Why Europe is Falling So Fast

If you think managing the body politic in a single country that speaks the same language and has lived under the same form of government for two and a third centuries is tough, try and generating some level of overwhelming economic policy in a structure – the European Union with about two decades of experience – where there are 27 separate nations, 23 official languages (there are lots of unofficial and minority languages that can be added to this list) and 17 countries sharing a common currency (the Euro Zone countries). Mix nascent and struggling economies, such as post-Franco Spain and modern Greece, with more stable nations, such as Germany and France, and take away the ability to adjust the currency values of just one country to correct territorial needs and differences.

Add to this mix an abject terror of hyper-inflation (the post-WWI legacy of Germany that gave rise to the Nazi party that erupted in WWII), a concern that vastly exceeds local worries about a depression. And finally add that psychological component of emerging EU nations wanting to look and act like the more established members, playing a lifestyle catch-up game to be more “European” even though their economies were hardly ready to produce sufficient values to pay for that upgrade… using debt to join the party and walk the walk.

The European Central Bank can’t inflate the value of the euro only in Greece to reflect a generally lower level of economic worth (which would make Greek exports instantly more competive) – what clearly would have happened had Greece had its old currency (the drachma) – and hence Greece has to adjust its economy by killing employment and retirement benefits, firing workers and dropping pay for those still employed. Greece was unable (unwilling?) to mirror other European nations in taxing her wealthiest citizens, who as tradition has dictated, make sure their vast wealth and massive holdings remain off-shore or at least far enough from government hands to avoid paying taxes.

There was no Lehman Brothers collapse to act as a seminal event to trigger a massive response to crisis. Europe dealt with each crisis, separately, never stopping to make an overwhelming policy shift. At first, Europe simply blamed the United States (and countries like the UK, Iceland, etc. who mirrored what was perceived as America’s cowboy, unregulated trading practices) as the cause of all economic evil, a notion that literally held Europe back from confronting some of its more egregious issues more quickly. Spend any time speaking with a European these days, and you are still likely to hear how the global financial crisis was caused by American misnamed “free market, freewheeling” business practices, one fomented by a government that was well-paid, in European eyes, to look the other way.

Europe eschewed the stimulus economics of its son, Maynard Keynes, and veered violently to the conservative side, slapping austerity programs everywhere it could. Even Britain, which is an EU nation outside of the Euro Zone and maintaining its own currency, reacted with the same crush on government spending. The results were massive and surprisingly swift. Lifestyle contracted equally quickly. In England, unemployment rose and the real estate market slumped a further notch lower. Governments of nations like Spain, Italy and Greece, legally committed to exceptionally generous retirement benefits, millions of traditional government “make-work” jobs and a proclivity to let the rich sock money away without paying taxes, literally were running out of money to pay for these commitments. There was no accretion of value that would create some sort of reason for people to lend money to these nations… their values were perceived to be either too new or too eroded.

Richer countries, who were literally the reason the euro has the value that it does, were deeply concerned about further erosion in their currency from profligate neighbors’ policies, began demanding profoundly deep cuts – Greece just announced plans to cut 300,000 government workers – in exchange for loans to shore up these failing economies. Credit rating agencies, who downgraded the U.S. debt level, were handing down new ratings that were placing interest rates on these marginal European economies at as much a 15% or more, exacerbating the economic troubles to new depths.

Remember, while all this is going on, each of the EU nations is separately governed with local issues, fears and political perspectives dominating. 80% of the German people recently polled do not want Germany money propping up Greece, but since the euro is a uniform currency, no matter what the German body politic may wish, Germany will be impacted whether it moves to help or sits on the sidelines, and the latter choice may result in longer-term disaster. While Germany’s PM, Angela Merkel indicated on October 6^th that EU nations (and the EU common fumd) should be prepared to step up and recapitalize European banks if necessary, nobody actually stepped up to implement this proposal, and there generally isn’t enough trust or confidence for European banks even to lend to each other. The notion of floating a pan-European “euro bond” – where the creditworthiness of the entire EU would be used as collateral – to generate a low borrowing cost and then pass that lower cost to the desperate economies of Greece, Spain, etc. – an obvious cost-savings over current practices – has not found traction, since voters in richer countries don’t like the sound of using their assets for others – profligates in their eyes – to get benefits from.

So the European economy trundles along, hoping that its slow and deliberate movement through each sequence of economic crisis will eventually burn out. Riots and strikes in the lowest European economies – like the disturbances in Greece pictured above – are par for the course, expected reactions. But if the big shoe drops, is Europe prepared for that possibility (probability?)? The October 5^th New York Times: “An uncontrolled Greek default or a run on a major European bank could still overturn expectations and compel France, Germany and the European Central Bank to act with much greater urgency. But for now, political and financial leaders are buying time, putting out fires one by one, like propping up Dexia Bank, and making vague promises, as European officials did [Oct. 5^th], about scheduling new meetings to discuss the recapitalization of European banks.

“‘Economists are trained to think about eventual outcomes and work backwards, and that’s the way financial markets function, too,’ said Charles Wyplosz, an economist at the Graduate Institute in Geneva. ‘That’s 180 degrees from how politicians function. They ask themselves about tomorrow or next week or maybe the next election and solve problems as they come. So they’re always behind the markets.’

“Despite the fact that economists and bank analysts now widely expect that Greece will have to default on its debt, no European leader will say so, at least for the record. Instead, the countries in the euro zone are continuing to act as if measures agreed to in July to shore up Greek finances, and that slow-moving European parliaments have yet to fully approve, are sufficient to contain the crisis. One sign that Europe is preparing to address the problem might be a sudden outbreak of candor about the real condition of Greece, or an acknowledgement that leading European banks that hold sovereign debt of Greece and other troubled countries in the region will need hundreds of billions in new capital to ensure their stability.”

Europe is falling fast, faster than the United States. Their forced austerity programs are taking the wind out of the sails of any realistic near-term prospect to reinstate recovery and their seeming denial of the elephant in the room will amplify the damage if full Greek default occurs; they’re just not prepared. Fractionalized bickering and intra-European “blame game” politics are making a bad situation worse.

But before we cast aspersions over this slippery-and-sliding European response to economic disaster, remember our president and our Congress have elected to apply the same kinds of austerity measures in the United States at a time when the only real remaining economic demand component in our nation is the government… consumers, laboring under an horrific jobs picture and worse crisis in the housing market, are hardly showing a flicker of the kind of demand they would have to exert to make a difference. We seem to lump stimulus into a general notion of helping big financial institutions, but that is not going to happen again… we need infrastructure, education and research… and the jobs that go with that kind of government spending.

I’m Peter Dekom, and it seems as if American politicians are loathe to learn the lessons of failed economic policies in Europe, embracing those same failed policies as solutions to our recovery issues.