Europe enters a wintery spring
Published in Business Spectator (Melbourne), 19 May 2011
When the European Union presents its economic forecasts, it often does not receive much public attention. Granted, one could argue that with the head of the IMF spending his week in a New York jail cell it’s understandable.
However, the EU’s latest figures are so extraordinary they should have generated more headlines. Not only do they demonstrate that Europe’s debt crisis is far from over. They are also a damning indictment of Europe’s crisis management so far.
There has not been one single factor triggering the fiscal and monetary crisis in Europe. Some countries were incurring substantial budget and current account deficits. Others were running trade surpluses. And yet, despite such differences and greatly divergent economic growth rates, both groups of countries were united by a joint currency, the euro.
The first country to crumble under these contradictions was Greece. Almost exactly a year ago, Greece was granted a €110 billion bailout. After that, the European Financial Stability Facility, a safety net worth €750 billion, was installed and both Ireland and Portugal had to seek assistance for their own debt problems.
Meanwhile, preparations are under way to extend the operation of these bailout funds into the future with the establishment of a European Stability Mechanism. And, of course, we should not forget that the European Central Bank has been busy soaking up debt from Europe’s periphery countries.
No one could claim that the past 12 months had not been full of frantic activism to get Europe back on track. Vast amounts of money have been mobilised to stabilise countries like Greece, Ireland and Portugal. However, the question remains whether all of these measures have had the desired effect. Looking at the figures the European Union just published, the answer to that must be a clear ‘No’.
According to the EU’s own figures, there is no hope for a Greek recovery anytime soon. The Greek government’s gross debt stood at 142.8 per cent of GDP in 2010. For this year, the European Commission expects 157.7 per cent, and for 2012 a staggering 166.1 per cent.
There are two reasons for the rapidly increasing Greek debt burden. First, the Commission expects budget deficits to remain high: 9.5 per cent of Greek GDP this year and 9.3 per cent in 2012. Second, the Greek economy is not expected to recover. A shrinking of 3.5 per cent is forecast for this year, with only a modest 1.1 per cent growth predicted for 2012. This also means that unemployment will remain at more than 15 per cent.
As for Greece’s current account balance, the EU expects an improvement, although a very gradual one: The balance will rise from a deficit of 8.3 per cent of GDP in 2011 to a slightly better, yet still dismal, 6.1 per cent deficit next year.
It is possible to sum up these indicators quite simply: Despite all the austerity measures implemented by Greece and despite all the capital made available to the country by its European partners, Greece’s economic and fiscal problems have not improved but deteriorated. If the country was bankrupt last year, it is even more bankrupt today. Capital markets demanding more than 25 per cent interest on Greek debt are an apt reflection of this state of affairs.
The EU’s policy towards Greece has not solved any problems. And, actually, it could have never been expected to solve any problems. It was obvious that Greece had a debt problem combined with a productivity crisis. But a debt problem cannot be solved by giving a country yet more credit, and a productivity crisis cannot be overcome if Greece remains in monetary union with much more productive countries in central and northern Europe.
Speaking about more productive countries, while Greece is fighting for survival Germany is steaming ahead. The very same low interest rates needed to keep Greece afloat are providing a boost to the German economy. And while the subdued Euro exchange rate did not help the unproductive Greek economy much, it was an invitation for Germany to export even more than it did before. This year, the total sum of Germany’s exports is predicted to top €1 trillion, which corresponds to a current account balance surplus of just under 5 per cent of German GDP.
In the figures of the European Commission, Germany’s short-term future looks like this: In the years 2011 and 2012 the German economy is growing at 2.6 and 2.0 per cent. Unemployment will fall to 6.0 per cent – a level last seen in the 1980s. Thanks to the boom, the German budget deficit will narrow to just 1.2 per cent of GDP next year.
Looking at Greece and Germany, there are only two things both countries share. They both begin with a ‘G’ and they are both members of the Eurozone. Everything else is different. Their economic structures are different, their fiscal position is different, their ability to export to global markets is different.
The European Union and its politicians have so far decided to keep Greece alive by turning the country into one giant welfare recipient, forever dependent on financial transfers from the richer north. In doing so, they have condemned Greece to remain an economic basket case. For the Greek, there is no way out: They are not allowed to default on their debt and leave the Euro but they are compelled to remain in a union with countries they cannot hope to compete with in the future.
The European Union’s economic spring forecast is a remarkable document. It is evidence that the EU’s crisis management has been a costly failure and an economic disaster. It’s a pity that hardly anyone took notice – least of all Europe’s political elites.