The bad news just keeps coming. Coming close on the recent revelation that economic growth is slowing faster than expected in France and Germany, British labour figures have disappointed forecasters and it seems that Greece is heading for yet another recession despite optimistic predictions to the contrary.
A familiar pattern is emerging here. European leaders attempt to paper over the problems afflicting their economies with unconvincing and half-baked measures and rosy forecasts about the future. Markets initially respond briskly when European leaders emerge from a huddle with a new “fix”; disillusionment sets in within a few days as the limits of the agreements become clear.
Over time, this approach loses credibility. New communiques are greeted with slacker and shorter rallies. Meanwhile, the underlying problems are getting worse, not improving.
The entirely predictable recession in Greece, for example, means that the Greeks are headed for yet another failure to meet the tough fiscal targets imposed by the EU. Greece’s problems are severe, but Greece is very small. Europe’s comprehensive failure after countless iterations to get Greece right suggests pretty strongly that it will be unable to manage bigger and more complicated problems in places like Italy, Belgium and Spain.
Breaking this cycle is going to require a more serious commitment to bold steps — perhaps like those proposed today by leading Euro Federalist Mark Leonard – towards overhauling a European system that is quite clearly broken. As Leonard notes, the only way out of the current crisis is both political and economic reform.
There are two problems, though, with this approach. One is political. While the concept of Eurobonds (in effect, having Germany co-sign all of the eurozone sovereign debt) offers the best and perhaps only hope of an economic fresh start, Angela Merkel simply cannot sell the idea of a “transfer union” in which Germans become responsible for the debts of the PIIGS (Portugal, Ireland, Italy, Greece, Spain) unless Germans genuinely believe that the only alternative is a huge economic crash. In other words, she can’t take the steps necessary to prevent a crash until the European house is actually falling down around her ears. Similar problems exist in other countries, and one of the consequences of the long agony of the euro is that voters everywhere are becoming more populist and nationalistic in sentiment, and are less confident in and trusting of their elites.
The second problem is institutional. Europe cannot act quickly. France and Germany want every member of the eurozone to pass constitutional amendments mandating balanced budgets, for example. (On this point at least, Europe is turning into Tea Party Heaven.) That means that 17 different countries have to amend their constitutions. Given that every country has a different process for doing that, and that some (as in the US) are deliberately cumbersome and slow to discourage random constitutional tinkering, this cannot happen on the kind of predictable schedule that jittery markets demand.
Big changes at the European level have never happened fast, and the pace of change in Europe has slowed as the Union has enlarged. The last set of big changes were a nightmare, with referendums in France and the Netherlands killing a proposed constitution, and the watered down Treaty of Lisbon only barely making it to the finish line. Balanced budget amendments are as controversial in Europe as they are here, and the idea of turning over control of national finance to foreign control is not an easy sell. It’s hard to see how Europe’s current governmental processes could make the changes Leonard and others want in a timely fashion — even if national elites agreed, which they don’t yet, that these changes were necessary and good.
Europe is out of its depth in a raging river and without radical and almost unimaginable changes, it may not make it back to the shore. Americans cannot afford to be complacent or smug. Partly as a result of our own poor decisions and bad leadership (stretching back over many years and implicating both parties), partly because the world economy is so interconnected and Europe’s economy is so big and so open, we cannot prosper if Europe fails.
As they say in New speak: Double Plus Ungood.