Without coordinated leadership, Europe will falter
There is an increasing probability that financial markets will respond negatively to the unfolding economic and political drama unfolding across Europe. So far, the European Central Bank has pumped out cash and calmed the nerves of investors, but it needs to do more. A cut in interest rates by the ECB is crucial to contribute to a revival of growth across the euro zone. On its own, however, that is not enough. Europe’s political authorities need to counter the increasingly widespread perception that they lack the will to confront the zone’s economic ailments and promote a clear path to growth – austerity policies alone will not work.
The situation has become far more serious now that the crisis has moved from the zone’s periphery to its major economies: Spain shows no signs of emerging from prolonged negative growth, Italy is now facing mounting difficulties and France is sliding into recession.
Overall, looking across the euro zone, the jobless data best illustrates the pain of this crisis. The latest statistics from Eurostat show unemployment across the 17-nation euro zone at 11.9percent; 19 million people are out of work. The rates in Greece and Spain are 27 percent and 26.2 percent, respectively, and in both countries the rate for youth unemployment exceeds 55 percent. In Portugal and in Ireland, where major efforts are being made to overcome acute difficulties, the jobless rates are, nevertheless, 17.6 percent and 14.7 percent, respectively. The rate in Cyprus has shot up from 9.9 percent to 14.7 percent over the last year. In Italy, the rate is over 11.5 percent, while in France it now stands at 10.6 percent.
It is most likely that in each of these countries the jobless rates in coming months will rise and, as they do, the public demonstrations will multiply and the risks to the sustainability of existing political structures in a number of countries will increase. Despite such prospects –- with the number of jobless expected to soon to exceed 20 million people — there is no sense that the political authorities are striving to formulate a “Brady Plan” of the kind that opened the way to sustained growth in Latin America, or take into account the lessons of past sovereign debt crises.
We have seen this movie before. The crisis that started in Mexico in 1982 soon engulfed much of Latin America, and the failure of political leadership saw massive public demonstrations. The public in most of the region’s countries rejected authoritarian regimes and embraced democracy. Fortunately, a number of outstanding political leaders emerged who could promote democratic approaches while building support for difficult, yet essential and eventually successful, economic policies. Their efforts made it possible to design and implement the Brady Plan that paved the way to regional economic resurgence.
The political threat in a number of European countries will come ‑ it already has in Greece and in Italy ‑ from populist politicians, unless today’s euro zone political leaders act with real urgency and in concert to focus on growth. Despite the rising political risks, both the European Commission and German public officials are unwavering in this fourth year of continuous and escalating euro zone crisis to call on all the governments facing economic difficulties to further consolidate their budgets. They seem oblivious to both the political risks of such a course and the resentment that is building in political quarters in several European capitals toward Brussels and the German political leadership.
Markets will not be patient for much longer, unless there is resolute action. In addition to an ECB interest-rate cut, there needs to be a package of actions that includes a) an acceleration of plans along a firm timetable for a euro zone banking union; b) clear statements by the European Stability Mechanism’s managers and the ECB that support the availability of finance to Italy and Spain and possibly other zone countries that go through periods of political instability; and c) a timetable to move toward a fiscal pact.
In addition, the ECB and the stronger European economies must work with all of their euro zone partners to emulate the kinds of policies that were implemented, for example, by the governments of Brazil in 1994, South Korea in 1998 and Turkey in 2001, when confronting their own crises. In each case, the governments demonstrated the leadership necessary to win public support for their policies while underscoring the importance of reviving financial market confidence. They put in place policies that boosted productivity, strengthened competitiveness, revived growth and rapidly regained capital market access.
Absent this kind of leadership in the euro zone, the mounting economic difficulties in the countries in crisis will aggravate the rising problems in other euro zone member nations, and increasingly affect Europe’s trading partners. Urgent action is essential to prevent this crisis from further damaging prospects for global growth and trade.
PHOTO: A button for emergency calls is seen next to the euro sculpture outside the headquarters of the European Central Bank (ECB) in Frankfurt, February 5, 2013. REUTERS/Kai Pfaffenbach