In Italy High Unemployment Is Good News

WASHINGTON – If you really, really insist on finding the proverbial “silver lining” in rather depressing news, here is a headline for you. We find it in the Italian daily La Repubblica, as the title for a recent story about unemployment in Italy: “Work, confidence returns, inactive people numbers are down”.

Things looking better? 

Well, with such a promising headline you would expect to read that Italy has turned, or is turning, a corner. You would expect to read that hiring is more robust, and tragically high unemployment is finally going down.

No. Nothing of this sort. We read instead that “Within an increase in overall unemployment [12.4% in July 2015] Istat [National Statistics Institute] reads positive signals that indicate a recovery. What moves the scale are inactive workers (those who do not have a job and who are not seeking one). Their number is down by 1.1%, to under 14 million. The ranks of the discouraged are also down, (-114,000 in one year), especially in the South, among young people aged between 15 and 34. On the other hand there are more people who are inactive (+77,000) because they are pursuing some kind of education.”

Bad news is good news 

Got the picture? The number of the chronically unemployed is now just a bit under 14 million, because there has been a 1.1% decrease. This clearly means that things are looking really positive.

Well, it takes a really heroic level of optimism to say that “confidence is back” in a country with 12.4% unemployment, and 14 million of long term unemployed. (By the way, the unemployment rate is 44% for young people. It used to be 28% in 2011). Italy looks bad even compared to the still uninspiring unemployment rate within the rest of the Eurozone: 10.9%.

No sense of reality? 

So, why do main stream media like La Repubblica try to disguise an ongoing national tragedy into a “confidence returns” story?

Have they lost any connection with reality? Or, in truth, in this new world of drastically diminished expectations, a 1.1% decrease among the long term unemployed, within a context of massive unemployment, is in fact good news?

This story exemplifies “decline” 

This being the case, I would take this news story about unemployment as a clear example that describes what “decline” is:

You are in it, and you do not even know it.

You are so used to a “New Normal” of a worsening economy, and lower standards of living, that you forgot how things should be.

From this perspective of diminished expectations, a story that at the very best could be construed as a faint ray of hope is indeed good news.

 




The Real Trouble With The Euro

WASHINGTON – The media love financial crises. And now they have the deteriorating Greek situation to talk about. I have no idea about how this tragedy (or is it a farce?) will end up.

Flawed monetary project 

But I believe that some simple considerations are in order. The whole “Euro Project” was poorly conceived. The notion that a new, effective monetary union would become some kind of “aggregator”, a powerful incentive to strengthen political and institutional ties among the EU countries that would join the monetary union, was profoundly misguided.

The mistake was in the belief that the goal of monetary union deep down was a political goal. A common currency was supposed to indicate the will to create a common political future among equal countries. 

First the country, then the currency

Let me put it in plain language. First you create a new country –in this case a Federal Europe– and then you create a currency. But instead, when the Euro Project was discussed, many believed that a pan-European currency would help expedite the achievement of a political union among key EU members.

Quite frankly, a bad idea. I am not suggesting that, because of Greece, the Euro is doomed. What I am suggesting however is that, by allowing under performing countries (and that includes Italy, Spain and Portugal) to join the Euro, the EU financial authorities created new problems.

No policy harmonization 

A common currency without a Federal Europe, that is without truly harmonized economic/tax/fiscal policies, created distortions. It should have been obvious that it is almost impossible to harmonize broad macro-economic policies among countries that have almost incompatible systems.

Northern Europe, (Scandinavian countries, Germany, The Netherlands, Austria, and a few others), on balance, is well-organized, fiscally responsible, innovative, and productive.

Southern Europe is not. Hence the discrepancies that were masked at first by the common currency, but then exploded when the Eurozone system came under severe stress after the 2008 financial crisis.

