The bleak continent (Hamodia, October 24)
The global economy is getting rapidly worse. That is clear to anyone who carefully follows the hard data regarding the economies of the main countries and blocs. Goldman Sachs, whose economic research is among the best, has just published updated analysis confirming both the “getting worse” and the “rapidly” components of the situation.
But once again, within the generally negative picture, it is Europe than stands out as being in by far the worst shape. This is not surprising — indeed, anything else would be considered amazing, because we have come to expect Europe to be the weakest link in the global chain.
The ‘Old Continent’ achieves this unenviable position in the face of stiff competition, especially from Japan — and, indeed, it may well be argued that Japan’s social and economic problems are more intractable than those of Europe. Yet Japan has offsetting advantages that, somehow, keep its business sector afloat and prevent its government sector from going bankrupt. Europe — which for all practical purposes means the 28-member European Union (EU) — is weak in almost every respect, with very few remaining strong points.
The crisis in Europe broke open almost five years ago, in November 2009. That was when the newly-elected government of Greece admitted to the EU secretariat in Brussels that the previous government had cooked the country’s books and that the Greek budget deficit, and hence the country’s debts, were much larger than had been reported.
From then on, a series of massive crises shook the EU to its foundations. It seemed that several countries, mostly along the Mediterranean but also including Ireland, were effectively bankrupt and would have to leave the European Monetary Union — the euro — and perhaps even the EU itself. These crises continued, on-and-off, until the summer of 2012.
However, at that point, the President of the European Central Bank, Mario Draghi, announced that his institution would do “whatever it takes” to defend the euro and prevent major European financial institutions, let alone entire countries, from going bankrupt. This commitment, and the limited measures that were actually taken, proved sufficient to calm the markets and, as it turned out, to end the series of crises.
This was impressive in itself, but the results were still more dramatic as time passed. The yield on bonds issued by the governments of the weakest countries, which had been as high as 6-7% for Italy and Spain and much higher for Portugal and Greece, fell hard and fast. Where previously their bonds were unattractive at almost any price, now when they issued new bonds these were over-subscribed as suddenly everyone wanted a piece of the action.
Yet despite the financial fireworks — and even the political upheavals in countries such as Italy — very little has changed in the underlying economies. Fortunately for the ECB, Dragi’s promise has not been put to the test. His program remains just a theoretical blueprint, with no rules as to how it would work in practice. But its biggest problem is that the biggest and richest country in the EU is against it.
The German central bank — the Bundesbank — simply doesn’t believe in the ECB’s strategy, seeing it as bad economics and also politically counter-productive, because it allows the politicians to avoid making the structural reforms that are essential in most European countries. Perhaps the fiercest criticism yet against the idea that the ECB should actually buy bonds in the market, as the US Federal Reserve has done, or that Germany should run a bigger budget deficit, was made by Bundesbank President Jens Weidmann last week at a conference in Riga, Latvia.
“The biggest bottleneck for growth in the euro area is not monetary policy, nor is it the lack of fiscal stimulus: it is the structural barriers that impede competition, innovation and productivity,” he said.
With most of Europe already in recession and even the German economy stalling out, the gulf between Germany and its partners over what policies to pursue seems wider than ever — and the European economy is about to fall through that hole.