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Europe Has Fallen Down And It Can’t Get Up

The foreign minister of Spain has a metaphor to describe Europe’s situation: the Titanic. “Even the first class passengers will drown,” he says, if the ship goes down.

The ship is sinking. Spain is the fourth largest economy in the eurozone, and nothing is going right for it. Bad real estate loans in a collapsing housing market are pushing the country toward a huge bailout of sick banks. Unemployment is at a Depression level of 24 percent; youth unemployment is at 50 percent. Interest rates on the country’s debt are up sharply and its credit rating has just been downgraded. The Spanish government has no idea what to do.

Meanwhile, with the Socialist François Hollande looking increasingly likely to become the next President of France, international commentators and politicians are beginning to wrap their heads around what this means for France, Europe, and the Euro. Opinions differ, but a few things are clear: Austerity is looking like a political loser, and Franco-German relations are about to become much tenser. The Economist is particularly pessimistic about the “dangerous” Hollande:

The trouble is that unlike, say, Italy’s Mario Monti, Mr Hollande’s objection to the compact is not just about such macroeconomic niceties as the pace of fiscal tightening. It is chiefly resistance to change and a determination to preserve the French social model at all costs. Mr Hollande is not suggesting slower fiscal adjustment to smooth the path of reform: he is proposing not to reform at all. No wonder Germany’s Angela Merkel said she would campaign against him. […]

It is conceivable that President Hollande might tip the balance in favour of a little less austerity now. Equally, he may scare the Germans in the opposite direction. Either way one thing seems certain: a French president so hostile to change would undermine Europe’s willingness to pursue the painful reforms it must eventually embrace for the euro to survive. That makes him a rather dangerous man.

Read the whole thing.

The Economist may be underestimating Sarkozy’s chance to make a legitimate play for a second term, but regardless of who wins, it looks like something along these lines is in store. The countries in Europe, especially those in the South, have reached a point where reforms to the core social model are needed—soon—to avoid a catastrophic breakup of the eurozone. But voters in those countries don’t want the changes to be made.

In theory, there is a way to resolve this. The wealthier countries in the zone (which means Deutschland, über alles) would underwrite the debts of the laggards as the laggards gradually made reforms and reduced their spending. That would make the reform process easier and promote some growth in Europe.

But the Germans believe — and they are almost 100 percent certainly right — that the Club Med countries plus Belgium and France will use any breathing space they get to water down or postpone reforms. After all, when they signed up for the euro, the Club Med countries knew that they needed to undertake ambitious reform programs to sustain their membership in the monetary union and they refused to do anything serious — especially in the super-sensitive area of labor markets.

This has been the problem from the beginning: Club Med doesn’t want to live under German rules and Germany doesn’t want a Club Med currency. Club Med can’t make Germany underwrite the Club’s lavish lifestyle and Germany can’t make Club Med live by German rules.

The pain in Spain and the increasingly anti-German, anti-reform tone of French politics point to a deepening crisis with no sign of an exit. Love of the blue social model, Mediterranean style, is killing the European dream.

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  • john haskell

    Does Denmark have a blue social model?
    Does Sweden have a blue social model?

    Hmmm. So countries in the Euro with a blue social model are on the verge of collapse. Countries outside the Euro with a blue social model are doing so well that Forbes is writing puff pieces about how tax cuts are causing their economies to prosper! Walter Russell Meade conclusion: pay no attention to the currency union behind the curtain!

    Think a little harder, people

  • SgtDad

    All as Milton Friedman predicted.

  • thibaud

    WRM: “Love of the blue social model, *Mediterranean style*, is killing the European dream”

    This is progress: nice to see WRM finally making a distinction between the thriving, northern interventionist model of Sweden-Holland-Canada, and the floundering southern interventionist model.

    The frugal northerners have excellent growth, solid fiscal management, dynamic private companies, low unemployment, relatively clean politics, and efficient and effective healthcare systems. Sweden’s growth rate has left ours in the dust – both in the period 1997-2007, and since the 2008 crisis.