A problem, not a solution

In the end, this monetary union willed into place mostly for political reasons turned out to be a problem. Heavily indebted Southern European states had taken advantage of the Euro in order to borrow more at lower interest rates. Lenders trusted the Euro and so continued to finance profligacy. And so on, and so forth.

As we now know very well, Greece has become the extreme case. Greece is the worst performing Eurozone country. However, mostly for political reasons, it became an article of faith that Greece needed to be saved. It needed to be kept in the Euro. For a variety of reasons, the expulsion of a non performing, smallish country from a “sacrosanct” monetary union was deemed to be “impossible”.

What’s next? Not much 

And quite frankly, even today, with failed negotiations on debt restructuring coupled with reforms, the upcoming Greek referendum on a “Yes” or “No” to the EU package, and more, it is not at all clear that Greece has to leave the monetary union.

You see, the prevailing European instinct is to patch things up. Find an eleventh hour compromise. Save the status quo.  Maintain a semblance of order, even though all parties know that the unaddressed systemic problems fester under the surface.

Technocrats in charge

As indicated at the beginning, monetary union should have logically followed the implementation of a European Federation. A real federation would have been based on truly harmonized economic and fiscal policies among its members.

But the technocrats running Brussels really believed that the Euro would become the magic glue that would bind Europe together, no matter the glaring incompatibilities among systems that travel at different speed.

Italy just like Germany? 

Well, as it turned out, the Euro worked out fine for some members; but not for all. However, this late in the game, whatever will be done about Greece, I doubt that EU policy-makers have the stomach to address the serious imbalances that separate, for instance, Italy from Germany.

If anybody believed that, by virtue of using the same currency, Italy would eventually become more like Germany, it is obvious that this did not happen. And it should be clear to all that it will not happen.

 




Optimistic Mood In Athens?

WASHINGTON – News reports from Athens indicate that the Greeks are feeling much better these days. Since the recent elections that brought the far left, anti-austerity Syriza party into power the mood has improved. People look more confident. The coalition government enjoys sky-high popularity, 70% in some polls.

All is well in Athens

It would appear that to most Greeks the “We shall not pay you” approach embraced by Prime Minister Alexis Tsipras regarding Greece’s catastrophic debt looks proper, realistic and reasonable.

And there is more. The new Greek government now stated that it intends to collect war reparations from Germany on account of its brutal military occupation of Greece during WWII. (Never mind that the whole issue of war reparations from Germany had been settled a long time ago).

We are rich!

So, here we go. All of a sudden, a miracle! Greece is doing well. It will not pay its debts to Europe, at least not all of them, and not according to a schedule agreed upon by the previous Greek government (that obviously was not looking after the best interest of the suffering people). And now it stands to get a fat financial settlement check from the Germans. What do you know. How fast things can change. From debtor to creditor, overnight!

Fantasies

Look, to some extent I understand that the Greeks may want to cling to childish fantasies. But I hope they wake up soon. Improvident Greece will not get out of trouble only because it elected a populist Prime Minister who promised during the campaign that he knows how to fix this gigantic debt issue.

Just like before?

Hoping to get some relief here and there from the much maligned creditors troika (EU, ECB, and IMF) is one thing. But the Greeks now seem to really believe that austerity has been abolished by their vote. They seem to believe that by electing a new government their debt somehow vanished. Therefore, the civil servants who lost their jobs because of budget cuts will get them back soon. People will retire early, with full benefits, just like they used to. All entitlements will be restored, and all will be well.

As I said, we can all be excused for engaging at times in wishful thinking. For sure, all of us would like to imagine that unpleasant troubles we are facing will miraculously vanish. But this Greek collective denial seems to have pathological proportions.

Greece is bankrupt

On its own, Greece is totally  bankrupt. Its debt is now 175% of GDP. Unemployment is at 25%. Youth unemployment is at 50%. The economy is weak. The country’s very economic and financial survival today, and for many years to come, will be tied to the good will of its European creditors. (The total EU credit is $ 210 billion of the $ 340 billion Greece owes now). The notion that after having taken all the money from Brussels (EU) and Frankfurt (ECB) the Greeks now have the option of not paying back, without any consequences, is ludicrous.

