Economic Storm Clouds Continue to Gather over Europe

In many ways Ireland is a “microcosm for Europe,” said Danny McCoy, the Director General of the Irish Business & Employer’s Confederation (IBEC) at the EIF Forum. He described the present situation as a “crisis of government and of business confidence.” Despite a partial rebound, domestic demand across the EU remains stagnant, or in some countries – Ireland, Greece, and Spain – is in decline.

As the European Union produces around 20 percent of global GDP, the crisis affects the global economy, as it means less business – from China’s factories, from U.S. exporters, from countries that produce commodities, etc. It also means higher unemployment, which lowers tax receipts and increases the demand on state treasuries for assistance to people and families in need.

While Ireland would fall into the “all of the above category” for most of those problems, and Greece remains the poster child for them, both are small nations, whose stability alone is not an existential one as far as the EU is concerned.

Spain, Europe’s fifth largest economic power, with its 20 percent unemployment, potential bank failures and declining economy is where the next crunch may well blow the EU apart. Italy has some of the same difficulties, but the consensus is that it will muddle through somehow, as it always has.

Exploding property prices fueled booms in Ireland and Spain; their collapse brought on the economic crisis, which has led to the austerity package encoded in the Stability Treaty. However, that has not helped the situation, as most economies – Germany, Austria and the Nordic countries excluded – continue to struggle.

“The real problem,” McCoy said, “is that Europe has no business model for growth.” It cannot be achieved by governments alone, but only by restoring business’ confidence in the future and assuring that investments will eventually be made. In a plea for a ‘yes’ vote he echoed the warning from Ireland’s Public Expenditure and Reform Minister, Brendan Howlin, that to achieve this result requires stability.

If McCoy’s analysis was mildly positive, his colleague on the platform, Dr. Constantin Gurdgiev’s view of Europe’s current situation was positively dire. A high profile financial expert, who heads the Ireland Russia Business Association, Gurdgiev described Europe’s business model as “getting along in spite of, not because of, the state,” which means that the “euro zone is not an engine for growth.” In his view European governments are overly reliant on debt, which means that investment is stifled, as too much money goes into financing governments.

These are “structural problems,” he said, which cannot be fixed without significantly changing the way the EU is administered. They have combined with Europe’s shrinking population (due to low birth rates and emigration) to produce a situation where there “are no drivers for growth,” and little chance that any can be created.

As far as the future of the euro zone is concerned, Gurdgiev described the present situation as “very difficult,” in the sense that the current disconnected structure simply doesn’t work, and the people who are charged with managing economic policy, including the euro, have so far appeared helpless to do anything about it.

He blamed the impasse on a lack of leadership, describing the EU as “stratified” with power devolved upon “a number of committees,” and “run top to bottom by the bureaucracy.” While the EU’s founders had a vision of a united continent with each member lending its strength to others, that “vision has been lost,” he said, and in his opinion it cannot be regained under the present EU structure.

These are fundamental problems. They go far beyond the immediate questions of whether or not to bail out Spanish banks, or even what will happen if Greek voters choose to elect representatives who would reject the bailout deal the country made with the EU when they vote on June 17.

The EU is both a state and not a state. While the leaders of the principle countries who make policy decisions, recently Germany and France, are elected, the people who actually run the EU through the European Commission are not.

As a result many Europeans feel alienated from the EU. Although they can vote for members of the European Parliament, it has little power. Faceless bureaucrats in Brussels carry out their jobs, and have provided a stable economic platform – until now. As both Gurdgiev and McCoy pointed out the current economic crisis has exposed the cracks in that system, and more menacingly, the inability of Europe’s leaders to so far do anything about it.