By Paolo von Schirach
August 14, 2013
WASHINGTON – Great economic news from Europe? Hardly. But the almost enthusiastic headlines would indicate that Europe is finally out of its slump and happily growing again. Indeed, it is yet another bizarre sign of the now established “new normal” of really diminished expectations that a feeble 0.3% Eurozone rate of growth has been saluted as the “End of the Recession in Europe“. Here we are, the bad times are finally behind us. The fact is that 0.3% growth for the 17 Eurozone countries is really lousy. And if you break this extremely modest rate of growth down, you realize that parts of Europe are doing very badly.
There is no Europe
Let’s start with the basics. There is no such thing as “One Single Europe“. Within Europe there are Regions, and they perform quite differently. There is Northern Europe doing reasonably well, and then there is everything else.
Germany, Austria, the Scandinavian countries are alright. Italy, Spain, Greece and most of the Eastern EU members are doing poorly, or very poorly. We are talking about national debt as high as 130% of GDP in Italy, while the economy keeps contracting, and 25% unemployment rate in Spain and Greece. And their collective bad performance clearly is not due to the ups and downs of the “business cycle“. Their abysmal conditions are due to the cumulative effects of systemic problems. Among them: lack of investments, negligible innovation, high labor costs, unaffordable entitlement programs, inefficient public services, too much debt and negative fertility rates leading to declining populations with a higher and higher proportion of senior citizens.
The North is doing fine, the South very poorly
If we average the more robust economies of the North and all the others, we see that Europe is finally in positive territory. But an optimistic reading of these very weak numbers would be self-deception. A o,3% average rate of growth within the 17 members Eurozone is poor to begin with, and it certainly does not mean that Europe as a whole has emerged from the worst downturn since WWII.
The fact is that Germany is up by 0.7%, and this is reasonably good news; while Italy, down by 0.2%, continues its slow but steady decline. France, given its precarious economy and mediocre leadership provided by President Francois Hollande, did surprisingly well, with growth of + 0.5%. But we shall see if this rate is sustainable.
So, bottom line: in Europe North is doing OK, South and East are doing badly.
Muted EU reaction
Therefore, If we take all this in, the almost enthusiastic commentary depicting a reborn Europe finally back on its feet and-ready to engage the world that appeared in all international business media looks rather odd. In fact, even key EU officials had a rather muted public reaction to the improved numbers. “Recovery is at hand“, commented Olli Rehn, EU Commissioner for Economic Affairs. However, he added that, in order to secure real success, Europe needs to persevere in its efforts against the crisis. “Reforms have to continue“, he added. “This is not a day for self-congratulatory celebrations about the end of the crisis“.
Serious reforms anyone?
Well, this is a rather sober assessment. Yet, Olli Rehn is right: “reforms” have to continue. But, beyond imposed austerity that does not do a lot of good in the short and medium term, as it causes aggregate demand to contract, the good reforms are not coming in the countries that need them most. Southern Europe badly needs a pro-business, pro-investment “enabling environment“.
Political resistance
But there is strong political and cultural resistance against meaningful change. Simply stated, Greek and Italian policy-makers are unable to reform labor markets and change tax laws so that enterprise will flourish and new investments will be made. Besides, in Southern Europe the public sector remains too big and inefficient. It costs too much money, (hence the ballooning debt), without bringing much value. However, serious public administration streamlining would be fiercely fought by all the civil servants unions.
As a result, scarce capital is not invested in productive endeavors; it is wasted on coddled constituencies that no one wants to antagonize. Lacking real reforms, we are left with silly gestures, like Italy’s decision to cut down the number of officials entitled to have car and driver at taxpayers’ expenses. In Greece the attempt by the government to shut down the costly and inefficient national broadcasting company caused a major upheaval.
In other words, they –governments and people– are not serious. And credible economic growth strategies require serious policy-makers and serious societies determined to bring about serious changes.