European Commission President Herman Van Rompuy attempted to calm markets In an editorial released yesterday, promising, “it can be done.”
“There are however two conditions,” he wrote. “Waste in the economy has to be eliminated, and growth has to be unshackled.”
The basis for this argument rests on experiences in Belgium in the early 1990s and Latvia more recently, when careful policy and planning pulled their economies back from the brink.
Can the same be done for Portugal, Italy, Ireland, Greece, and Spain? Or is Van Rompuy just trying to instill false confidence in the failing eurozone?
Let’s take a look at what happened in Belgium in the 1990s:
– In 1992, Belgian public debt topped 130%. By 2007 it was down to 85%, although it rose again with the advent of the 2008-9 recession.
– In the 1980s, the Belgian government increased spending and subsidies to aid ailing industries like steel and textiles. These actions resulted in a staggering amount of national debt, which was ultimately rectified with tighter spending and an end to social security subsidies. The Belgian government succeeded in balancing its budget by the early 2000s.
– GDP growth — positive up until 1993 — sunk to -1% in 1993 before returning to a healthy 3.2% in 1994. It remained above 0.8% until 2009 (when it sunk to -2.8%).
– A flood of foreign investment after 2004 caused the Latvian economy to boom. When it dried up in 2008, the economy collapsed. Unemployment spiked to 20.5% in early 2010 when the Latvian government refused to devalue its currency, the lat.
– In 2009, Standard & Poor’s downgraded Latvia’s credit rating to BB+, or “junk.”
– Latvia’s government enacted a number of unpopular measures in order to get its finances under control. It increased income and real estate taxes while holding down corporate taxes.
– The country turned a 25.7% current account deficit in 2007 into a 10.1% surplus in 2009.
Yes, recovery can happen. But how likely is it in Greece, Spain, or Italy? (Because, let’s face it; who really cares about Ireland or Portugal?)
Greece — as the first developed country to default in more than 60 years — seems to have encountered far more serious problems than Latvia or Belgium. Just because those two countries bounced back does not mean Greece will.
Italy looks most like Belgium, where modest GDP growth and high levels of public debt have crippled the economy. In comparison to Belgium, however, Italy has far more serious social problems that render it averse to economic growth. Poor labour mobility, rampant corruption, and declining population growth are not endemic in Belgium, which was the first nation in Europe to embrace the industrial revolution.
Spain could be comparable to Latvia, though certainly not in size. Like Latvia, Spain has far less overwhelming levels of sovereign debt than Italy. It also has a far more friendly attitude towards business.
Latvians, however, proved remarkably accepting of austerity measures like increased taxes. This unity simply does not exist in Spain, particularly with indignado protests becoming ever more frequent in Madrid. The ruling PSOE party has spent the last decade pumping money into social programs. While the centre-right PP party is likely to enact more and different austerity measures when it comes into power in November, these are still sure to make lots of people…well, indignant.
True, Belgium and Latvia are countries that have been able to overcome severe economic difficulties, however they did so under less debilitating circumstances than are currently present in Europe today. Right now, contagion may be the biggest concern for Spain and Italy — as well as the rest of the EU. This was far less of a concern for Belgium or Latvia. And though Spain appears somewhat more positive than a backwards Italy, in both countries political turmoil could halt austerity measures in their tracks.
Could the PIIGS still find a miracle solution? Maybe, but it is going to be a bumpy ride.