Europe on the brink of collapse

The Euro-zone is in a spiral of self-destruction as its crisis-hit economy heads from bad to worse

Collapsing confidence, tumbling stock markets and a sickly currency take second place to a spectacular public row between the president of the European Commission and the European Central Bank on whether the central pillar of policy is "stupid" or "indispensable for economic and monetary union".

Even by the standards of the "fudge and mudge" political culture that has long prevailed in Europe, it is hard to believe it has sunk to this.

Pork-barrel spending or utterly inflexible central bank rules: one or the other of these roaring dinosaurs will have to give. But in this epic battle it is the economic future of Europe that is giving first.

While this battle rages, the Euro-zone economy is going from bad to worse. It was hardly surprising that many missed the devastating one-word summary of the German economy by the country’s equivalent of the CBI last week: "catastrophic".

From the bottom to the top, but especially at the top, Europe is in a deepening mess. The international economic downturn has contributed to continental woes. But that downturn is not the cause, or the proximate cause, of Europe’s stunning reversal of fortune.

The cause is a self-destruction wrought by a political elite that has wrapped itself in fantastical self-delusion about the superiority of its economic system, the coming ascendancy of the single currency over the dollar, and the tide of wealth and prosperity that would inevitably flow from the relentless pursuit of "ever closer union". Here, on an epic scale, has been a procession of naked emperors who cannot begin to grasp why the world has stopped applauding.

For the Euro-zone, the applause stopped long ago. In the cacophony that passes for policy coherence there has come an absurd but utterly predictable result: far from the euro providing greater stability and a platform for better performance as its apologists claimed, the economies inside the Euro-zone are now faring worse than those outside.

This year will be the third in succession that the economies of the EU 15 have in aggregate outperformed the Euro 12. For this year and next it looks set to be the case that Britain, in GDP growth terms, is better off out. Those five economic tests behind which the government has hidden should be stripped away to show a glaring, humbling truth: if it’s economic performance you want, you’re better off out.

Nothing has more exposed the myth of the superior continental economic model than the flight of capital out of the Euro-zone and the stock market collapses this year. They have been breathtaking in their severity. At one point this month the German stock market was showing a collapse of 70% from its peak, double the percentage fall in the Dow Jones. The full consequences of the destruction of savings on such a scale and at such a pace have only just begun to make themselves felt.

Barely a week now passes without another red pencil taken to forecasts for economic growth in the Euro-zone. Last Friday, it was the turn of the National Institute for Economic & Social Research. As if 1.4% growth last year was not slow enough, it now forecasts that the Euro-zone will only manage growth of 0.9% this year and 2.1% next.

As for Germany, which accounts for about a third of output in the zone, GDP will rise by only 0.4% this year, and by 1.7% next, a shadow of the subdued growth in America - the economy that Europe so despises. On Monday, the keenly awaited Ifo index of business confidence is set to show a further fall for the fifth month running. On top of slowing demand, German business now has to contend with a coalition that has proffered yet more of the disease as the cure: yet more tax.

It is not the world slowdown that has caused this performance collapse, but the interaction of entirely self-inflicted wounds: over-regulated labour markets, a relentless rise in the government share of the economy, a growing tax burden, regulation out of every orifice and a desperate rearguard action against all and every attempt to dismantle state aid and subsidies. The same clique that greeted the bursting of America’s new economy bubble as proof of the flawed Anglo-Saxon model is the same one that, now their own economy has fallen into a far deeper slowdown than that in the US, turns to blaming US policymakers for not doing enough to pull the rest of the world including the EU out of the mire. To listen to Europe’s political elite is to hear the pathetic cry of the bankrupt that someone else spent all the money. As for Germany, the powerhouse of the 1950s and 1960s has long given way to lethargy and laziness. Reds and Greens attack what is left of a once proud enterprise culture. They declaim their country in the Bundesrat like latter-day Tom Paines. But truly, it is they who pity the plumage and forget the dying bird.

Despite all this it has long been the belief of EU apologists in Britain that if only we engaged "at the centre of Europe" we would "win the argument" and slow the drive to ever closer union and ever greater centralism. But this is to ignore the fact that there are large sections of opinion in continental Europe that do not share the political and economic attitudes of the Anglo Saxon world one iota. Indeed, not even in the disintegration of the Growth and Stability Pact is there much cause for British reformists to cheer. It was Prodi no less, who repeated his call last week for "a single economic government for all countries that share the same money", with more power to the Commission to enforce a Stability Pact duly doctored to his liking.

This call was echoed by members of the EU’s latest triumph of hope over experience, the Convention on the Future of Europe, whose economic committee called for the introduction of qualified majority voting on tax harmonisation and for strengthened economic co-ordination between the member states.

As the economist Stephen Lewis eloquently argues: "In the circumstances it is questionable whether UK ambitions in the EU are realistic."

In any event, there is no guarantee, he adds, that what emerges from the current crippling stand-off between Prodi and a European Central Bank that seems bent on holding out against interest rate cuts until the incipient recession has turned into the full-blown type, will be a substantial improvement.

