In-Continental

Days of rioting in Greece started over the mistaken shooting of a 15-year-old boy from a lower economic class, and soon he became a symbol for that nation’s failed economic policies. The violence and looting settled somewhat on December 10, but general strikes and union rallies threatened to re-ignite the protests. The raging public, bolstered by cries from socialist political forces, threaten to topple the government. Unrest also simmers in other Western nations – protesters in Spain, Denmark and Italy smashed shop windows, hurled bottles at police and even assaulted banks this week; cars were set on fire in France – all over the purported causes and consequences of the this economic meltdown.

The financial crisis clearly impacts certain European Union (EU) nations, which include most of Europe, much worse than others. The EU has centralized most of its economic planning and currency/monetary controls into a single body. Some countries, like England (the United Kingdom), are EU members but still retain their own currency (the UK has its own central bank and retains the Pound Sterling as its currency). But this very “unity” of economic policy may in fact have exacerbated the problem.

My own theory as to why the EU was created in the first place is predicated on the belief that individual European countries were not large enough to counter the economic power of behemoths, particularly the U.S. But it is precisely that amalgamation of divergent cultures and economies that may be Europe’s particular weakness in dealing effectively with recovery strategies for this staggeringly deep recession.

Like the United States, where some states are feeling the recession much more deeply than others (the “sand” states of Nevada, Arizona & California or the automotive center of Michigan), Europe’s recession is not evenly spread across its member nations. Iceland is fundamentally an insolvent country, and the despair in nations like Greece, Spain, Hungary and Belarus is quantum leaps worse than relatively unscathed countries like Germany. With 27 countries accountable to some degree or another to the European Central Bank (a pan-European version of our Federal Reserve dedicated to the control of the Euro), most have surrendered their right to deal with this crisis on an individual national basis.

Some of the recommended European “counter-measures” includes elements which they hope the U.S. will join in supporting: new uniform accounting standards, restrictions on executive pay and various forms of new regulations on certain private institutions and derivatives that have escaped serious governmental oversight. Other measures, like setting Euro-based interest rates, prevent individual states from sculpting solutions to the uniqueness of their situations. Lower interest rates fueled a speculation bubble that contributed to unsupportable overexpansion, fatal to Iceland as we have seen.

Take Ireland for example. The Celtic Tiger, when grew at an astounding 7.5% average rate for the 12 years following 1995 when the Irish government created a series of tax incentives and subsidies that drew new industry (perhaps too subsidized as I have pointed out in past blogs), fell down particularly hard in the recent meltdown. Home values crashed, and unemployment skyrocketed. Still, the Irish have willing investors and business people ready to restart their economy, but they are finding the effectively higher newer European interest rates too steep for local project financing.

Europe is struggling to find a solution that fits the entire continent – they need to stop “cheap money” that led to Iceland’s collapse (which borrowed itself to death), and large economies like Germany and France don’t need interest rates to fall and further devalue the Euro; yet they also need to set rates that allow countries that can grow their way out of the recession to have borrowing capacity that may differ from central policies. This may be too much to ask from a central economic system, but time is running out of time on restarting Europe’s markets. While individual nations might struggle less, the overall picture for Europe thus remains even bleaker than what we face in the U.S.

The November 26 Los Angeles Times puts it this way: “Although the United States is set to shrink by 1% next year, the 27 EU nations may contract by an average of 1.4%, according to Tom Mayer, chief economist for Deutsche Bank in London. The former dynamos of the region, including Ireland and Spain, appear likely to be hit hardest, with unemployment in Ireland already at an 11-year high and, analysts predict, likely to get much worse.”

If Europe doesn’t structure a viable pan-European economic path to recovery soon, we could see the anomaly of a meltdown that started in the U.S. market stretch out European recovery well beyond the U.S. timeframe. As we search for solutions, it is only slightly comforting to know that with strong leadership, the U.S. has an easier time of creating fundamental reforms and national solutions to “find a bottom” and rebuild from there than our European brethren, whose very diversity makes a centrally-directed recovery plan that much more difficult.

I’m Peter Dekom, and I approve this message.