It has been startling to watch Europe turn frugal overnight, Germans preparing to bail the weak and the ECB promising NOT to do certain things (and then doing them).
To what purpose?
They are all desperately trying to buy time in the absence of the one thing really needed to keep the debt dragon contained and successfully address the centrifugal forces tearing the Euro apart.
That something is the absence of growth. Old Europe (recalling Donald Rumsfeld) remains woefully ex-growth.
Bits here and there impress (the German export engine, north Italian creativity and fashion, Dutch trade).
But much more of Europe is without it. The Italian south sponging on its north. The endemic Spanish unemployment. And now we discover Greece and Portugal and their problems. Italy and Portugal in recent years have barely averaged 1% growth.
All these countries have rigid labour markets, high structural unemployment, inefficient bureaucracies, too many monopolies. Overdue supplyside reform is needed, indeed revolutionary stuff.
But this is not limited to the distressed countries. Germany also needs supplyside reform in order to generate more domestic growth than its export engine can generate.
Europe needs to grow, growing its tax revenue base, outdistancing its debt, making debt loads sustainable.
As the German Minister of Finance noted, you want Germany to grow more, but you don�t want him solely doing the pushing by increasing government spending or widening the fiscal deficit.
Instead, more long-term German unemployed need to be productively re-absorbed (thereby also assisting fiscal contraction through reduced welfare payments).
In the case of the distressed Club Med, these countries should function well even if the government bureaucracies were HALVED in size. Not that this is going to happen to quite this extreme degree, but it indicates the extent of available scope. In addition, their already far too many long-term unemployed need to be reabsorbed.
That means far more flexible labour markets, easier exits and entries and lower wage rates WITHOUT welfare incentives to stay on the sidelines longer than needed.
The present European welfare state is dying, its luxuries unable to be maintained at such low growth rates if it means steadily higher debt burdens.
So the spectacle of macro policy bending over backwards to ease market liquidity and prevent debt default is merely an attempt to create space time in which Europe will need to do something far more fundamental.
Europe needs to change its operating style, become again hungry for growth and less lifestyle preoccupied while encouraging rather than preventing competition (between vested interests and labour elites) or condoning large swaths of non-productive bureaucracy.
This sounds easy, right?
But even a casual stroll through the enchanting Club Med countries AND the richer parts of Europe tells you it won�t be. Indeed, some think it outright impossible, perverse even. If it was that easy, it would have been tried long ago. But they didn�t, for a reason.
Modern Greece is really an ex-Balkan state with its Ottoman feudal foundations rehashed into a local client state run by a small elite and greased by corruption in which private initiative cannot flourish.
The other country cultures similarly suffer from age-old afflictions which aren�t easy to jettison in favour of what a modern market economy requires.
The resulting debate falls into two distinct parts.
Namely those who feel different spirits don�t belong together and should split. And those who feel they do belong together for the simple reason of occupying the same space (home), but requiring offers from the weak as much as the strong to be workable.
On a ten year view, the true European revolution won�t be fiscal cleanup as budget deficits are shrunk and spiraling debts are arrested, or even the audacious manner in which the ECB of late is imitating the Anglo-Saxon central banks in preventing country defaults from gumming up the region and risking costly splits.
Instead, the real challenge is structural, aiming to restart economic growth akin to Europe�s post-war reconstruction. Annual growth of 1% in parts and near 2% overall isn�t enough. As the US has shown, GDP growth of 3% or better is what is needed, also bearing in mind the aging challenge.
The creative destruction of war and its aftermath can unleash such rejuvenation. Can the threat of financial unraveling?
Or are there easier outcomes, such as falling back on national currencies, taking the easy route, simply devaluing the currency often, even if this comes at the expense of a greater growth dynamic remaining out of reach (crises again becoming the regular stuff of life)?
There is a lot of fear driving Europe, about past disasters, future competition, how to pay for ageing and not wanting to lose the welfare advantages achieved.
But are these, and the fear of total financial loss, enough to transform European supplysides, overcoming inertia and ideological opposition (ideas), never mind vested interests richly served by the sclerotic present?
