Europe in Crisis: Bolt from the Blue?

by Brad Rowe

I had the pleasure of attending a UCLA Center for European and Eurasian Studies (CEES) book talk with author Ivan Berend of the UCLA History Department. He invited discussant Stefan Biedermann, Deputy Consul General of Germany in Los Angeles to join him.

Berend’s book Europe in Crisis: Bolt from the Blue? described the history of the present financial crisis in Europe. He offers some policy and economic prescriptions to help the European Union emerge from the crisis with strength, peace and dignity.

HISTORY

Berend starts by referencing a Joseph E. Stiglitz quote which states that the financial crisis was “made in the U.S.”  Berend disagrees. He argues that despite the prevailing wisdom that says the crisis was borne of Wall Street, indeed ten of the eleven European Union countries caused their own crisis.

Specifically, Mr. Berend feels that, in the lead up to 2008: Iceland had relied on a system of irresponsible banking, Greece was engaged in chronic irresponsible government spending, and Ireland was feverishly caught up in reckless consumer spending.  Britain, Spain, Portugal, Hungary, Latvia and Romania he argues were similarly adrift.

He backs his statement regarding Greece by citing their national retirement ages, in some cases as young as 48 years.  A perhaps telling public spending gaffe during the 2004 Olympics allowed a $2.5 billion construction budget balloon to over $10 billion. When put into context with the widespread abject poverty so many Greeks are living in today, this opulence seems absurd.

GLOBAL CONNECTIVITY AND ARROGANCE

Connecting the European financial crisis to the global one, Berend gives the Lehman Brothers collapse and ensuing Wall Street panic credit for freezing international liquidity flows. This triggered a financial collapse, which in turn triggered the recession where the “real economy”–like industry, agriculture and the service sector–faltered.

An oddity among the twelve nations was Poland, which escaped the global crisis unscathed. This was not the case for most European countries, which ended up with a 14% reduction in Gross Domestic Product (GDP). Since the beginning of the recession, six countries were bailed out. Complete repayment seems unlikely as these sovereign are currently only able to pay the interest on these loans.

So, what happened?  First, globalization spread everywhere with its international interlinked finances. Secondly, neoliberal economics happened. Proponents of this economic ideology had declared victory over Keynesian economics and claimed there would be no more economic cycles.

As Ben Bernanke had called it, this was the “Age of Great Moderation. Robert Lucas, a Nobel Laureate from the Chicago School of Economics, had trumpeted the trust of markets and skepticism about government. Fredrich Hejek said “Stock regulation and intervention is bad, it is a straight jacket on business. It is the road to serfdom.”

Berend clarifies that European economic shifts exacerbated the problem. There was a 27% drop in industrial employment. In fact, finance, insurance, and real estate (or F.I.R.E.) were bigger sectors of employment than manufacturing and had grown six times faster than industry, agriculture and services.

The other contributing culprit to the financial collapse was the destruction of enforced regulation. With waves of neoliberalism in America, England and Germany, regulation had been essentially eliminated from the 1980s onwards.  Champions of deregulation were Reagan, Thatcher, and Chancellor Kohl.

Hedge funds became gambling institutions that won regardless of whether investors won or lost. Consequently, fund managers became eager to attract risky high yield investments. At the European Union’s (EU) very inception, Berend refers to the Euro currency and economy as a “birth defect” in that there was monetary unification without fiscal union. This was a problem because every country was totally different, each with its own fiscal traditions, taxation, and government policy. Greece and Italy had massive non-taxable informal “black economies”.  Systemic tax evasion defined Greece and Italy as well during this period.  Berend says this was not so for the core countries of the EU like Germany and France.

PRESCRIPTIONS

Berend suggests that the solution to the crisis is to reintroduce regulation and supra-national control. He envisions a “European System of Financial Supervision” for early warning.

Furthermore, he feels austerity measures integrated with growth policies should be a part of bringing Europe back to financial health. To reign in the peripheral countries like Greece and Italy, Berend prescribes a limit to credit extensions.  He goes on to say that any level of credit will be maxed out and spent regardless of ability to pay the loans back.

For the long-term, Berend suggested that quasi fiscal unification could be healthy. His suggestion calls for a movement toward federalization with all budget policy being centrally guided.

Finally, Berend calls on the Euro zone to set up a two-tier union in which some more fiscally solid countries join the “fast track” and others participate at a level commensurate to their stability.

FORECAST

Berend’s forecast warns of a continuing crisis this upcoming year. He thinks Greece and Portugal could possibly default on their debts and depart from the EU. Additionally, he signaled that Eurosceptic Britain and Nationalist Hungary may deliberately leave the union. Berend calls Britain the “inside outsider.” They have maintained that the EU capital of Brussels “…cannot dictate to us. We want to be independent.” 

GERMAN REDEFINITION

To all of this: Stefan Biedermann, Deputy Consul General of Germany in Los Angeles, departed from Berend’s analysis by saying the European Union is not financial. “It is a vision beyond war, rage and violence…it is built on a rock of friendship between Germany and France.”

He stated that war between those two historical adversaries today is unthinkable and warned against today’s youth taking for granted the peace and stability that the EU provides. He says “they don’t realize the thin ice we are moving on.”

Biedermann predicts that the EU will emerge stronger out of this crisis. He hopes that the experiment of bringing a continent together in peace will work. The “United States of Europe” is his vision for peace in the future.

Brad Rowe is a second year Masters In Public Policy candidate at UCLA focusing in Education, Crime and International Affairs.  Rowe is also a Rosenfield Fellow working on Educational Policy and Programs for the United Way of Greater Los Angeles.

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