What Will it Take for Europe to Wake Up One Day


(B) Europeans enjoy some of the best social programs in the world, from the highest number of paid vacation days, the shortest number of hours worked per week, early retirements, education and unemployment benefits paid by their governments. Europe is financing its social programs with large taxes, on households and businesses, and running large public deficits. And, the costs of those social programs are increasing faster than wealth is created. Instead of permanently crafting new regulations and new taxes to support their social programs, Europeans should focus their energy investing and growing their economies in order to create wealth.

Europeans public companies are much less profitable than their American counterparts, therefore, expanding less and hiring less. Raising capital for a start-up in Europe takes three to five times the time it takes in the US for three to five times less capital. And, Europe is not investing in tomorrow technologies. Even if at the Copenhagen conference, Europe was the most willing to reduce its carbon dioxide (CO2) emissions, according to a new United Nations Environmental Program (UNEP) research, Europe only spent from its 2009 economic recovery program the equivalent of 0.2% of its GDP in green investments, while the US spent 0.7% and China more than 3%. Even in Africa, Europe is losing its economic relationships with rich commodity nations such as Niger and Congo that are now looking to China for their financing.

European economies have two major structural challenges. The first one is that long-term growth in living standards can only be achieved by fundamentally raising productivity. Or in Europe since the 90s, wage growth is in excess of productivity growth. The second major structural challenge is that public funding for social programs has increased to support an aging population. This is not, however, a problem specific to Europe but also largely spread in the US and in Japan.

The 2008 financial crisis has worsened the fiscal positions of most European nations by first requiring them to support their financial systems, second by spending to stimulate their economies and last by lowering their taxes due to the economic recession. And, nations that had already accumulated significant public debts before the financial crisis are now at risk (like the US).

In addition, the tight monetary policies from the European Central Banks (in comparison to the low interest rates from the US Federal Reserve), and before this year, the appreciation of the Euro (due to Middle East and emerging market investors diversifying from the US Dollar to the Euro) that made it more difficult for European companies to compete in international markets, and you have finally the complete list of the ingredients to explain this week and this year Greek and other coming European economic disasters.

European countries, part of the Eurozone, cannot restructure their debts by issuing new debts in their own currencies. So their unsustainable public debts lead to credit crises and defaults on their sovereign debts which are government bonds issued in a foreign currency. That is what happened to Greece but could happen to Portugal, Spain, Ireland and the UK which are facing more and more the pressure of their sovereign debt investors.

The greatest achievement of the European Community is to have created a single market absorbing Mediterranean nations and emerging Eastern Europe democracies. But the European community has wasted too much energy creating a useless bureaucracy in Brussels and endlessly negotiating European treaties while gradually losing its economic competitiveness.

This week’s collapses of the London’s FTSE, Paris’ CAC 40, Frankfurt’s DAX and New York’s Dow Jones (and in particular the Dow Jones’ intraday on Thursday losing 1,000 points due to high frequency trading and even worse – human trading mistakes; very current during panic crises) are by all means very reminiscent of the 2008 stock market crashes.

The 2008 credit crisis started with the collapse of the subprime mortgage market, that was initially thought to be contained, and spread suddenly like a virus to the US financial system and later to the world financial system. Similarly, the collapse of the Greek economy could very well spread across Europe: Portugal, Spain, Ireland, the UK, Italy and France, all those countries have large public deficits as a percentage of their GDPs and sovereign debts (to the exception of Italy which, like Japan, has its government debt-financed mostly by the savings of the Italians themselves).

And to make things worse for the equity markets, investors are started to worry that Europe could certainly slow down the US and the global economic recovery.

While I am hoping that Europe will stop its political divisions and delays in decision making and moves quickly toward fiscal responsibility, the US should learn from the present European crisis. First, because the US is running like Greece a 10% fiscal deficit in 2010. Second, look at the damage caused by the Greek $400 billion public deficit, and imagine what could be the damage caused by the US $14 trillion public deficit! What is presently saving the US, is that the dollar is still, fortunately, the world reserve currency and the US has the largest and most liquid debt market. But if China, Japan, Saudi Arabia, and other foreign investors lose their confidences in the US, they will likely reduce their willingness to sustain further the US public debt. The longer the US waits to take the path toward fiscal sustainability, the more dramatic and the more limited will be its options.

In the meantime, I am still hoping that Europe one day will wake up and start to be more concerned about increasing its productivity and competitiveness than increasing its wages and social programs. Maybe when that will happen, it will be nice again to re-discover the richness of the Greek Mythology in the streets of Athene or admiring the masterpieces from Monet or Gaugin at the Musee d’Orsay in Paris without having to worry about an unexpected strike affecting your visit.

Annex 1:
Following are the fiscal situations and prospects as a percentage of their GDPs for some European nations according to “The Future of Public Debt: Prospects and Implications” from the Bank for International Settlements (BIC):

Annex 2: 
Following are the sovereign CDS spreads and several fiscal indicators for some European nations according to “The Future of Public Debt: Prospects and Implications” from the Bank for International Settlements (BIC):

 Nouriel Roubini interviewed on Friday, May 9th on CNBC: Crisis Economics
 Stephen Cecchetti, M S Mohanty and Fabrizio Zampolli, The Future of Public Debt: Prospects and Implications, Bank for International Settlements (BIC)
 A Silicon Valley Insider, The Public Debts of the Developed Nations Could Well Lead to the Next Financial Crisis, March 28, 2010
 A Silicon Valley Insider, Too Big to Fail, June 28, 2009
 A Silicon Valley Insider, The 45 Trillion Dollars Credit Default Swaps, April 5, 2008

Note: The picture above is the famous Paris’ bookstore Shakespeare and Company in Latin Quarter.

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Categories: Economy