    There are many Europes, and there are many models of interventionist capitalism. The interventionist societies that have succeeded could teach us a few lessons about the importance of

    – intelligent fiscal reform that preserves a backstop of support for ordinary working people, including universal health insurance =>cf. Canada and Sweden’s reforms in the 1990s that reined in their budget deficits without shredding the safety net;

    – reasonable controls on their banksters, including those who try to prey on naive or inept public pension fund managers with exorbitant fees and junk deals and fancy derivatives;

    – relatively clean politics, including an absence of the “pay to play” model so beloved of US politicians;

    – a culture that values savings and moderation over our own, recently-acquired national ethos of buying tons of cheap Asian-made junk we don’t need with money we don’t have.

  • Jacksonian Libertarian

    If only the Europeans were as culturally advanced as the US, then they would have a TEA Party and could deal with their fiscal and structural problems.

  • Jim.

    Compare this to the US’s pension woes for a moment.

    If short-term shortfalls are made good by some deep-pocketed benefactor, is there still enough credible growth in the medium-term to make up for the medium-term shortfalls?

    The fact is that pensions in the US need to be trimmed. The fact is that Blue Model benefits in Europe need to be trimmed.

    Expectations of what government can hand people for doing nothing at all need to be reduced — otherwise, the system collapses.

  • Kenny

    “Opinions differ, but a few things are clear: Austerity is looking like a political loser, and Franco-German relations are about to become much tenser.”

    Metaphorically speaking, it sounds like the Panzers are revving up their engines. If so, the French better start dusting off their knee pads.

  • Otiose

    The blue model can work just fine as long as it spends less wealth than it creates.

    Any stalemate between France and Germany will be temporary – cold hard Reality will decide the issue soon enough.

  • Corlyss

    It is common knowledge that Africa, the Middle East, and Eastern Europe are all trying to flee to Europe for economic opportunity.

    So where does Europe flee to realize economic opportunity?

  • Corlyss


    Agreed. I’m betting on war. If that’s what it takes to make the Europeans understand that 1) they can’t create Heaven on earth, and 2) there’s no there there in reviving the Holy Roman Empire, the sooner they will start working with nations instead of creating all these useless NGOs.

    Nations rule. NGOs are merely debating societies on steroids.

  • Steve W from Ford

    As stress within the system grows the real questions are “Who will be today’s Credit Anstalt?” and will the current institutions be any better able to contain the inevitable crisis than those of yesteryear?

    No guess as to number one but given the current international leaderships penchant for burying their head in the sand I’d have to bet the answer to number two is No!

  • Jim.

    @Corlyss —

    The Holy Roman Empire may be dead, but how about the Wholly German Empire, as envisioned by Niall Ferguson?

    thibaud’s heroes could band together in a stronger union… that is, until (as some, like Luke Lea I believe have pointed out) the loss of trade from the Mediterranean countries leads the North into inevitable austerity as well…

    That’s the problem with governments over-promising their citizens, consumers over-spending to cover their lifestyle aspirations, and everyone over-borrowing to pay for it all.

    Eventually the music simply stops, and the whole arrangement collapses. You can save some of it — the parts that have the best actual productivity matched with the lowest expected standard of living — but the rest is in for a long fall with a hard landing at the bottom.

    No, Virginia, there is no magical way to stop it.

    The best thing is to get real as soon as possible, and rebuild from there.

  • Luke Lea

    “In theory, there is a way to resolve this. The wealthier countries in the zone (which means Deutschland, über alles) would underwrite the debts of the laggards as the laggards gradually made reforms and reduced their spending.”

    That’s not called theory. It’s called in your dreams.

    Austerity in the short term will only make matters worse. They are in recession already. Better some inflation now (get over it Germany!) followed by long-term plans to balance their budgets.

  • Corlyss
  • Corlyss

    @ Jim

    Thanks for the article – I missed that one. Ferguson is a fav.

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