Was it the fact that both the IMF and the World Bank warned that the eurozone’s economic mismanagement could trigger another global recession? Or that the world’s economic and political elite was dismayed by Angela Merkel’s business-as-usual speech in Davos? Or perhaps because the EU was due to announce that eurozone unemployment is still rising, reaching a new all-time record of 10.4% (even as it has dropped to 8.5% in the U.S.)?
In any event, it seems some EU leaders were worried that all this happening in the days before the summit to finalize a fiscal discipline Treaty, mandating more-of-the-same-budget-cuts-and-tax-hikes that have failed to prevent the worsening crisis, might make them look… well, not just heartless, but stupid too.
So, a few days before said summit, the EU leaked to the press its intention to also present a Growth & Jobs Plan. The solemn statement of the assembled Presidents and Prime Ministers, imaginatively entitled “Towards Growth-Friendly Consolidation and Job-Friendly Growth” (in case you didn’t get the point), featured seven pages of lofty promises for youth employment, small and medium enterprises, and international cooperation.
The actual Growth & Jobs Plan that was cobbled together at the last minute included little more than some minor youth programs and the reshuffling of existing EU funds “towards jobs”, in any event worth less than a minuscule 0.001% of GDP. That’s stimulus that is bound to do some good.
The effort was so embarrassingly half-hearted and misleading that even Brussels insiders could not maintain the pretense. An economist at the EU-funded Bruegel think tank called it “[not] much of a strategy apart from the typical laundry list”. One EU official went so far to condemn their own plan, saying “It’s like paracetamol to mend a broken arm.”
The sad little episode was a great expression of the “law of inverse relevance” that was described on the very first episode of the classic British politico-comedy TV series Yes Minister over 30 years ago: “The less you intend to do about something, the more you have to keep talking about it.”
Smile, it will get worse
Such improvisation might have you think Europe’s leaders are not taking things seriously. Yet things are dire. The wonks on the Brussels Think Tank Forum’s panel on addressing the social crisis presented an at times apocalyptic picture of the near-future.
Gordon Bajnai, a former Prime Minister of Hungary, warned of coming “intergenerational conflict”, a “reversal of social mobility” and “slower growth”. Further, with North African levels of youth unemployment in some EU countries, he argued “revolution” itself “might be gaining relevance again in the post-2008 world.”
Thomas Fischer and Sarah Hoffmann of the Bertelsmann Foundation (sponsor of this website) wrote in their paper: “The social unrest in Greece and Spain, where youth unemployment has now reached about 50%, could be just the beginning.”
And what of the promises of EU leaders for growth to reverse these trends? Giles Merritt, leader of the Europhile (obviously) Friends of Europe, advised against believing a word of it: “There’s a strong smell of business as usual.”
How the system doesn’t work
Why are the dismal scientists (economists) so downbeat? One problem with the euro crisis is it’s too damn complicated. The basic problem in short:
- A country has high debt and bond yields (interest paid on new loans from the markets), leading to…
- Bigger deficits, and then…
- Budget cuts & tax hikes to reduce them, causing…
- Recession (shrinking GDP and revenue), making debt repayment less likely and thus causing…
- Higher bond yields.
Rinse and repeat ad defaultum as all while unemployment relentlessly rises.
Clear enough? What isn’t clear is how the eurozone escapes this vicious circle but there are two big ideas: either Eurobonds are created (shared EU debt) or the European Central Bank (ECB) commits to systematically buying national debt, both of which would (it is hoped) drive down bond yields. Incidentally, the U.S. Federal Reserve, the Bank of England and the Bank of Japan have all achieved this by buying up their own country’s debt (the total debt of each is equal to or higher than the eurozone average).
Berlin fears and loathes both ideas, not wanting to be made responsible for other EU countries’ debts or risk inflation. Less than two weeks ago, Merkel’s top economic adviser said unambiguously “I reject intervention by the ECB, I reject Eurobonds” while Jürgen Stark, formerly Germany’s top man at the ECB, said he, as suspected, had been opposed to existing debt purchases by the central bank which had prevented Italy’s bond yields to go past 7%. Apparently, had he had his way he would have let Italy’s bond yields rise into Greek territory, perhaps letting the country default (dragging any number of French and German banks, who own Italian debt, down with it).
There has long been a theory that Germany will accept either ECB intervention or Eurobonds when there is a credible fiscal discipline treaty ratified. Merkel herself in a major interview with six European newspapers expressed this idea most explicitly:
“Shared liability is something we will only be able to contemplate once the EU has achieved much greater integration. It will not do as a means to resolve this crisis. That greater integration would involve the European court of justice enforcing controls for national budgets, for example, and much more besides. If we at some point have harmonized our financial and budgetary policy, that will be the time to try and find other forms of co-operation and shared liability.”
Or roughly translated: Not now, not very soon, maybe never. There’s no telling when Berlin will deem these conditions fulfilled. Merkel, when talking of getting out of the crisis, has tended to talk in terms of years. That might well be how long this recession lasts. Greece’s economy will apparently shrink forever. Spain, with the highest unemployment in the developed world, is expected to have at least two more years of ungrowth.
An EU official at the panel discussion on addressing the social crisis was distinctly discouraging. In the teeth of permanent recession and monstrously high youth unemployment, he advised for more focus on the “social economy” (non-profits and volunteering) and “social and public sector innovation”. By the way, the EU has basically no budget or real competence in this area and, as so often, these buzzwords are unlikely to ever have much reality outside Brussels conferences.
A week of improvised spin, an inscrutable German Chancellor, and many Brussels experts warning of something like social breakdown and revolt if things are not turned around. Not cheerful. An outright collapse of the European economy appears unlikely now that the ECB, through a massive lending operation to banks, has apparently stabilized Spanish and Italian bonds, albeit at still fairly high rates. But any lasting improvement looks like it will take years.
In the meantime, entire nations and a generation of European youth have been condemned to lasting unemployment and economic insecurity. EU leaders’ may have promised Growth & Jobs but it looks we won’t be seeing either for a long time.