But this seems to be thinking in Athens. After all, the new Prime Minister was elected on the basis of his campaign promises to fix all this. Therefore, the Greeks expect him to negotiate a good (and certainly painless) solution with the European creditors.

I suspect that this euphoria will not last long. The EU partners may be willing to extend terms and relax some conditions. May be. But they are not going to forgive this massive debt. And I believe that even the option of forgiving some of it is out of the question.

The impact of a Greek default

That said, the prospect of a Greek default, very real now, is not at all pleasant. The portion of the Greek debt engineered via the Eurozone bailout mechanism is $ 210 billion. Germany is on the hook for 27% of that. And that is $ 57 billion. France’s share is $ 42 billion. And Italy would have to absorb a loss of $ 37 billion.

If Greece goes bankrupt, staying within the Eurozone or after a messy exit, these EU countries have lost their money. Germany may be able to absorb the blow. But shaky France? And almost equally indebted Italy? I am not so sure.

 

 

 

 




The Greek Economy Never Recovered – Now It is Once Again In Crisis

WASHINGTON – We were told months ago that Greece, the ultra-sick member of the Eurozone, was essentially out of danger. Thanks to a gigantic aid package, (240 billion Euro, or $ 306 billion), jointly created by the European Union, the European Central Bank and the International Monetary Fund, Greece had been stabilized.

Greece had been fixed

No more talk of Greece being forced out of the Eurozone. In fact, Athens had managed to go back to the international credit markets and sell bonds. The incredible spread between its treasury bonds and those issued by Germany and other “healthy” states had shrunk, significantly.

So, it seemed that the tough diet of spending cuts, privatizations and forced slimming down the once bloated public sector had worked.

Well, not really.

Greece back in the news

While many Eurozone economies this year are stagnating (France) or are in recession (Italy), Greece, sadly, is in much worse shape. So much so that, according to the Italian daily La Repubblica, Jyrki Katainen, the EU Commissioner for Economic Affairs, felt obliged to issue a statement of support in which he stressed that the EU will continue to assist Greece “in order to assure that it will be able to collect funds in the markets, and that it will continue to have full access to them”.

Economy in bad shape

Why this reassurance? Because the Greek stock market just collapsed. After sustained losses over the Summer, It lost 9% on October 15. Yes, this is 9%, in one day. The economy is still doing poorly, (-3.9% in 2013, a little above zero growth in 2014). Greek unemployment is still at 26.4%. Youth unemployment is at 50%.

And now potential Greek debt buyers demand higher interest rates. The Greek 10 year bond carried an already high interest of 7.6%, now it is 8.96%. (German 10 year bonds have less than 1% interest rate, US Treasury Bonds come at 2.15%). May be this has something to do with the fact that the Greek national debt, after all the interventions, loans and other measures concocted by its saviors, is now 190% of GDP.

Not an inspiring picture.

Political instability

To make things worse, the government headed by Prime Minister  Antonis Samaras survives on an extremely small parliamentary majority. There are now rumors of early elections.

The possibility of a good showing by the left-wing Syriza Party, likely to quarrel with Brussels on all issues related to the (demonized) EU-imposed austerity, creates fears of political instability, on top of extreme economic and financial weakness. Hence the (feeble) attempts by the EU to reassure the markets.

Well, good luck with that. The truth is that after years of extraordinary interventions (the Greek financial crisis started in October 2009) and many near death experiences, Greece is not out of the woods. This is not just a minor relapse. This is serious. As the rest of Eurozone seems to have caught a bad cold, it appears that Greece has got pneumonia.

More bailouts for Athens?

