With all the bad news coming from the United States in the past few days, one must not forget Europe. The news from the European Union (EU) is bad – could get worse – and at present even in theory Europe does not have some of the exit options that the US still has, like a government and a central bank that can bail the economy out. So watch out for news from Europe. The biggest problem that the Eurozone economies face is that they do not have a “union” government; they have a central bank that is not a lender of last resort, and they are not yet ready to issue collectively guaranteed bonds that could bail their governments out. These immediate problems are worsened by long-standing ones, like an ageing population, rising sovereign debt, inflexible labour markets, stagnant economic growth and regional imbalances. Eurozone biggies, especially Germany and France, are so far unwilling to bankroll the laggards – Greece and Portugal – back to health. If Italy and Spain were to go under, the EU would not even be able to afford a bailout package. Europe’s biggest problem is lack of adequate income growth. The US has so far had the cushion of income growth preventing the economy from falling into a debt trap. A debt trap clearly stares Europe in its face.
What lies ahead for the EU? There are no easy options. One of the two realistic options is a dismantling of the Eurozone, so that individual countries can tackle the problems they face individually, minimising the risk of the domino effect. That would be the end of the idea of Europe and no European politician today has the charisma to secure popular endorsement for it. Equally tough seems to be the second option of going all out and integrating Europe into a real “Union”, which would have the capacity to help its weaker constituents. This, too, is an idea whose time hasn’t come yet. No political leader in Germany or France is in a position to assume the leadership of the Union and offer a regional, rather than a purely national, solution to the problems at hand. The real problem, however, is that at present only Greece has become insolvent. If Italy and Spain fall into a debt trap, not only would the problem become bigger, but any attempt to bail them out will also pull Germany and France into a debt trap! For all his faults, US President Barack Obama has not been sitting idle and is working hard to build a bipartisan consensus on policy options. Europe’s politicians are far more divided, reflecting a more divided polity. The link between economics and politics stares us all across the Atlantic. Unless the world’s richest nations are able to offer wiser and more determined political leadership, things can only get worse before they get better. Developing countries cannot remain mute spectators to these deeply troubling developments, nor can they be expected to silently sign on cheques being issued by the International Monetary Fund. The G20 must discuss developments in the US and EU and demand better macroeconomic management from both, aimed at stabilising the global economy. Apologists for failed western governments are offering all manner of explanations for their policy brinkmanship. The time for explanations is over. It’s time for credible action.