Europe's dangerous illusions

The calm is deceptive - chaos can erupt in Europe again any moment

In Rome Italian politicians, unable to reach any reasonable compromise, had to re-elect 87-year-old Giorgio Napolitano as head of state. The first thing that Mr Napolitano did after being re-elected was to scold these politicians for their failure to do what needed to be done to get Italy out of its deep economic crisis. Nobody knows when a new government will be formed in Rome that will be able to address the pressing challenges posed by a steadily deteriorating situation.

In Paris, President François Hollande is embroiled in political scandals and untimely diversions - the boiling dispute on gay marriage, for example - while unemployment keeps rising and the economy keeps sinking deeper month after month. Everybody has known since last summer that the official objective of bringing the budget deficit back to three per cent of gross domestic product (GDP) for this year was just a pipe dream, but Paris had to wait until last March to admit the obvious reality. It is now recognised that whatever meagre growth that has been forecast for this year is to be forgotten - in fact France will have negative growth in 2013. And the forecast of 0.9 per cent growth for 2014 has now been revised to 0.7 per cent.

In Berlin, every decision or action by Chancellor Angela Merkel and Finance Minister Wolfgang Schäuble - the duo supposed to hold the key to any problem related to the European crisis - is taken with only one consideration in mind: the impact that initiative or decision will have on the outcome of the forthcoming parliamentary elections next September.

Meanwhile, in Lisbon the Supreme Court has ruled unconstitutional - and thus abrogated - some key austerity measures in the government package designed under the supervision of Brussels, the European Central Bank and the International Monetary Fund (IMF), officially meant to help Portugal correct its structural economic flaws and get back to a sounder path. In Spain, the government is finding it increasingly difficult to implement austerity policies and reforms at a time when general unemployment stands at 28 per cent - between 45 and 50 per cent for young people - and when an increasingly restless population is fed up of belt-tightening with no light at the end of the tunnel and, in fact, no end to the tunnel. The picture is exactly the same, if not worse, in Greece, despite some figures showing a rise of exports.

You wonder what extreme indulgence in wishful thinking had induced some business and political leaders at the beginning of the year to proclaim in some international fora that the worst was presumably over for the European crisis. Indeed the markets had calmed down because last fall Mario Draghi, president of the European Central Bank, had declared that the ECB would do what it takes to preserve the euro; indeed some structural reforms have taken place in the "Club Med" countries. However, Europe is far from being out of the woods even by the wildest optimistic standards.

Nowhere can we see any significant easing of the economic crisis. Even Germany, the roaring engine of Europe, will be lucky to do better than zero growth this year. Having discovered the common-sense fact that austerity measures have a much deeper impact than pure econometrics would indicate when such measures are implemented brutally, on a broad scale and simultaneously by many countries, the IMF has supposedly convinced Germany to be more flexible on the time frame it had imposed for crisis countries to go back to that magical three per cent ratio of budget deficit to GDP. This provides some solace. However, the damage created by the blind overemphasis on austerity remains - the scars are getting deeper not only in the economic domain, but also psychologically and politically.

The alert about the Cyprus crisis and now the concerns about Slovenia show that beneath the apparent quietness in the financial markets, things can go haywire again any moment - whether because Italy will continue to lurch into political paralysis, or because doubts will keep growing about France's ability to straighten its course, or because of whatever gets into the heads of financial market operators.

Two illusions need to be deflected. The first one existing in some circles, especially in Brussels and in Germany, is that it is basically a matter of hanging tough, of being patient and enduring the storm. The hope is that when the austerity measures and the structural reforms have brought their expected results, and when the global economy has returned to more solid growth, everything will be fine again. It won't happen; this crisis is a major turning point. The mantra repeated ad nauseam that "Europe needs more integration" does not do anything to address the real situation. By the way, Mr Schäuble recently poured cold water on the hopes that a European Banking Resolution Authority could be put in place by the end of this year, explaining that this would require a change of European treaties that would have to be endorsed by all the euro zone countries' people or Parliaments - which means that this will be, at best, quite a few years down the road.

The second illusion is to think that Germany will agree to "do its part" to help ease the crisis by taking some measures to increase domestic consumption and to liberalise its services sector further and, thus, provide additional export opportunities to the countries in crisis. This is not going to happen, because this runs directly counter to the German economic model based on export-oriented growth and steady restraint on wages to sustain international competitiveness. The ratio of export of goods and services to GDP is 50 per cent for Germany, against 27 per cent for France and 29 per cent for Italy. So, to put it bluntly, the Germans have no intention of adopting the Latin European model. They want Europe to adopt the German model that Chancellor Merkel has claimed should be what the rest of the world must imitate.

Unless these two illusions are dispelled and European leaders come to terms - in a realistic way and not through the usual tired mantra of "more Europe" - with the huge structural flaws and discrepancies that the present crisis has highlighted in the European integration process, there will be no way to escape the notion spreading around the world of Europe as a slowly sinking Titanic.

The writer is President of Smadja & Smadja
https://twitter.com/ClaudeSmadja