Europe and the Recession

Will the recession do more to divide or unite Europe?

 

March 18, 2009

FLORENCE, Italy — It seems very plausible that during 2009 Europe will face a huge economic downturn with G.D.P. tumbling by 3.6 percent (according to Goldman Sachs, an international bank), while the German economy — by far the most important economy at the E.U. level — could plummet by 5.2 percent. In addition to these general very dark forecasts, until now it is not entirely understandable how to solve two disruptive issues that Europe has to confront right now: growing trade imbalances within the Eurozone and possible sovereign state defaults in Eastern and Central Europe.   

First, the growing trade imbalances within the Eurozone where the economically most vulnerable countries — the so-called PIIGS (Ireland, Italy, Spain, Portugal and Greece)— are considered to be more prone to undergoing an economic stagnation as a consequence of the current recession. These economic imbalances have already started to be evident since the middle of 2008 because of the spreads between the yields of German bunds and the yields paid by bonds emitted by PIIGS countries. The worst case scenario is to have one of the PIIGS countries forced to abandon the euro with all the consequences that such a move could mean for the future of the common European currency.

 

The second issue to be solved is linked to what is happening in Eastern and Central Europe where some sovereign states, like Hungary, Bulgaria, Romania and Latvia, really risk defaulting in the next months and where also other countries like the Czech Republic and Slovakia — which are in better economic conditions — will be strongly touched upon by both the general economic recession and the dramatic situations of the surrounding countries. If one of these countries defaults also the eurozone could be brought down. At the moment it is understandable that the E.U. and the International Monetary Fund (I.M.F.) will provide financial help, but given the fact that serious risks of huge household defaults exist in Eastern and Central Europe, will both the E.U. and the I.M.F. be capable of injecting the required resources in order to avoid the default of sovereign states? There is no clear answer.

In other words, the situation is critical and it is quite interesting to try to investigate whether the recession could boost Europe’s unity or could rather be an instrument of division among the European countries — such an instrument would indeed create fissures to the EU building. This recession could already have been for the E.U. a great opportunity — probably for Europe in general — to become a more integrated area. Last October, after the failures and the bailing-outs of many an international bank on both sides of the Atlantic Ocean it seemed that also in Europe there was a clear understanding among Europe's political key players (N. Sarkozy, G. Brown, A. Merkel) of the fact that global problems require collective solutions. Instead, after initial proposals regarding an extension of the field of action of the E.U. economic policy, Germany strongly rejected this possibility. Since then, all the attention has been given more to domestic interventions rather than to the implementation of collective E.U. actions. All this means that the indicators are not positive and that at the moment it is possible to have started a process that will continue to divide Europe rather than unify it. The economic crisis is a reality that cannot be avoided, but good E.U. economic politics could be the best tool to tackle it at three different levels: eurozone (16 countries), E.U. (27 countries), and European countries not included in the E.U. But could this be implemented in the next weeks? The answer is no.

In fact, Europe misses a class of national leaders seriously oriented towards the European idea. None of the political leaders of the E.U. most important countries, i.e., France, Germany, Italy and U.K., is entirely committed to the advancement of the E.U. In particular, there is not anymore a credible Franco-German axis, like the one that around 20 years ago at the time of Mitterand and Kohl was the real cornerstone of the European building. What is striking today is the position of the German Chancellor Angela Merkel, who does not understand that carving out just national solutions is not the right answer for Berlin. In fact, economic growth in Germany has become in the last years more reliant on exports than for the rest of the currency union. At the same time, Germany has continued to have a constant weakness in relation to its domestic demand. In other words, this means that the German economy is not well balanced and that its future possibilities are not extremely positive in reason of the current global recession that is investing also the Eurozone where are located the most important buyers of German products. The reasons for this position is probably linked to the fact that German politicians (like all politicians) have to respond to their constituencies. And these groups do not have a clear picture of the basic imbalances that have generated the current global economic turmoil, while they merely understand how to retrench their national economies domestically. This brings to another aspect, which is the widening gap between the E.U. institutions and the people of the countries members of the E.U. This trend had already emerged during the previous years and the vicissitudes of the Lisbon Treaty well exemplified it. What is happening now is only the following step.

The absence of politicians committed toward the European building is the real and most difficult hurdle to overcome in order to use this current global recession to unify in a better way Europe. On the one hand, it's true that  prospects are really grim. In Eastern Europe (Hungary, Czech Republic and Slovakia) it is already growing support for nationalistic movements — some of them inspired by the Nazi-Fascist ideology — and, given the fact that for the whole 2009 the economic situation will continue to worsen, the outlook is depressing. On the other hand, there is a possibility that the economic recession could be used to unite Europe. In fact, if  the global recession really risked destroying the E.U., probably, such a scenario would force the E.U. technocrats, as well as the politicians of the member countries, first to understand that only a common action could save the European dream, and second to find a way to implement a reliable solution.