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Wednesday, 16 May 2012

Five necessary factors for an economically healthier Europe… and why the EU neglects three of them

Today was just another day at the office:

-      Angela Merkel speaks on Greece that it should remain a member of the Euro-zone and that Europe will never let the country down, but her story sounds hardly convincing.

-      ECB Chairman Mario Draghi and Chief Commissioner José Manuel Barroso, the ‘Starsky and Hutch’ of European politics were spilling their guts on Greece in a ‘bad cop, worse cop’ performance. They tried to convince the Greek citizens to do their patriottic duty, by voting in favor of the austerity package. Democracy is nice, as long as people don’t vote for the wrong cause.

-      Other politicians and pundits were stating about Greece that it was 'five seconds (!) for  twelve' and that an exit of the Euro-zone might seem inevitable nowadays, but would still mean disaster for the whole Euro-zone, starting with Greece, Portugal, Spain and finally Italy.

-      A third group of politicians and pundits is calculating ‘what if’-scenario’s for Greece with three digits behind the decimal point, in order to show what every scenario would cost the Dutch and European citizens.

-      One brave Dutch columnist (link in Dutch) stated that what the Greeks achieved during the last year was nothing short of an economic miracle, sweeping away British 'Thatcheronomics' in the eighties by a factor eight. He pleaded for giving Greece a break and sligthly slacken up the austerity program, replacing it with some pork for economic growth, like structure funds and subsidies. His plea, although heartfelt and very sensible, was drowning in a sea of cheap cynicism, feelings of revenge and envy towards Greece in the other newspapers and economic broadcasts.

-      Loose news items spoke of brutal Greek violence against a German member of a supervisory committee on Greece and a Dutch inhabitant of this country.

-      The European stock exchanges meandered around yesterday’s closing rate, after a number of days with substantial losses.

-      The fixed income experts signalled ‘larger than ever’ spreads between the German bunds at one hand and the Spanish sovereigns at the other.

Like I said: ‘a typical day at the office’…

Let’s look at things from a slightly different point of view. I am convinced that every recipe aiming to help Europe return to prosperity, must at least contain the following ingredients:

-      Budget stabilization
-      Debt and interest control
-      Jobs, jobs, jobs
-      Restoring consumer confidence
-      Balance in the international trade between North and South Europe.

However, when these five ingredients are ALL necessary to restore prosperity in Europe and the Euro-zone, why are three of those so structurally neglected by the European Union? That is the 1000 billion Euro question, litterally!

I want to look at these five factors by mentioning why they are so important. Then I will try to find out why three of these factors are neglected by the European Union.

Factor 1: Budget Stabilization

Whether you like it or not, stabilization of the European countries’ state budgets towards a rate close to or below the 3% threshold of the European Stability and Growth Pact, is inevitable:

-      The bigger the void between income and expenses, the more money must be borrowed at the financial markets to cover this void. Borrowing more money means paying more interest…

-      A larger budget deficit means that the financial markets start to worry on a country’s financial stability. Worrying financial markets  mean paying more interest…

-      A larger budget deficit means that a country can lose its current rating at the most important rating agency’s. Losing your rating means paying more interest…

There is no way to blow a hole in this reasoning. Therefore countries need budget stabilization.

Factor 2: Debt and interest control

This is the Siamese twin sister of the first bullet. A larger budget deficit means increasing state debt and increasing state debt means paying more interest. Increasing interest payments mean that the budget deficit is even harder to control. This is almost a perfect catch-22 situation. This explains why both factors (budget deficits and state debt) are so extremely hard to fight, once they are there.

While both budget and state debt were fairly controlable in most Euro-countries at the beginning of this century, it is a fact that the 2008 banking crisis caused both to explode. Especially in the south-European countries, but also including the UK, France, Belgium AND The Netherlands with their weakly financed, extremely large banks and financial institutions.

Both factors are definitely at the EU’s retina. They should be, let there be no doubt about it.

Factor 3: jobs, jobs, jobs

People that have a steady job:
-      spend a substantial part of their income on consumption of luxury goods;
-      have in general a good mood and trust their government;
-      pay VAT (Value Added Taxes) and income taxes on it;
-      cost the state in general very little money;

Therefore a competitive trade and industry with sufficient commercial jobs and low unemployment is THE recipe for a healthy economy.

While Austria, Germany and The Netherlands show in general perfect marks for (youth) unemployment, the (youth) unemployment rates of the PIIGS, the East-European countries and France give you goosebumps.

Still, it seems that every European country is ‘a one man show’ in creating jobs. Some countries are extremely successful in it (Austria, The Netherlands) and other countries, like Greece, Spain and Portugal fail hopelessly.

