How Europe can stave off a crisis

By Gordon Brown
October 21, 2011

By Gordon Brown
The views expressed are his own.

It was said of European monarchs of a century ago that they learned nothing and forgot nothing.  For three years, as a Greek debt problem has morphed into a full blown euro area crisis, European leaders  have been behind the curve, consistently repeating the same mistake of doing too little too late. But when they meet on Sunday, the time for small measures is over. As the G20 found when it met in London at the height of the  2009 crisis, only a demonstration of policy intent that shows irresistible force will persuade the markets that leaders will do what it takes. An announcement on a new Greek package will not be enough. Nor will it be sufficient to recapitalize the banks. European leaders will have to announce a comprehensive — around 2 trillion euro — finance facility; set out a plan to fundamentally reform the euro; and work with the G20 to agree on a coordinated plan for growth.

For three years it has suited leaders across Europe to disguise Europe’s banking problems and, citing the blatant profligacy of Greece, they have defined the European problem as simply a public sector debt problem. And it has suited Europe’s leaders to call for austerity (and if that fails, more austerity) and forget how the inflexibility of the euro is itself dampening prospects for growth, keeping unemployment unacceptably high and weakening Europe’s competitive position in the world today. Indeed, Europe’s share of world output has now fallen to just 18 percent.  And it is a measure of how it is losing out in the growth markets of the future that just 7.5 percent of Europe’s exports go to the emerging markets that are responsible for 70 percent of the world’s growth.

When I attended the first ever meeting of the euro group of leaders in October 2008 there was astonishment when I reported that Europe’s banks had bought half America’s subprime mortgages and there was incredulity when I said that European banks were far more at risk than U.S. banks because they were far more highly leveraged. Since 2008, as American banks have tackled their toxic assets, they have written off 4 percent of their loans and raised the equivalent of another 4 percent in new equity.  But euro area banks have written off just 1 percent of their loans, and have raised their capital base by only 0.7 percent, leaving them highly vulnerable even before their exposure to sovereign debt has become a central issue.  Their vulnerability is increased because they have always been far more dependent for their funding on the short term and confidence-dependent wholesale markets, and  countries within the euro zone are able to do far less in the face of capital flight than, say, Britain.

Of course in 2008, governments could fund the rescue of indebted banks; in 2011, indebted governments are finding that more difficult. For they know that even after they recapitalize the banks, they have still to deal with the even bigger financial problem of funding the borrowing needs of the most at-risk countries: Greece, Ireland, Spain Portugal and Italy, which could cost as much as $2 trillion in the years to 2014.

It is thus clear that the 400 billion euro rescue fund, the European stability fund, is wholly inadequate to address this profound failure across the European financial system, and that without a mechanism for fiscal coordination the euro cannot easily survive. A few days ago, U.S. Treasury Secretary Tim Geithner said that “the critical imperative is to ensure that the governments and the financial systems under pressure have access to a more powerful financial backstop.”

I believe that only an impenetrable firewall will show the determination of European leaders to head off the crisis and save Europe from a new recession. I know of all the doubts about a new but temporary role for  the ECB, but it is unlikely that any other organization has the resources for quick action. But the IMF should back them up, funding their contribution through loans from the oil states and China. It may now be impossible to avoid hundreds of billions in bank de-leveraging and liquidations, but a coordinated approach with the support of the international community could provide the breathing space for what matters — the  reform of the euro.

But radical as these measures are in staving off a financial crisis, they do not ensure a recovery. And once again Europe needs the support of the international community to grow. In 2011, no one continent on its own can reignite the world economy.  But every country, from America to China, is trying to export its way out of trouble — and logically this strategy cannot work. A coordinated global growth strategy is the only sure way of maintaining high levels of employment and growth. And when the IMF examined the upside of coordination, compared with the downside if events took a bad turn, they discovered that world output would be 5.5 percent higher, employment would be 25-50 million higher, and there would be 90 million fewer in poverty.

Coordination is all the more necessary because we are at a unique historical juncture — in the transition to a new and more balanced global economy.  For one hundred and fifty years, Europe and America produced the majority of the world’s manufactured goods, accounted for the majority of trade and were responsible for most investment and consumption. But in 2010 for the first time, America and Europe (the EU 27) were out-manufactured, out-produced, out-invested and out-traded by the rest of the world. Significantly, we were not out-consumed.

Only 40 percent of manufactured goods and even less investment may come from Europe and America, but they still consume 55 percent of the world’s goods and services.  So today there is a precarious balance between producers and consumers. The West is the world’s majority consumer but not the world’s majority producer — and the rest of the world is the majority producer but not the majority consumer, so the West and the rest depend on each other. Ten years ago the West, then the world’s majority producer and consumer, could drive the world economy on its own.  Ten years from now Asia may be able to do likewise. But for the moment at least, East and West either rise together or falter together.

