Saturday, May 26, 2012

Europe - The Clock is Ticking

It is becoming clear that the real crisis in Europe is one of leadership and imagination.

Last week at an informal summit meeting (complete with a formal photograph), the European leadership came up with a new “rescue plan” - "project bonds" to be launched for a trial period this summer. Some €230m (£183m) has been earmarked from the existing EU budget to help the state-backed European Investment Bank provide infrastructure loans. This initiative will apparently attract €4.6bn in private investment, so helping the Eurozone grow its way out of trouble. It shows how much in denial the European leadership really is. Growth is stagnant in Europe, even in Germany. As Liam Halligan says in todays Sunday Telegraph, this “solution” is akin to “tackling an inferno with a water pistol”.

The underlying problem is that most of the banks of the European Union (with some notable exceptions) are insolvent. Spain’s Bankia just asked for €19 billion (this on top of support already received) and many banks through the region are now so interdependent on Government bond payments that they are effectively bankrupt. Regions of the EU are bust. Catalonia, Spain’s wealthiest region, announced this week that it is bust and needs the central Government to pay its bills.

None of these issues were discussed last week at the informal summit. Nor was the pending exit of Greece from the Eurozone – now a certainty. Nor were the recessionary forces now shrouding Europe on the table – German indicators, for example, show a sharp drop in GDP growth in the last quarter. It is as if the leadership of Europe is walking in a trance towards Eurogedden.

All look to Angela Merkel. She is said to be “dusting off” the plan made for the integration of Eastern Germany some several years ago, which forced a degree of austerity onto the German people so as to permit integration. She is a one trick poney, and that trick isn’t a solution.

The real solution is painful. It requires European nations to become competitive and productive. In real terms, this means lowering the standard of living in Spain, Portugal, Greece, Italy, Britain and France and raising the bar for the receipt of social services. It means increasing the number of hours worked, delaying retirement and changing working practices. It means returning to a focus on cost reductions in public and private sectors and to a relentless focus on innovation. It also means abandoning lofty and expensive ideals about climate change mitigation based on state subsidy – something which is making matters worse rather than better in that it is significantly increasing the volatility of energy prices and raising energy costs to a point in which industry cannot compete. One estimate is that this package of measures means a lowering of the standard of living in these countries by one third.

And this is why we have no leadership. What leader in a democracy based on four year terms is going to advocate these policies? None. Yet the alternative – drift, denial and despair – is inevitable. Prepare for Eurogedden. The clock is ticking.

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