<b>Claude Smadja:</b> Europe - Back to crunch time

Angela Merkel's re-election changes nothing, and Europe's economy is still being destroyed

Europe had been in suspended animation for the past six months. The conventional wisdom was that nothing could happen until the German election, and it was important not to embarrass Angela Merkel or endanger her re-election prospects by pushing some issues not to the German electorate's liking. Besides, some faint signs that the economic condition in the European Union (EU) might be improving, the good behaviour of financial markets, and Europe's sacrosanct long summer break conspired to cause a complacent lull. And European leaders were only too happy to enjoy this respite with good conscience on the assumption that Ms Merkel, once freed from electoral constraints, would provide a new impetus to the solution to the European crisis.

Sadly, this expectation had more to do with wishful thinking than it had to do with political analysis. In fact, basically nothing new will happen with respect to a resolution of the crisis that is destroying a good part of the European economy; and Ms Merkel is not going to change course in any significant way from what she has been pushing and imposing over the last four years. She made that very clear during her first press conference after her electoral success. She said: "Our European policy is positive about integration and I see no reason to change it." Translation for the Irish, the Spaniards, the Portuguese, the Italians and so on: don't dream of any easing of the excessive emphasis on austerity and budget-tightening policies that have been killing any prospect of economic recovery.

And, in fact, why would Ms Merkel change anything in the policies that she has so steadfastly pursued in the last few years? From her perspective, as she said, this has been working well: she has been trying to get the southern countries of the EU to fit into the mould designed by Berlin. She has been able to enforce, at least in some good parts, the Berlin consensus.

So far, the social, human and economic costs of the overemphasis on austerity policies have been gigantic. But now the fashion in some European circles is to point out that the economic situation in Europe is beginning to improve, while pointing to this or that slightly better-looking economic indicator. But nobody should be fooled. Most of these supposed signs of improvement are purely statistical. And in Europe's present situation, statistics picked from here and there to generate some optimism can present just one part of the picture.

The truth of the matter is that, in many ways, the economic and social situation keeps deteriorating in many European countries because, as time goes by, the crisis and the damages it is creating are getting more and more entrenched. During the summer, the number of jobless people in the euro zone fell by 15,000 - but the overall number of jobless people stands at 19.23 million, and the overall jobless rate is 12.1 per cent. One needs to be quite desperate to take any comfort from that kind of "improvement". And the best that can be said is that the gross domestic product in the euro zone will shrink less in 2013 than it did in 2012 or that, at best, there will be zero GDP growth. Nothing provides much hope for the unprecedented, astronomical number of unemployed young people in many European countries - 56 per cent in Spain, 39.5 per cent in Italy, and about 26 per cent in France as of July 2013. This is bound to generate a long-lasting feeling of insecurity, of hopelessness, of revolt and of deep anxiety about the future.

It is now admitted that Greece will need a third bailout, which will do little to solve the issue that its debt is quite simply beyond its capability to pay back; that Portugal is at risk of requiring a second bailout; that Ireland and Spain are exhausted, and have reached the extreme limits of acceptance of austerity. And whoever thinks that Italy's situation has improved over the last year must have been living on a different planet. The country's unemployment and debt-to-GDP ratios are still increasing; its productivity levels are still declining; and political governance issues are bigger than ever. And we are talking about the third-largest economy in the euro zone.

So you might say that, after all, Ms Merkel and the people around her in Berlin are not blind and that they must know what the present situation is. Maybe yes, maybe no. However, the reality is that the German chancellor looks at the situation with the German credo in mind: that the Berlin consensus and its compact of balanced budget/austerity/downward pressure on wages are the only recipe for Europe. In addition to that, though Germany is a key beneficiary of the creation of the euro, it will continue to refuse to move towards what would be logical in a monetary union - such as banking union or euro zone bonds - because of the potential costs and risks involved in such steps. In the same way, it will refuse to boost domestic consumption and imports to provide additional markets for exports from the countries in crisis to help generate more activity there, because this goes against the very model on which Germany built its success.

Finally, while Germans are looked at with envy by the rest of Europe, most are only too aware that there are a number of severe challenges threatening their economic vitality - whether it is the pronounced demographic decline; the dire need for improvement of the country's infrastructure, which will necessitate huge investments; or an education system that is in urgent need of overhaul to produce the kind of talent and expertise that the economy will require in the future.

So this means that the muddling through will continue for Europe; the economic crisis will keep exacting its toll; and the meagre improvements heralded here and there will make little difference to the overall picture. For instance, it is not the 0.8 per cent GDP growth forecast by the International Monetary Fund for France or the 0.7 per cent growth for Italy in 2014 (after a decline of 1.8 per cent in 2013 for that country) that will bring any number of jobless French or Italian people back to work in the foreseeable future. In that context, it's not surprising that most observers expect significant gains for Europhobe groups at the next European elections in May 2014. Is that the kind of jolt that European leaders need?

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The writer is president of Smadja & Smadja
https://twitter.com/ClaudeSmadja