Global Agenda: Tidings of comfort?
The improved atmosphere in Europe is something to be enjoyed while it lasts, but is not an indication that the financial crisis is over.
Euro symbol near European flags Photo: REUTERS/Francois Lenoir
What’s news in Europe? On the basis of developments in the financial markets,
there seems to have been a dramatic improvement in the economic and financial
situation of the periphery countries, namely Greece, Italy, Portugal, Spain and
Ireland. Known collectively by the unflattering acronym “PIIGS,” these have been
the epicenter of the wider European economic and sovereign-debt crisis for over
However, things have changed. As usual, the change shows up
most strikingly in the stock markets. To take the extreme example, the main
index of the Athens Stock Exchange slumped to about 500 in July, but it has been
trading between 850-900 in December. A profit of 75 percent to 80% in half a
year is certainly cool, but not many people recommended taking the plunge into
Greek equities in July, and probably very few had the guts to actually do so.
The exchanges in Lisbon, Madrid and elsewhere have also recorded large jumps,
albeit smaller than those of Greece.
More important, by far, is that the
market for government bonds of these countries has improved
The spreads between the yield on Italian and Spanish bonds
and those of Germany have shrunken significantly, so that, while still large,
they are no longer “life-threatening.”
All this has been achieved on the
basis of a firm commitment by the European Central Bank to buy the bonds of
troubled countries, subject to various conditions – of which the most important
is that the countries themselves apply for a rescue package and then accept the
(onerous) terms that the lenders (read Germany) will demand.
impressive of all is that the improvement is not limited to the financial
markets, which, as more and more people are realizing, are entirely manipulated
by government and central-bank activities and barely function any more in their
primary task of “price discovery.”
Spain has become the poster boy of the
improvement under way in economic structures; the Rajoy government has passed,
in the teeth of intense opposition from unions and sections of the public,
landmark reforms in the labor market and elsewhere.
The goal of these
reforms, in all of the PIIGS countries, is to make their economies more
competitive with Germany and the other “northern” EU countries. The problem for
the periphery countries has been that their labor costs were far too high,
relatively, their productivity too low and their laws too rigid. Taking a leaf
from Germany itself, which underwent a painful reform program in the years
2003-2008, the Spanish and others are trying to improve their competitiveness
without using the traditional method of devaluing their currencies. This is
because, as members of the European monetary union, they don’t have their own
currencies anymore. The only choice left, therefore, is “internal devaluation,”
which means reducing wages and benefits sufficiently to get back on a par with
But the extent of the “internal devaluation” necessary (i.e.,
the reduction in real wages and ancillary benefits) is huge. Goldman Sachs,
which has no interest in exaggerating the severity of the problem, estimates
that in Greece and Portugal the reduction needed is in the order of 50% – and
even in Spain and Italy in excess of 30%. These are massive “adjustments,”
which, if carried through, will surely help bring down the very high
unemployment rates that these countries are enduring. But they also imply that
most working people will suffer very hefty reductions in their standard of
living. Of course, those who move from being unemployed to having a job are much
happier. But those who still have a job and are required to work in it harder
for considerably less real income are not happy at all.
Sachs is dubious that an “internal devaluation” of the size needed can be
imposed on the populations of these countries without a sociopolitical
There is, in addition, the very real issue of the banking
systems of the PIIGS countries, which are all bankrupt and are kept alive by
transfers from the ECB and/or Germany.
Spain, in particular, is belatedly
facing up to the consequences of a real-estate boom and bust that, on a relative
basis, was much greater than the one in the US and has gutted its
But the mega-problem of Europe going forward is that both the
financial and, especially, the economic aspects of the crisis are not limited to
the PIIGS countries. Rather, they encompass France, which is especially
resistant to structural reforms, as this year’s elections showed, as well as the
UK. Nor is Germany itself as strong and vibrant as it was, and it is certainly
incapable of carrying the PIIGS on its back for several more years.
short, it seems that the improved atmosphere in Europe is something to be
enjoyed while it lasts, but not to be taken as an indication that the European
crisis is over and that the euro, and the EU itself, are