to the public. If governments ignore voters instead of involving them, sooner or later the European project will run aground.

Most people know what is required to create a strong united Europe that flourishes economically. Famously, singers such as Peter Tosh, Loretta Lynn and Albert King also had an inkling: “Everybody wants to go to heaven but nobody wants to die.” Europe is unlikely to give up the ghost, but equally there will be a lot of water under the bridge before it implements the necessary reforms under pressure from the markets.

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