This means that the G20 countries must do more than work with the ECB and IMF to smooth a euro rescue plan. At their meeting in November, they must push forward with a deal between the West and the rest of the world for growth. Of course there are other problems — exchange rates, trade restrictions, capital controls, and potential inflation — but these can be best addressed within a framework for growth.

By coordinated action, the G20 can push back on protectionist policies and give people confidence that the world economy can grow sustainably. None of this avoids the painful decisions that arise from the de-leveraging by the banks, nor can they be a substitute for tough debt reduction plans. But if China increases consumption, and Asia opens its markets; and if America and Europe spend on infrastructure, (not least because Asia is out-building, out-investing and, perhaps soon, out-educating the West) then we can create a self reinforcing cycle of growth. Indeed if China were confident its export markets would not collapse and if the West were confident it could export more, then the world economy would move forward again. With inflation still relatively low, the time is right for a G20 growth and employment pact. It is not only the way forward for Europe but the right path for the whole world.

PHOTO: Civil servants march in front of the parliament during an anti-austerity rally in Athens October 21, 2011. REUTERS/Yiorgos Karahalis

22 comments

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Brown – you are the last person who should be commenting! YOU left the UK bankrupt. YOU wrecked pensions, wrecked industry, wrecked the economy!

Now you have the arrogant gall to dictate to your mates in the Greater European Empire – to whom you sold out the UK – by sneaking in at the back of the room to put your scrawl at the bottom of a “treaty”?

Brown – just go back to crofting or polishing egg cups – the damage you & your worthless party caused will be paid for my kids for the rest of their lives – they are still in school!!!!!!

Posted by mgb500 | Report as abusive

Clear headed, balanced, great depth and global vision. What a shame ambition drove you, Gordon Brown, to wish to be the “Chef d’Orchestre”in 2007 and not continue to be a virtuoso performer economist and strategist. You appear to favour a restoration of the status quo at the same time recognizing”a unique historical juncture”in a changing world that is demanding greater democracy and redistribution of wealth,in fairness you are a pragmatist not a Crystal ball gazer. Its been very interesting reading your article.

Posted by ritchard | Report as abusive

One is not altogether clear what form a “growth and employment pact” would take, other than as a mere rhetorical device. However, whatever it is, it is clear that if not everybody is agreed on the necessary steps, then it will take longer to negotiate than the Doha round, and if everybody is agreed, then a formal agreement is quite superfluous.

In any event, the one thing we don’t have is the decades it would take to negotiate such a pact.

To be cruel, Mr Brown is falling into the same trap that has ensnared the French and German governments – he knows exactly what is required to solve the problem but cannot understand why nobody agrees with him.

Posted by IanKemmish | Report as abusive

The nations Gold – Sold at a record low on a grand scale.
Private Pensions – Extra tax that signalled the widescale end of final salary affecting young people and new employees
Loosening of Mortgage lending rules – signalling the start of a massive house price bubble fueled simply by how much banks would lend improvishing first time buyers, or leaving them priced out completely.
PFI – changed from its original purpose for one of special highly risky projects (Channel Tunnel) to building run of the mill things like Hospitals and Schools for the sole reason of an off balance sheet trick to flatter your scared golden rules the end result meaning our country is mortgaged to the hilt on recent public infrastructure and no flexibility for reducing payments.
Bodged Bailout of HBoS – dragged a previously healthy LTSB down too, and currently we’re still making a huge loss on all the tax payer bailout money you predicted would be in profit by now.

The above are just a few highlights from your glorious time in charge. Based on it I don’t think your opinions should even be being aired. You had your time, you made an awful mess of the finances, no more please.

Posted by SimpleLife | Report as abusive

All I ever read are ways to solve the financial problems of the Euro zone whilst the structural issues are ignored. They will not go away even if all of the debts of the Euro members are written off. The Euro concept is a failure but no one has the ‘cojones’ to admit it. Wages, prices, property values and standards of living are all much too high in the PIIGS and need to return to a level that is justified by each country’s economy and in particular their foreign earning ability. This would normally be achieved by way of devaluation however this is not possible. Trying to squeeze the country through austerity measures is also not working and indeed making the problem worse. For goodness sake – accept that a number of countries need to leave the Euro and get on with it. Only then will we begin to draw a line under this economic mess.

Posted by pavlaki | Report as abusive

Typical Broon, forgets to address the cause of the problem, governments spending money they don’t have. Churchill described governments trying to borrow their way out of debt as akin to a man standing in a bucket trying to lift himself up by the handle.
The UK ran a deficit at the top of the boom, who did that Gordon? His excuse, because we were never going to return to “boom and bust”. That’s the value of his opinion.
I read that for every £ that GDP increased by between 1997 and 2007, Princess Tony and his banker Broon increased debt by £1.30.
As mgb says above, paying off the legacy of the last Labour Government will consume our childrens’ lives.
Remember that the next time they promise you an easy answer.

