Europe’s Problems Go Way Beyond How To Deal With Austerity – The EU Should Seriously Rethink Who Belongs and Who Does Not – The Poor South Will Never Catch Up

By Paolo von Schirach

April 24, 2013

WASHINGTON –  Recently the WSJ provided a lengthy insight into Germany’s role in determining how the long and painful fiscal crisis affecting Southern Europe has been and will be handled. But, in fact, we already know the issues. The weak countries at Europe’s periphery, (Greece, Portugal, Spain, Italy and now Cyprus), want a “soft” bail out. They would go along with some spending cuts, but not too drastic. They are willing to deal with their basic fiscal shortfalls through (some) austerity and tax increases; but not just now. At least not the entire “medicine” just now.

More time

In the meantime, they appeal to “European Solidarity”, so that the Brussels/Frankfurt (free?) money will keep flowing. They claim, (with some justification), that their countries are too weak to withstand a severe, Berlin imposed, prolonged austerity regime aimed at reducing deficits and eventually debt. “Give us more time“, the impoverished relatives say to their Northern benefactors.

But Berlin cannot give the appearance that it is willing to bail out the weak South for ever, without guarantees that there will be demonstrable policy changes. Politically, “free money to the South” will not fly in Germany and in the rest of Northern Europe. And Berlin is the only party in a position to dictate the terms. In the meantime, the indebted South grumbles, while it is manifestly incapable to engineer any “home made” economic renaissance. 

Imperfect Union

This is, more or less the picture. But this problem is not just about short or medium term policy disagreements, leading eventually to some kind of solution. The current predicament allowed Europe’s serious systemic failures to be finally fully exposed; and, sadly, there is no easy way out. Simply stated, the European Union is a very imperfect Union made out of countries that really should not be under the same umbrella.

Northern Europe is made out of countries whose economies, (supported by good education systems and decent public services), are reasonably competitive. Things work. Governments are accountable. There are investors. There are good, and in some cases excellent, companies employing qualified, well trained workers.

South cannot catch up

But Southern Europe is literally in another universe. It managed to disguise its systemic deficiencies because, (ironically), the solid and reliable Euro allowed profligate governments to keep borrowing at a very low interest. High levels of (growing) debt appeared sustainable. Now the party is over. It is clear that Southern Europe is not just semi-bankrupt. It is semi-bankrupt in large measure because it never addressed (let alone solved) its huge systemic deficiencies.

Among them: labor market rigidities, noisy labor unions, low level of investments, too many non competitive sectors, ridiculously generous pensions, mediocre education systems, bloated and inefficient public sectors and public services –and, of course, a lot of corruption. Last but least, the collapse of fertility rates in Southern Europe means that these countries will soon resemble large geriatric wards, made out mostly of older people who, almost by definition, are not productive while they require more services –first of all health care. All this points to lower revenue and higher pressure on spending in already heavily indebted countries.

Gap cannot be fixed

Different analysts may disagree, but my contention is that these problems affecting the South are so severe that they are essentially beyond repair. Which is to say that the present gap between Northern and Southern Europe cannot be closed. It is simply not possible. Well, if we would agree on this basic point, then it should follow that the current monetary union membership makes no sense. Monetary union assumes responsible and compatible fiscal policies among its members, coupled with comparable economic strengths.

Rethink the Eurozone, rethink Europe

This is manifestly not the case. Greece will never catch up with Finland. Italy will always be several steps behind Germany. And this is not all. Beyond the Euro, ideally the EU should find the courage to reconsider who belongs and who does not. If the EU were  just a jazzed up customs union, then the standards for membership could stay low. But if they insist on the idea that all policies should lead to a “Political Union”, then they better think about the foundation for such a Union. The notion that Portugal, Bulgaria and Sweden are essentially one and the same is ludicrous.