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Europe's Calm Summer Masking Big Trouble Ahead


After years of crisis in Europe, key economic indicators are beginning to look up, and a calm is settling in. Manufacturing is on the rise, markets are less turbulent than they were a few months ago, and the euro no longer seems bound for imminent destruction as it did last year. Even the latest installment in the Berlusconi soap opera in Italy couldn’t shake the repose of financial markets.

Yet this new calm may be masking a number of key weaknesses that could quickly send Europe back into chaos if they aren’t addressed soon, warns Mohamed A. El-Erian in an incisive new piece at Project Syndicate:

First, joblessness continues to spread. The overall unemployment rate (12%) has yet to peak, led by an alarming lack of jobs among the young (24% joblessness in the eurozone as a whole, with highs of 59% and 56% in Greece and Spain, respectively).

Second, adjustment fatigue is widespread and becoming more acute. Long-struggling European citizens – especially the long-term unemployed – have yet to gain any sustained benefit from the austerity measures to which they have been subjected. And the result is not just general disappointment and worrisome social unrest. In the last few weeks, political stability in Greece and Portugal has been threatened as governments struggle with declining credibility and a rising popular backlash.

Third, bailout fatigue is apparent. Citizens in the stronger European economies are increasingly unwilling to provide financial support to their struggling neighbors; and their elected representatives will find it hard to ignore growing resentment of repeated diversion of national tax revenues, which has yielded only disappointing outcomes. Meanwhile, high levels of past exposure and weakening creditor coordination are undermining the availability of external funding, including from the International Monetary Fund.

As Erian notes, European leaders are certainly aware of these problems, but they have effectively chosen to remain silent until after the September 22 federal elections in Germany are safely in the past. Then it’s likely that attention will finally turn to how little Europe has actually accomplished, and how daunting the prospects for success still are.

And they are daunting indeed. Unemployment remains a disaster, especially for young people; the financial system in many countries is not helping small and medium businesses; and the public is growing increasingly weary of endless pain without gain.

One thing to keep a close eye on is the state of affairs in France. At the moment, the growing economic gap between Germany and France and the danger that France may be “moving south” to join the Club Med countries are the biggest medium-term threats to the economic cohesion of the EU. Current indicators aren’t looking good: the government’s auditor is now warning that tax increases alone won’t be enough to balance the budget; spending cuts need to be on the table too. This isn’t going to be easy for a weak and divided Socialist government.

Europe isn’t out of the woods yet.

[Euro image courtesy of Shutterstock]

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  • Corlyss

    Bus still teetering on edge of precipice. No news here. Check back when bus actually plummets into the chasm.

  • Anthony

    “In essence, Europe (and the West more generally) owes its recent tranquility to a series of experimental measures by central banks to offset the troubling combination of too little demand to generate sufficient job creation, inadequate structural reforms to revamp growth engines, debt overhangs that undermine productive investment, and insufficient policy coordination. Consequently, the resulting surface calm masks still-worrisome economic and financial fundamentals.” The aforementioned pretty well sums it up – complex unresolved long-term challenges remain.

  • Jacksonian_Libertarian

    According to the Rahn Curve
    a nation’s economic growth is maximized when the burden/spending of Government is between 15%-25% of GDP. Since, the socialist governments of the EU generally have a burden of 50% or greater, their growth rates will be tiny or negative for the foreseeable future, despite any so called austerity programs that really aren’t cuts in spending only reductions in the rate of spending growth.
    Anyone who understands compounding growth, understands that the loss of even 1% per year of growth due to the overburden of Government, significantly damages an economy over time. As an example take the growth rate of the US over the EU’s since Reagan. When Reagan took over, Europeans had a per capita income roughly equal to Americans, now it’s roughly 40% less.

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