Lowering income taxes, luring foreign companies with state subsidies and exotic tax breaks and maintaining a wage restraint policy for a number of years were the tricks that the European countries played on eachother during the last decade. The result was a pan-European race to the bottom, with clear winners and pitiful losers.

The sad truth is that nowadays the European joblessness and a pan-European approach towards employability is still not really at the retina of the EU and its political leaders:
-      The successful countries don’t want to share their jobs and success factors with the other, less successful countries;
-      The losers of this battle – especially the GPS-countries (Greece, Portugal and Spain) lost track – often have to fight their labor unions, local government bodies and special interest organizations, as well as the people that do have a steady job, to achieve change in the old and outdated labor rules;
-      The neo-liberal roadmap of the European Union and the increasing globalization during the last twenty years have caused a lot of suspicious feelings among the people at the wrong side of the bottom line. To put it plain and simple: Europe isn’t trusted anymore by the people that need it most;

Instead of developing a pan-European approach for spurring employment and employability, the general approach remains: every country for itself and God for us all. This way of working has brought a muddle-through scenario on Europe since the crisis started. At this moment, many countries are close to or in a recession.

Factor 4: Restoring consumer confidence

While factor 3 is largely responsible for declining consumer confidence, other important factors are the banking industry, the commercial and residential real estate market and the personal indebtedness of European citizens.

The European track-record during the last decade concerning all these factors is hopeless.

The European banking industry is still extremely weak in spite of the billions and billions of Euro’s in government aid that have been pumped in it. Banks were ‘enslaved’ by the excessively harsh Basel III rules for liquidity and solvability and the European Commission rules for receiving state-support, while at the other hand the EU allowed that nothing really changed in the European banking industry. Banks are still too big to fail and are nowadays more than ever looking for the investments that bring the big yields, in order to meet the Basel III demands. This seems a recipe for disaster.

The commercial and residential real estate markets in countries like Spain, The Netherlands, Ireland, Greece and increasingly Germany and Belgium are a disaster that still keep enormous amounts of private, bank and state money locked up. Excessive housing prices are the main factor for the personal indebtedness of many Europeans.

Europe, however, keeps silent like a mouse on these extremely important factors for restoring consumer confidence. There is a lot of movement, but extremely little action from the EU itself to change this situation. Almost all actions of the ECB and other European institutions are aimed at maintaining the current status quo, in order to not let things get worse. Is this a solution? No, it isn’t.

And the consumers with an average income in Europe? Many have waved their white flags and simply stopped spending outside the necessary purchases.

Factor 5: Balance in the international trade between North and South Europe

When you look at the export data of the Euro-zone, you will find that the North- European countries generally have a trade surplus and the South-European countries, including France, have a trade deficit. It is as simple as this.

You would suggest that from an European point of view, this is an undesirable situation.

The North-European countries have in fact been using all kinds of ways to deploy a ‘beggar thy neighbor’-policy on South-Europe: a.o. wage restraint in Germany, extremely favorable income, dividend and corporate taxes (Ireland and The Netherlands) and banking secrecy acts that attracted enormous amounts of (black) investment money (Belgium and Luxemburg).

These factors, in combination with the generally much more favorable circumstances for industry and agriculture, made that the North-European countries have the South-European countries at a leash. The results are clear: low unemployment in the North and high unemployment in the South of Europe.

While it is not easy to say ‘HOW’ it should happen, it is clear THAT there should be more balance in the trade between North and South Europe. In my opinion it is also clear that the EU should have a leading role in such an operation, by more effectively enabling subsidies, structure funds and growth programs in the South-European countries (The PIIGS) and France.

Why this doesn’t happen? One word: Germany! Germany is considered by all (including Germany itself) to be the  motor of Europe. Everything that would change this position, will probably be vetoed by the German chancelor Angela Merkel or her successor. Most European countries are too scared to put real pressure on Germany in this matter. Other European countries, like Belgium, The Netherlands and Finland hide behind the wide German back and keep also their trade surplusses intact.

This is the reason that this imbalance between North and South Europe remains. An imbalance that could eventually lead to the demise of the European Union.

Most European politicians know that these five factors are decisive for the success or failure of the European Union as a whole.

Still, there is a lack of political courage at most Union members to look at these factors with a European view, instead of the narrow national view. Europe is at best the ideal patsy for when things go wrong: we were successful, but Europe failed. This makes the European Union such a weak institution. 

The biggest display of this weakness are the very weak official representatives of the EU: José Manuel Barroso, Catherine Ashton, Herman van Rompuy, Olli Rehn and Mario Draghi. All smart, sensible and politically sensitive people, but with the charisma of a cardboard box. Europe deserves better leaders.

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