Posted by Skibadly | Report as abusive

Nobody cares Gordon. You were unelected to lead, then not elected to lead and even the IMF didn’t want you.

It’s time to stop now.

Please, just stop.

Posted by ben110574 | Report as abusive

As expected, the knives are already out against Gordon Brown (understandable, as no one elected him).

However, what he says is correct. Austerity is NOT fixing our economies. To the contrary it is stalling growth, increasing unemployment and reducing confidence in already shaken markets that the sovereign debt crisis can be resolved. For every £4 the UK govermment cuts in public sector spending it is only reducing the structural deficit by 75p, which is frankly appauling, and as we can see with the Greek crisis, draconian austerity measures imposed on a state by its better off neighbours aren’t working either.

The only way out of this is co-ordinated international action. The West isn’t the force it once was and we rely on a global economy in which EVERY COUNTRY IS DEPENDANT.

EU member or not, we are still at the mercy of the rest of the world because we buy their goods and sell them ours. It’s pretty simple economics – those states with cash need to buy from those who don’t otherwise the state of the world economy won’t change.

Posted by bob_moss | Report as abusive

It is interesting to notice that the European needs help from China and other emerging countries through the IMF while the IMF is still overrepresented by the European. The US said it is a bad idea for China and Brazil to help the European. So who is right?

Posted by history_student | Report as abusive

How is it that Brown is an advisor to something called World Economic Forum?
This is the same moron that bankrupted the UK (with the help of his equally useless party), and even managed to sell off the UK’s gold reserves at an all time low price just so they could waste the money on jobs for the boys, (bloated public sector jobs). They might as well be taking advice from the local village idiot.

Posted by Jnoone765 | Report as abusive

Oh, the irony and jaw dropping arrogance of the man. Gordon is the poster child for how not to run an economy – we are all paying the price for his social engineering agenda which relied on votes bought with unaffordable benefits and public sector non-jobs. The pension crisis to come will hit everyone including those who were preparing for the future, thanks to his raids on private pensions. Greece is finally learning that you cannot live the dream of unaffordable borrowing and spending forever – for the man who took the UK down the same road to suggest he knows the answer is ridiculous. The damage he did to the economy far exceeds that of the banking crisis, maybe the Wall Street and London rent-a-mob should be looking to protest Blair, Brown and Balls rather than protesting against capitalism.

Posted by m1keg | Report as abusive

Jemery Clarkson got Brown absolutely spot on.
Shame on Reuters asking him for an opinion.
Next you’ll ask Blair about humility or Carlos Tevez about being a team man.

Posted by barry1966 | Report as abusive

Other comments have said pretty much everything…opinion expressed is his own and few people care enough to hear it.

Posted by Pablito | Report as abusive

This man has the cheek of old Harry

Posted by Truebrit | Report as abusive

If … If … If …

Posted by Realist1001 | Report as abusive

there’s a surprise… more debts! borrow borrow borrow
congrats to all previous comments, esp. Skibadly

Posted by jerry_01 | Report as abusive

Printing more money by itself won’t help. It’s the distribution of money that is the issue. All the new money is sucked up by the banks to beef up their coffers, contributing nothing to growth. Brown committed this folly, and he still doesn’t get it. Screw the banks and distribute money directly to the common citizen and small companies doing productive business, they are the growth engine.

Posted by Sal20111 | Report as abusive

Do NOT let Europe blinker you from what is going on with global macro developments in the wider world. That is the most important thing of all. Don’t lose sight of the wood for the trees… as they say.

For all the abuse GB gets, he does make an extremely good point here – he clearly understands how the world is changing… already. Today.

Gordon Brown:
“Indeed, Europe’s share of world output has now fallen to just 18 percent. And it is a measure of how it is losing out in the growth markets of the future that just 7.5 percent of Europe’s exports go to the emerging markets that are responsible for 70 percent of the world’s growth.”

SPOT ON.

Posted by globalecon | Report as abusive

Why is it that past Presidents/Prime Ministers always seem to see with such clarity of thought on how to solve the worlds problems when they are no longer in the job, yet lack vision and competence during their term in office?
Strange ……………very strange.

Posted by prepare_now | Report as abusive

I believe politics to be a very cruel game and those who enter to be either viciously ambitious or incredibly naive. That still leaves room for intelligence. Gordon Brown shows some in this article.

Posted by changeling | Report as abusive

at last some clear analysis…bvious, but yet clear and sophisticated…nevertheless problems of trust and adjustment work against co-ordination…we need a psycologival recognition in the west that the balance of power is rapidly shifting. such a recognition needs to be on all sides to develop the trust necessary….and there is the problem. If I was China, I would not trust.

Posted by mhin | Report as abusive

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