 




The Bad “Lesson” of The EU Debt Crisis Is That There Will Always Be A Bailout

By Paolo von Schirach

July 31, 2013

WASHINGTON – The situation in Europe turned from really dramatic into just chronic. No more talk of a “Greece Exit”. There are no defaults on the horizon. Still, there has been no qualitative change. Therefore it would be highly deceptive to call this calmer state of affairs a real improvement. The reality is that Southern Europe cannot travel at the same speed of its better organized Northern counterparts relying on its own means. This means that Club Med will have to receive aid and/or special treatment for a long, long time. Who knows, may be in perpetuity.

Bailout does not affect the fundamentals

Mostly for political reasons, wealthier Northern Europe (read: Germany) decided that it was and still is in its own self-interest to bail out its Southern poor, and perennially disorganized, cousins. Better to pay now, then to face the headwinds and possible chaos that may result from a sovereign debt default.

Still, nobody believes at this juncture that the bailout money and/or the indirect fiscal support via ECB bond buying programs or easy credit to battered banks will cause a real qualitative transformation within the South. While economic conditions may improve somewhat, the fundamentals remain bad. For example, Sergio Marchionne, the CEO of FIAT, still the largest Italian industrial conglomerate, in a call with analysts indicated that “Italy continues to have an impossible environment for industry”.

Now, consider this rosy assessment on the economic fundamentals within the third largest Eurozone economy, coming as it does from a pretty seasoned practitioner. How is a profoundly uncompetitive country that continues to have impossible conditions for industry (i.e. growth) going to produce the extra wealth that will allow it to get out of its impossibly high national debt? The simple answer is: “Never”. Italy will probably limp along, supported by ECB bond buying and some other half measures. It may not drown, but it will never become an energetic, competitive economy. In other words, thanks to extra help it will not go under, even though the best it can hope for is survival.

Everybody gets a rescue package 

And here comes the real point. If you are a policy maker in Slovenia, Poland or Hungary, having noted that Germany decided that Greece and the others are indeed “too big to fail”, you will conclude that, if your country gets into serious trouble, it will be considered too big to fail,  just like all the others. Help will come. You will not be allowed to go under. This “message” unfortunately has a perverse effect, because it diminishes the pressure on other mediocre economies to get busy in order to jump-start serious growth.

Michigan allowed Detroit to go under, a lesson for all other troubled municipalities

In a different, but somehow related, context the State of Michigan allowed battered Detroit to go under. Michigan decided that its own domestic “Greece” was not “too big to fail”. It did not bail it out. It forced it into bankruptcy. The just initiated bankruptcy process in turn allowed the rest of America to see and evaluate the compounded effects of unfavorable economics and bad public administration, combined with over generous pensions to public employees.

As a result, local administrators in Chicago, Oakland and other challenged cities now have a strong extra incentive to get their own house in order. If Detroit is not “too big to fail”, chances are that their own municipalities, all of them headed Detroit’s way, may also go under. Therefore some at least may conclude that it is time to get busy and make changes, (renegotiating unsustainable pension benefits would be a good start), before it is too late.

Rescue packages are a disincentive to implement reforms

In contrast, policy-makers in Europe get essentially the opposite message. “Your countries are perennial economic under achievers. Your public accounts are headed the wrong way. But not to worry. Just as they did with Greece, the wealthy Northern partners will bail you out”. If this is indeed the “lesson” of the catastrophic debt crisis that began back in 2009, then you can bet that with the exception of a more solid North most of Europe will lack the incentive to do better and therefore will continue to underperform.