It is the basic principles on which this monetary union rests that are deeply flawed. No amount of dissemblage about five economic tests makes up for the failure to recognise and attack the profound structural and conceptual flaws that lie behind this currency union and the crisis that has developed within it, one not of performance merely, but of survival. Here was a construct that was never an end in itself but an instrument intended to drive ahead towards "ever closer union" and it is that drive, and the Bonapartian vanity behind it, that is leading Europe to ruin.

Some take comfort this weekend from the news that Peter Hain, the government’s "Mr Europe" has been moved to the Welsh Office. But the balance of influence in the Cabinet has moved if anything in favour of the pro-Euro camp. If that is good news, at least one does not need to look too far to see what bad news is like.

Also with globalism, the goal is to get wages lower and lower. Chinese can work because they'll take $.25 an hour, Mexicans want $.60 an hour which is now too high. With good economies, average wages are going up and then more people can buy more, with global economies, average wages are going down and then more people can buy less.

Re #7

I agree. The problem with Europe is that it has been so reluctant from coming out of the system which did not work. Socialist-intertia and irrational exhuberanc are both detrimental. Capitalism with prudence built-in is the way to go, in my opinion. By prudence, I mean the restraining of speculative impulse in financial markets.

Re #15

In reality, globalism only served to help big financial entities make fast bucks globally. I do not know if they were able to keep the bucks they earned. I know that this is not the official reason for pushing globalization. But it ended up that way. The globalization should have happend spontaneously just as the development of capitalism itself. Some big boys tried to shape it in their way, pusing too fast and distorting it to benefit their interests. Now we are cleaning up the aftermath of their wild-partying. The legacy of Clinton-Rubin years.

No, but they can tell you what the economic numbers are. If you prefer to keep your head in the sand that's up to you. Unless the long-forecast (by the pessimists) double-dip comes into being, the numbers show this is a shallow recession so far, thanks most likely to the Bush tax cuts.

The Great Depression was preceded by a Stock Market crash that was caused by grossly inflated stock prices. Some were 40% over their true value when it all crashed. Judging from my 401K plan the stocks are falling quite fast and I don't see anything on the horizon to turn that around. What I see here are companies laying off --1200 in just this town I'm near last week, and the economy here was in free fall several years ago. For now people are still buying but how long can they buy after their unemployment runs out?

And is Bush really cutting government spending to match the cuts in tax revenues from manufacturing companies that are leaving in droves? Also when the laid off employees don't pay taxes, is the government cutting back? One thing worse now than we had before the 1930s is our enormous welfare system, how do we cut that back without getting riots?

My answer; let the markets dictate, those commies will die by their own swords/deeds. We're going to have some heavy duty rumble and tumble, some extremely unstable markets, so be it, but after the dust settles everyone will be better off.
Free markets will allways prevail, like it or not!

I agree we're entering a hard-assets market like the one that accompanied Jimmah Carter's insane inflation. Paper assets will be out of favor for a time and no one is going to be enthusiastic about the market for a while.

There are some real changes in the world, too. In my estimation the future of oil is the biggie. Our entire economy runs on oil and the Saudis are making some curious moves, like trying to buy nuclear weapons. The next 10 years will be very interesting as new power balances and alliances form and re-form.

Re #31

It is a shame that many people do not get it until they face an abject failure. I hope that people in the future do not forget lessons learned in 20th and the beginning of 21st century. Because too many people died and too much lives have been destroyed to learn this simple lesson.

"It is not the world slowdown that has caused this performance collapse, but the interaction of entirely self-inflicted wounds: over-regulated labour markets, a relentless rise in the government share of the economy, a growing tax burden, regulation out of every orifice and a desperate rearguard action against all and every attempt to dismantle state aid and subsidies."

Does this sound familiar? When people complain about manufacturing leaving America or about the cheap labor in China--I always think of these points. America is marching toward the same destruction due to the over-regulation, taxation and the massive welfare state. I agree with the writer above about the importance of a gold standard, too.

Yep, socialism sucks, doesn't it?

Mainland Europe is on its deathbed, poisoned by too many years of socialism. They've got one way out. Ditch this socialist garbage. No more overregulation of business. No more cradle-to-grave welfare. And put an end to the ridiculous tax levels. Myself, I think they are too stubborn and too locked into their liberal extremist ways to ever do it. To turn into a true capitalist society would be an admission that we Americans are right, that we are smarter than they are, and that the policies of the extreme left have failed yet again. The only bad thing is that it will create some problems here in the US, too, but given the arrogance and elitist attitude the Europeans have shown in recent years, I cannot feel sorry for them when this comes to pass.

Re #37

They must return to a real religion if they cannot live without a religion. So far leftism has not been so much a set of social policies as a substitute religion, a poor substitute. Let their society be governed by a realistic sytem which acknowledges human limits as well as human potential. If they insists on having the heaven on earth, the only thing they get is the hell on earth.

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