One of the more prominent pessimists on the future of Europe and the European Union is Willem Buiter, the Dutch chief economist of the American Citigroup.
He was responsible for the invention of the word “Grexit”, being a join of the words Greek exit. Lucky enough for Europe he proved to be wrong last year. Although the Eurozone has been clinging on to life by the skin of its teeth, the Eurozone and especially Greece survived the 2011 and 2012 legs of the Euro-crisis.
Still Buiter remains very pessimistic on the Euro-zone and Europe in general, according to an interview with Dutch financial newspaper Het Financieele Dagblad (www.fd.nl).
According to the article:
Buiter lost his confidence in Europe and sentenced ‘the old continent’ to a slow economic demise. In his Outlooks for Economies and Financial Markets 2013, he predicts that – except for Greece – also Ireland, Italy, Portugal and Spain (hence: the classic PIIGS) need to restructure their debt in order to avoid defaulting.
America will grow for almost 3% more than the Eurozone; the biggest difference since 1993. According to Buiter, things will remain this way. Within less than two years, the US will return to a real GDP per capita equal to 2007, only to surpass this level with 9 or 10% in 2017. In the Eurozone, however, the 2007 GDP per capita will not yet have been reached in 2017; the Eurozone will have missed this number by 3 or 4% and the peripheral countries will have missed this number by a lightyear.
Countries like Germany and The Netherlands will just do enough to keep the whole Eurozone from falling apart, but they will fail to keep the peripheral countries afloat. Eventually these countries will be “spat out” by the financial markets.
The reason for this difference between the US and Europe? Due to the aggressive monetary policy of the Fed and the American government – imprudent in the eyes of the Eurozone government leaders - and the way in which mortgage debt and other debts have been destroyed in the US, the American people and the banks have a very good chance to restart their lives with a clean slate. Thus the American people are ready to pick up the momentum at the end of the worst crisis in 75 years.
Europe muddles through the crisis, imprisoned in a circle of debt and penalties. Even the shield of the ECB – the possibility to buy limitless amounts of sovereign bonds from the Eurozone countries which are meeting strict conditions – will not be enough to get a grip on the situation in Spain and Italy. Buiter emphasizes on top of this that Greece will leave the Eurozone, even if the country isn’t pushed to the exit.
He predicts that the four European countries in the top ten of most competitive economies in the world- Germany, France, Great Britain and Italy – will all lose positions. Germany will be overtaken by India 2020 and Indonesia will have overtaken France and the UK. Italy will disappear from the Top Ten at all.
In 2025, the size of the Eurozone economy will only reach to 66% of the US economy from 78% in 2012. By the way, China will have overtaken the US as the number one economy in the world.
To be clear, I happen to agree with Willem Buiter’s analysis of the US monetary policy versus the policy within the Eurozone. Until now, the politicians of the Eurozone failed big time in solving the crisis.
Everybody who understands Dutch and wants to know how big the failure of the European government leaders has been during the Euro-crisis, should definitely read the truly excellent book: “the Eurocrisis, revealing review of political failure”, written by FD journalist and good friend Martin Visser. Since September, an updated version has been published.
Under the influence of especially Germany and the Northern European countries, the focus has been too unilaterally pointed at the monetary policy and fiscal austerity. The Eurozone leaders have forgotten that THE most important step for a healthy economy is… a healthy economy. Budget austerity and fiscal prudence is also important, but it has been mindless, imprudent policy to try to make the peripheral countries healthy by deploying one austerity measure after another. The results of this mindless policy can be seen in Greece every day.
Still, I am hopeful on Europe, without closing my eyes for the economic facts.
Although the overly cautious European policy will make the crisis last for a much longer time than strictly necessary – Buiter is totally right there -, at least it prevents the continent from the hyperinflation that is still looming after the extremely aggressive monetary policy that has been advocated by the Fed and the American government. People that don’t understand the German fear for hyperinflation, should look in the history books for the phrase ‘ Interbellum in Germany”. If you have been bitten by an alligator once, you will always be afraid for it!