Martin Feldstein’s Recipe For Southern Europe: Stimulus Now But Combined With Credible Public Spending Cuts

By Paolo von Schirach

Related story:

http://schirachreport.com/index.php/2013/07/08/europe-will-continue-bailing-out-its-weak-southern-members/

July 9, 2013

WASHINGTON – In a recent piece (see link above) I pointed out that there is no sign of a real qualitative “turn around” in Southern Europe. Greece, Portugal and the others are just limping along, supported by loans from their better off northern cousins. However, these loans are not leading to qualitative transformations. At the moment, they just keep these impoverished societies alive. And there are signs of things getting worse. Under strong pressure from exhausted populations, political leaders in Athens, Rome and Lisbon bargained with Brussels/ECB/ International Monetary Fund to obtain some relief from drastic austerity measures. While this may help calm restless societies a bit, less austerity means more borrowing and therefore, in the long run, adding to the debt and the misery. 

More borrowing is a bad idea

In an insightful FT piece, (An end to austerity will not boost Europe, July 9, 2013), Harvard economist Martin Feldstein points out that more borrowing on the part of already impoverished countries is a bad signal to financial markets. With no end in sight to Club Med’s spending and debt problems, investors will demand higher interest rates in order to lend more cash to unreliable debtors. So, short term relief today will translate into a bigger debt burden tomorrow.

Very sensibly, Feldstein argues that Southern Europe should combine short and medium term stimulus with serious public spending reform. He advises to concentrate investments in new infrastructure and training programs that will give new skills to the unemployed.

It is too late

Well, with due respect, this is a bit like saying to a terminal alcoholic that it may be wise to cut the booze. Sensible idea, of course. But it is too late. While a collective awakening entailing the re-discovery of free market capitalism is in theory possible, this would be a miracle. Southern Europe is largely prisoner of a socialist, welfare-plus-entitlements frame of mind. And this is combined with political systems that reward loyalists with fake public administration jobs. Greece elevated this wasteful practice to an art form. Likewise, poor Sicily has many more public servants than bigger and richer Lombardy. France has many more public officials than thrifty Germany, and so on.

Flawed models

Any serious public administration reform plan would have to include cutting tens of thousands of useless civil servants who are also the (often essential) political backers of the elected officials who gave them the jobs. So, double problem: a political upheaval and an economic disaster, as most of these newly unemployed bureaucrats would have nowhere to go in the private sector. 

Last but not least, very little innovation and enterprise creation in globally competitive sectors, while the better educated young people leave, seeking greener pastures elsewhere.

The sad conclusion is that fixing Southern Europe would require a highly improbable collective shift from “statism” to a genuine “private sector-led” economic model. Such a huge cultural, ideological and psychological turn around would be a monumental task on any good day. Trying to transform the values and the beliefs of millions of depressed and demoralized people in the midst of enduring hardships is next to impossible.




Europe Will Continue Bailing Out Its Weak Southern Members

By Paolo von Schirach

July 8, 2013

WASHINGTON – Back in 2009, at the very beginning of the Eurozone debt crisis, optimists believed that Greece, Portugal, Spain and Italy only needed a mix of extra liquidity and credible public spending cuts to stop the red ink and get back on their feet. The consensus was that all these countries were experiencing a liquidity crisis. With generous financial aid from its better off northern cousins southern Europe would gain the necessary time to fix its public spending, this way signalling to financial markets that there was a genuine healing process underway.

Structural crisis

Well, it did not turn out this way. Leaving aside the cumbersome and often rancorous negotiations, the fact is that several years into a huge problem that manifested itself at the end of 2009 there is till no light at the end of the tunnel. It is clear that Southern Europs’s crisis goes much deeper than temporary liquidity. The crisis is unfortunately structural. There is an unhappy combination of dysfunctional and bloated public administration, high labor costs, labor market rigidities and too little investments in innovation. All this makes these countries uncompetitive, while people continue to demand benefits and costly entitlements. 

Sure enough, drastic austerity measures imposed by the lenders did not help much. It is like putting on a diet a patient who just had major surgery. Lack of nourishment will simply delay recovery.

No turn around

Still, in the long run all the loans that the weak countries have receive make sense only if these programs will lead to a genuine, self-sustaining economic and fiscal recovery. In other words, markets need evidence that at some point Greece will have a productive economy and a slimmed down and efficient public administration. However, at the moment there is no confidence in any turn around. At the moment the debate is still focused on the modality through which more aid will be disbursed.

