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.