Until now, the European leaders "managed" to not let the Euro-zone implode and I'm certain that the whole Eurozone, including Greece, will survive the Euro-crisis eventually.
And the main reasons that I’m hopeful are, that Europe is still at the epicenter of industrial development and the fact that the continent is still the warrant for skillfully, sometimes handmade, products of the highest quality possible. There is nothing that can replace the quality, craftsmanship and beauty of an Italian-made Ferrari, British tailor-made fashion and shoes, Swiss watches, German-made home appliances or French jewelry and Champagne. These are products that can survive the Chinese invasion of cheap imitations, as there is simply no substitute for it.
European companies like Philips, Fiat, Thomson, Daimler-Benz, Nokia and EADS have always been at the forefront of innovation and development. Most of these companies - if not all- will remain to be there, in spite of the fierce US and Far Eastern competition: simply, because it is in their heritage.
This is not meant as a commercial for European products, but to emphasize the fact that Europe has a lot to be proud of. What Europe needs now is a more balanced economic policy that looks at the possibilities and impossibilities of the European countries as is. European countries have battled against each other as economical enemies in the very recent past:
The Netherlands turned into Europe’s tax haven for legal tax avoidance and letterbox firms and had the lowest wage increases in recent years of the whole Eurozone, in spite of the fact that it is one of the richest countries in Europe.
Germany reduced its personnel costs drastically through ten years of wage austerity and turned thus in a competitive monster that ate the PIIGS alive.
Both countries flooded the peripherals with exports that have been too cheap for the factories in Italy, Greece and Spain to compete with and financed these exports by lending billions and billions of overly cheap money, knowing that the PIIGS could not devaluate their currencies anymore.
Italy and France went through decades of anemic economic growth, due to widespread (political) corruption (Italy) and an industry that is overly "lazy" and much too dependent on state-participation (France). Both politics and the labour unions in these countries scared away from the necessary changes to make these economies more healthy.
Spain, Portugal and Greece are still very much in the transition phase of growing from economies, based on agriculture and tourism into healthy industrial and services economies. This process had already been years and years underway before the Eurozone was formed and - as a matter of fact - it has been delayed by the Eurozone.
The same is true for the Eastern European economies: these are also in a transition phase, turning from centrally controlled communist economies into
market economies with reduced corruption.
These are difficult and hard-fought battles between conservative and progressive powers in these countries and it might take another decade before these battles are over.
The United Kingdom is a different story: if you would take out the London City, the UK would be in very big economic trouble. Luckily, the UK still has the City as this is the financial cork that keeps the countries, forming the UK, afloat. The main decision of the UK should be whether it wants to remain in the EU or not. The chance that the UK leaves the EU is 70% - 30% in my humble opinion.
Other Eurozone countries like Belgium, Austria and Finland are doing relatively fine. Belgium, especially, is going through a period of “political peace and quiet” after the “language-and-influence” wars between Flanders and Wallony and will hold its economic ground, is my assumption. Austria and Finland are small, but fine European powerhouses.
Still, whether you like it or not, the only healthy direction for Europe is towards more political and economic integration: a message that will not be liked by the Europe-haters that are omnipresent in Europe these days.
Together the European countries should solve the problems concerning the mass unemployment in the peripheral countries and the massive youth unemployment anywhere in Europe. The political leaders should develop plans to improve innovation, green energy development and industrial production in Europe.
Corruption and organized crime should be battled on a European scale. Industrial zones, transport and distribution areas and energy parks should be developed at the locations where they have the best chance for success. These locations should not be decided upon by local politicians that offer the best subsidy money and lowest taxes to large companies, but by a mutual interest for all European countries.
By doing so together, Europe can improve its chances against the US, China, India and the other BRIC’s.
Does that mean that the Eurozone and the European Union should turn into a United States of Europe? Not necessarily! All European countries have been different and will be for many generations to come. This has always been the strength (but also the weakness) of Europe and it has always been the basis of the famous European culture.
However, there is so much that the European countries CAN do together without losing that treasured culture. We – the European people – should just not be so afraid for it!