|To mark this year's EU Project Day, Chancellor Angela Merkel discussed the future of Europe with students in Berlin on May 06, 2013. She said afterwards, "I saw myself how Europe is part of everyday school life here."|
Dr Peter Morici: Europe’s Depression
- - The whole of Europe is headed for
a permanent recession—a depression. Austerity and labor reforms can’t save it.
Radical measures - - abandoning the euro and deficit spending in Germany -- are
the only way out.
Unemployment exceeds Great
Depression levels in Spain, many parts of Greece, Portugal and Italy, and is
rising in northern Europe. Slashing government spending and labor market reforms
have neither restored Club Med economies nor their governments to solvency.
Across much of Europe GDP is
shrinking faster than governments can cut spending, and sovereign debt burdens
are becoming worse, not better.
In the south, labor market reforms
can only work if those are decisive enough to change investor’s perceptions and
export opportunities abound to sell what new factories could make. Europe’s
entitlement culture makes swift reform politically impossible, and the Club Med
states’ economic troubles have spread to their natural export markets—the German
and other northern economies are contracting too.
For Club Med governments, stimulus
won’t work either. They can’t increase borrowing and spending fast enough to
boost their economies without panicking bond investors and instigating a
pan-European financial crisis.
What should keep Angela Merkel
awake at night is if southern Europe completely collapses, Germany and the other
northern states, lacking southern markets for their exports, will be thrust into
a permanent recession too—all of Europe would be gripped by depression.
Then it’s either draconian
austerity and double digit unemployment for Germany and other northern states
too or investors
will desert their bonds too.
The European Central Bank would
either have to preside over the demise of the euro or print enough money to
finance governments and set off hyper inflation—Europe would be gripped by
double digit inflation and unemployment.
What technocrats behind Chancellor
Merkel’s extreme austerity prescriptions for southern Europe won’t acknowledge
is that a significant measure of German and northern Europe economic success is
premised on exporting to the south and amassing trade surpluses.
Simple math requires the
Mediterranean states to have corresponding trade deficits as long as those are
locked inside the euro and can’t devalue their currencies to escape. Those trade
deficits must be financed by borrowing from the north—either by their
governments spending and borrowing too much, as Rome and Athens did prior to
their crises, or their banks finance real estate bubbles, as Madrid permitted
prior to the global financial collapse.
Once that borrowing is
constrained—as the austerity imposed by Germany in exchange for aid now
requires—German and other northern economies lose their export markets and sink
into recession. That is happening right now—GDP is contracting in Germany,
France, Belgium, Luxembourg, Austria, and Finland.
The only option left is for
Germany and the others to boost government spending and deficits to stimulate
their economies, export less, and import more from the south—permit trade to
balance between the north and south and get Europe on a more sustainable path.
German politics make voluntarily abandoning mercantilism virtually impossible.
Prior to the euro, the European
Union thrived without permanent unemployment throughout the Mediterranean
states. But now the single currency has locked in high labor costs in the south
and made their recessions permanent.
A return to national currencies
would permit Italy, Spain and the others to devalue to make their exports more
attractive in Germany and other northern states and rebalance trade and growth
in ways the German politicians can’t or won’t.
slipping into a depression—unemployment and stagnation not seen since the 1930s.
Nothing can save it other than abandoning extreme austerity, labor market
reforms too rapid for national politics to support, and a single currency that
delivers economic decay and depravation to large portions of the continent.
When high unemployment in Europe
brings voters to their senses, then abandoning the euro and realism about the
prosperity and security governments can guarantee may bring Europe back. Nothing
less will do.
Professor, Robert H. Smith School of Business, University of Maryland,
College Park, MD 20742-1815,
703 549 4338 Phone
703 618 4338 Cell Phone
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