Friday, May 25, 2012

Experiencing Europe

The headlines across Paris focus on the future of the Eurozone without Greece. It is a foregone conclusion, at least amongst the patrons of the smart café’s in the Montparnasse, that Greece will exit the Euro. “Not a moment too soon,” says my waiter, who is a student of economics at the Sorbonne. “Trying to keep Greece in the Eurozone has been a costly mistake for the EU” he thinks.

Pierre and his student friend Martine, also an economics student at the Sorbonne, both suggest that what we are witnessing in Europe is the classical struggle for the soul of capitalism that Marx described in Das Capital. It is clear that capitalism has failed the people of Greece, Spain, Italy, Portugal and Ireland and that permitting the financial markets to operate with a great deal of immunity from responsibility and then transferring private risk to public debt will mark the end of this period in the history of capitalism in the West. What these two students don’t understand, they tell me, is how the adoption of the Shock Doctrine – austerity and privatization ($50 billion of public assets in Greece are about to be transferred to the private sector in the next quarter) aimed at stimulating capitalistic responses in a “more efficient” market will lead to growth and prosperity.

They are not alone. Austerity has not and will not work. While Greece does need to better manage its public finances, the underlying problem is the lack of growth coupled with the decline of productivity, the absence of significant manufacturing capacity and skills and the ageing population. Austerity will just hasten a “death spiral” for the economy, says Andre - an MBA student at INSEAD.

The movement towards growth, spurred by the G8 meeting at Camp David, will splutter and splinter the EU. The summit meeting held this week showed this clearly. Even though Angela Merkel was present at the G8 and appeared to support the “growth agenda”, behind the scenes she is quickly undermining some of the key ideas. She is against EU wide public spending using pooled EU funds. Against the issuance of Euro Growth Bonds underwritten by the Eurozone countries. Against letting inflation rise to 4-5%. Against increasing the size of the European Stability Fund to permit greater risk taking by Government. Against the creation of nationally owned “bad banks” to restore confidence in the “good” banks so that they in turn can lend with surety. In short, the German Chancellor is against actually doing anything that would lead to growth.

History is her pointer. She points to broken promises by the Mediterranean Eurozone countries with respect to public finances. She points to Italy and asks “if we did everything everyone is talking about, would Italy suddenly change and become highly productive, efficient and effective economy?”. She is right to ask the question. She is also right in her assumption that, apart from the earthquake hit region in the North, the answer would be no.

But her conclusion is that “austerity is the only way” and that “this lady is not for changing her mind” is a mistake. It shows a lack of understanding of the real situation here, which is only partly a structural economic problem. The underlying problems are social, generational, political and cultural.

The social dimension relate to the underlying assumptions within many European countries of entitlement. Entitlement to a limited work week (by law, 35 hours in France is the maximum anyone is allowed to work), to early retirement with state pensions (between 55 and 60 in France), to generous support for unemployment (up to twenty four months at 70% of salary in France) and generally free health care, including prescription and dental. While these entitlements are now being challenged, the public reaction to even modest changes is equivalent to the reaction of a small but violent group of students in Montreal to a modest increase in student fees.

The generational dimension is that fewer of the young married couples in many parts of Europe want children and that many of the young adults stay at home longer than did their parents. This reduces the mobility of people, lowers birth rates and increases the stagnation of community. Demography is a major structural challenge for the whole of Europe and, while demography need not be destiny, it is becoming an underlying political issue in that disaffected youth are politically volatile. Remember – youth unemployment of the 16-24 year olds in many parts of Europe exceeds 50% of the age cohort.

The political dimension is complex. At its heart is the fact that no one is seen to be describing either the current situation well or is bringing the future to the present with any sense of authority. Europe is being led by light weights, like David Cameron in Britain or, well, no one in particular in Greece. Indeed, Greece’s inability to form a Government is a symbol of this issue. The electorate does not trust anyone to govern and those who would govern do not really know what to do. The leadership vacuum is palpable to the observer.

The cultural dimension is an interesting one. In Paris and in the French country side, life continues. The café’s are busy, cinemas are selling out, shops like BHV (the largest Department store in Paris) have many customers. To some extent, this genuine crisis does not impact daily life for many people. It is not until it impacts more people in more places will the extensive nature of this crisis hit hard. In Greece and Spain it is already doing so. In Italy it is beginning to do so. But at the heart of French life, the situation is normal.

On the TGV from Paris to Tours (which was full) the Deputy Commander of French Naval forces told me that recruitment is up, retention is high and the fleet is well equipped. “For what?” I asked. He smiled. “For whatever comes next”, he replied, somewhat laconically. This is more than can be said for France in terms of economic strategy. It is not well equipped and is finding it difficult to retain its businesses. The navy may be well positioned, but the country is not.

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