Europe’s necessary creative destruction

November 11, 2011

By Ian Bremmer
The opinions expressed are his own.

What we’re seeing in Europe — in rising Italian borrowing costs and the felling of two prime ministers — is the growing impatience of the markets for a resolution to the euro zone crisis. To put a finer point on it, the hive mind of the markets has decided it is not going to give Europe enough time to get its act together. The big institutions that drive the world’s economies are sitting on huge amounts of cash — enough to solve many of these problems overnight. But they have lost confidence in the ability of the European political system to deliver solutions that will work.

In a G-Zero world, where there is no strong global leader to direct the course of events, no one is interested in taking a flier on helping the Europeans get out of their mess. As the abortive G-20 conference showed last week, there is no backstop for any country or institution that makes an error in today’s environment, whether it’s tiny MF Global or the Chinese sovereign debt fund. In the postwar era, the Marshall Plan was the very definition of global security — it was a huge commitment by the U.S. to rebuild Europe into the economic force (and not incidentally, trading partner) that the world needed. Today, there is no Marshall plan for Europe, from within or without.

That’s the high-level view of the Europe situation. The question everyone wants answered is this: what happens next? Start with Greece: the best possible outcome for that country has happened with Papandreou’s resignation and the selection of economist Lucas Papademos as Prime Minister of an emergency government. Papademos is committed to remaining in the euro and accepting the terms of the Greek bailout package. Despite the roller coaster ride Papandreou took his country and the euro zone on, Greece has now moved closer to the Spanish and Portuguese models for avoiding the debt crisis drama. In Greece, a resolution is starting to be reached. It’s not the beginning of the end, but maybe this is the end of the beginning.

The same can’t be said for Italy as the situation changes by the day. The decisive Senate approval of a package of austerity measures (by a margin of 156 to 12) was one small step for Italy in the eyes of the markets— and a big step toward Silvio Berlusconi resigning his mandate.  It’s a wonder that Berlusconi held on to power for so long; he burned up his political capital years ago with scandals of all stripes. His stepping down is good news for Italy in the long run, but the handover of power to likely frontrunner Mario Monti is a delicate process that will have to be handled with tremendous care.  Unfortunately for Italy, political drama has insured it will face a higher and longer level of scrutiny.

Markets will continue to demand extensive and enforceable changes in spending levels throughout the peripheral states. When Italy and Greece look more like Spain and Portugal, the bond markets will treat them more like Spain and Portugal.  But that alone won’t solve the problem: investors are going to demand to know what happens next time any euro zone periphery country is on the brink of collapse. Euro zone institutions and politics have to be reshaped to prevent this type of crisis from ever happening again. Until this risk is mitigated, lending costs will stay high for a long time to come.

Case in point: I talked with about 200 international financial executives at a conference two weeks ago. 92 percent thought a “Lehman event” could easily happen once again somewhere in the world. Because we all thought the economy had been getting better over the last few years, we took our eye off the ball when it came to shoring up the global financial system and making the necessary structural fixes. In the U.S., President Obama took up health care. A weak Dodd-Frank bill passed. In the global financial system, Basel III has gone nowhere. And so every time the markets are rattled, we stare down the financial abyss, again and again.

I’m an optimist on the euro zone; I still don’t think it will fracture. The political will to stay together is too great; the mechanisms for countries to drop out are too complex and undeveloped. The institutions that compose it will get stronger — eventually. But that will be a long time from now. Until that day, we’re likely to see a lot of economist Joseph Schumpeter’s “creative destruction” — but as applied to financial systems, rather than corporations. Much of the financial edifice of the 20th century is yet to come crumbling down. To fully rebound from this era of crisis, more of it must.

This essay is based on a transcribed interview with Bremmer.

Photo: A man walks past signs that read, “For the good of Italy: Berlusconi resign” in Rome November 11, 2011. Former European Commissioner Mario Monti has emerged as favorite to replace Silvio Berlusconi as prime minister.


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All that is solid melts into air.

Posted by WhyADuck | Report as abusive

Good to read a more productive and stimulating line of analysis.

A welcome relief from the gossip and partisan headlines.

Posted by scythe | Report as abusive

Take this analysis with a grain of salt until Bremmer’s prediction of disintegration in Libya comes true. He claims Libya will go the way of Iraq, without considering a small population of religously similar tribes. I sort of remember alot of shooting, car bombs and America hole up in the Green Zone in Iraq. His analysis of the EU is also half baked. Missing is the rebuilding of Libya, puffing up Southern European trade and development, as well as the savings Europe increasingly enjoys now from nearly 40% renewable energy.

Posted by Kingsago | Report as abusive

“Greece: the best possible outcome for that country has happened with Papandreou’s resignation and the selection of economist Lucas Papademos as Prime Minister”

How is more neo-liberalism and more debt a “solution” to anything.

Just like underwater mortgages in the US with no prospect or ever being payable, the time has come for massive write-offs and restructuring the banking system from TBTF to a regulated public utility model.

Enough neoliberal baloney.

Posted by upstater | Report as abusive

I don’t find any “neo-liberal” elements here, but rather a thoughtful and cogent analysis. However, the cost of borrowing staying high is probably the best medicine to convince these peripheral Eurozone countries (plus Italy) to stop borrowing. And debt and overextended borrowing are hardly liberal concepts, as we know from our debt and borrowing record under Reagan, Bush I and Bush II.

Posted by justine184 | Report as abusive

For anyone who wants to know what’s going to happen next in the Eurozone crisis, with solutions, this guy has been right all along…led the bandwagon everyone is now jumping on. A MUST READ. 1/11/09/reality-hits-the-eurozone-finall y/

Posted by sarkozyrocks | Report as abusive

If Europe needs a new Marshall Plan because, after 60 years of political integration, it is in the same economic position it was at the end of WW2 then it would be fair to say the EU has totally failed the people of Europe.


Posted by RamonZ | Report as abusive