We are about to find out these next few years. Expect lots of water in the wine, but also genuine effort. The trick is not to confuse the two.
To what purpose?
They are all desperately trying to buy time in the absence of the one thing really needed to keep the debt dragon contained and successfully address the centrifugal forces tearing the Euro apart.
That something is the absence of growth. Old Europe (recalling Donald Rumsfeld) remains woefully ex-growth.
Bits here and there impress (the German export engine, north Italian creativity and fashion, Dutch trade).
But much more of Europe is without it. The Italian south sponging on its north. The endemic Spanish unemployment. And now we discover Greece and Portugal and their problems. Italy and Portugal in recent years have barely averaged 1% growth.
All these countries have rigid labour markets, high structural unemployment, inefficient bureaucracies, too many monopolies. Overdue supplyside reform is needed, indeed revolutionary stuff.
But this is not limited to the distressed countries. Germany also needs supplyside reform in order to generate more domestic growth than its export engine can generate.
Europe needs to grow, growing its tax revenue base, outdistancing its debt, making debt loads sustainable.
As the German Minister of Finance noted, you want Germany to grow more, but you don�t want him solely doing the pushing by increasing government spending or widening the fiscal deficit.
Instead, more long-term German unemployed need to be productively re-absorbed (thereby also assisting fiscal contraction through reduced welfare payments).
In the case of the distressed Club Med, these countries should function well even if the government bureaucracies were HALVED in size. Not that this is going to happen to quite this extreme degree, but it indicates the extent of available scope. In addition, their already far too many long-term unemployed need to be reabsorbed.
That means far more flexible labour markets, easier exits and entries and lower wage rates WITHOUT welfare incentives to stay on the sidelines longer than needed.
The present European welfare state is dying, its luxuries unable to be maintained at such low growth rates if it means steadily higher debt burdens.
So the spectacle of macro policy bending over backwards to ease market liquidity and prevent debt default is merely an attempt to create space time in which Europe will need to do something far more fundamental.
Europe needs to change its operating style, become again hungry for growth and less lifestyle preoccupied while encouraging rather than preventing competition (between vested interests and labour elites) or condoning large swaths of non-productive bureaucracy.
This sounds easy, right?
But even a casual stroll through the enchanting Club Med countries AND the richer parts of Europe tells you it won�t be. Indeed, some think it outright impossible, perverse even. If it was that easy, it would have been tried long ago. But they didn�t, for a reason.
Modern Greece is really an ex-Balkan state with its Ottoman feudal foundations rehashed into a local client state run by a small elite and greased by corruption in which private initiative cannot flourish.
The other country cultures similarly suffer from age-old afflictions which aren�t easy to jettison in favour of what a modern market economy requires.
The resulting debate falls into two distinct parts.
Namely those who feel different spirits don�t belong together and should split. And those who feel they do belong together for the simple reason of occupying the same space (home), but requiring offers from the weak as much as the strong to be workable.
On a ten year view, the true European revolution won�t be fiscal cleanup as budget deficits are shrunk and spiraling debts are arrested, or even the audacious manner in which the ECB of late is imitating the Anglo-Saxon central banks in preventing country defaults from gumming up the region and risking costly splits.
Instead, the real challenge is structural, aiming to restart economic growth akin to Europe�s post-war reconstruction. Annual growth of 1% in parts and near 2% overall isn�t enough. As the US has shown, GDP growth of 3% or better is what is needed, also bearing in mind the aging challenge.
The creative destruction of war and its aftermath can unleash such rejuvenation. Can the threat of financial unraveling?
Or are there easier outcomes, such as falling back on national currencies, taking the easy route, simply devaluing the currency often, even if this comes at the expense of a greater growth dynamic remaining out of reach (crises again becoming the regular stuff of life)?
There is a lot of fear driving Europe, about past disasters, future competition, how to pay for ageing and not wanting to lose the welfare advantages achieved.
But are these, and the fear of total financial loss, enough to transform European supplysides, overcoming inertia and ideological opposition (ideas), never mind vested interests richly served by the sclerotic present?
We are about to find out these next few years. Expect lots of water in the wine, but also genuine effort. The trick is not to confuse the two.
No comments:
Post a Comment