Endless bail out? 

And here get to the real issue. Is northern Europe willing to accept the cost of keeping alive its structurally weak southern European partners –indefinitely? At present this is the most likely scenario, even though there has been no open and frank debate.

It is quite possible that, after the German elections to be held in September, Berlin will force a serious discussion. But if the Germans do not want to press the issue, then we can expect more of the same. If the Germans, the Dutch and the Scandinavian countries are indeed too afraid of the consequences of any forced exit from the Eurozone we can expect that the bail out out the poor southern cousins will go on and on. For the time being this may appear politically more palatable. But it will weaken Europe even further.




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.




Praise For Mario Draghi Is A Way To Forget That Europe’s Structural Economic Problems Have Not Been Fixed – The Financial Situation Is Much Better; But The Economies Of Southern Europe Remain Hopelessly Weak

[the-subtitle ]

By Paolo von Schirach

January 20, 2013

WASHINGTON – I am really worried about too much praise for European Central Bank President Mario Draghi. He is described as Europe’s savior, as a genius because last Summer he bluntly said that he would do whatever is necessary to defend the Euro.

Draghi’s bet

Since the bond markets did not test this bold proposition, in essence believing that Draghi would be able to follow through with adequate liquidity aimed at supporting bonds under pressure, he won the battle. There is no more downward pressure against the Club Med countries bonds. Europe’s financial markets are back to “normal”. So, this is it? Just one brave statement of intentions by the head of the monetary authority fixed everything?

This is patently absurd. There is a huge difference between the end of an emergency and return to normalcy. Mario Draghi deserves a lot of credit for boldy asserting his intention to fight for the integrity of the monetary union.

German help

But this is after all his job. And by the way this would have never worked had Draghi failed to enlist the German government as key supporter for his plan. Imagine if Chancellor Merkel had said publicly that Draghi’s strategy couldn’t work because key Eurozone members would not provide the liquidity to rescue Club Med. That would have been a disaster.

Still, some praise is deserved. In an environment where timidity and half measures are the best that mediocre leaders can come up with, Draghi’s blunt words were like a lion’s roar.

Meltdown avoided, picture this bleak

That said, it should be crystal clear to all observers that the President of the ECB cannot turn Europe around all by himself. The idea that since monetary meltdown has been avoided now all is well is plain stupid. Sure, the patient (Club Med) did not die, and he may be soon out of intensive care. But the prognosis is that there will never be a full recovery. The ailment is so severe that it created permanent damage.

Weak Club Med economies

Let’s look at the picture. The Eurozone is in a recession. Unemployment is at 11%. If this is bad, look at Spain where it is at 27%. Yes, that is 27%. Youth unemployment in the Club Med countries is around 50%. Austerity measures, while necessary to cut spending and restore some confidence in highly indebted countries, are recessionary. They have sucked oxygen out of the room. Tied to the Euro, the Club Med countries cannot hope in an export led recovery aided by a devalued currency. More broadly, they still lack macroeconomic policies that would strongly encourage domestic and foreign investors.

Greece will never come back

Just look at Greece. After the latest bailout, Greece will have received 255 billion Euro. This is an astounding figure for a small country. The IMF now warns that it may need an extra 9 billion Euro. And, despite all the massive interventions, the economy is in free fall. Sure enough, the Greek 10 year bond is now “down” to 11%. This is a huge success if we consider that it was at 30% just few months ago. While this is great progress, 11% is still extremely high. (Germany is less than 2%).

If markets had total confidence in the rescue plans for Greece, then its sovereign debt should be regarded as debt of any other perfectly solvent country, with zero risk premium attached. But it is not so. And this proves that Draghis’ victory, while significant, is only partial and temporary. Avoiding the Euro’s meltdown is not the same as restoring full credibility in Europe’s future.

ECB cannot fix weak economies

The truth of the matter is that Southern Europe’s structural problems are not just fiscal. They are also economic. True enough, its public sectors are still too large and inefficient, its welfare programs too expensive. Partial reforms have yet to resolve these core problems. But, in addition, its economies are not competitive, productivity is too low. There is no business creation. Old and underfunded education systems are unable to turn out world class knowledge workers. And, to make it even worse, all Southern European countries have extremely low fertility rates. This means societies made out mostly of inactive old people clamoring for pensions, medical care, disability benefits and more.

Europe will under perform

Even if Mario Draghi were the best central banker in history, the ECB cannot fix these systemic problems all by itself. Without miraculous economic transformations, dragged down by its weak and needy Southern periphery, Europe will continue to under perform.




Europe Avoided Disaster – But The Economies Are Fragile And So Are The EU Institutions – Expect Current Weakness To Continue

[the-subtitle ]

By Paolo von Schirach

January 15, 2013

WASHINGTON – These days in Europe there is a far more optimistic atmosphere. It would appear that the big Eurozone crisis has been solved. No Greece exit. Italian and Spanish bond yields are back to tolerable levels. It seems that all problems, if not entirely taken care of, are now smaller and manageable.

Draghi’s magic

And how did this miracle happen? Well, it is all about the heroic and daring statements pledging unwavering support for the Euro made last year by European Central Bank (ECB) President Mario Draghi. He said that the Euro was and is there to stay and that the ECB has plenty of ammunition to take care of any challenges. These bold words reassured markets and inspired new confidence in the solvency of the troubled Mediterranean countries. “The ECB is in charge; so all is well”.

Really? As is easy as that? Are we to believe that the ECB is so powerful that all by itself it can overcome all the structural impediments to fiscal balance and growth that have plagued and are plaguing all the Club Med countries? This is sheer lunacy. Of course the ECB can do a lot. But, by itself it cannot reform public spending and productive activities in Greece or Spain.

Promised changes

That said, part of the new confidence in the future of the Eurozone was also predicated on reforms promised about centralized budgeting and banking supervision that now look a lot more uncertain. In other words, belief in Greece and its future solvency rests in large part on the perception that there will soon be mechanism in place that will guarantee Greek debt, no matter what. However, these mechanism, while planned and decided upon, are not yet in place. When credit markets will be convinced that credible actions did not follow talk there will be a new wave of turmoil.

Political weakness

And this is yet another example of Europe’s chronic inability to have real follow up. And this is in large part because of Europe’s political weakness. Within the EU there is an unfortunate combination between weak institutions, lack of a coherent strategy leading to a real Political Union and economic weakness affecting a number of member states. Weak institutions will have a hard time shoring up (let alone reforming) structurally weak Greece, Cyprus, Italy, Spain and Portugal.

EU: an ill defined project

Leaving aside the specifics of the implementation timetable for this or that fiscal or banking reform, Europe’s main –and conveniently ignored– problem is that it is an ill defined enterprise. The EU is far more than a Free Trade Area and far less than a Federation. It is a confused hybrid with political ambitions without political instruments and almost zero political legitimacy coming from Europe’s citizens. This is a basic, systemic weakness that limits the ability to come up with binding agreements and real follow through on commitments.

Add to this institutional and political fog the additional problems stemming from bankrupt welfare states in Europe’s periphery, out of control public spending and non competitive economies and you get the full picture.

Central Banks are no substitute for sound national policies

Mario Draghi and the ECB may have indeed a lot of fire power. But not even the best Central Banker in the world can be a substitute for well organized, cohesive and productive societies. The ECB may be able to guarantee that Greece will not implode. But it can do almost nothing to turn it into a mini-Germany. Given all this, the current euphoria about Europe’s prospects has no justification. Europe is weak and will stay weak.