The first golden age of globalization that spanned more than four decades from the late nineteenth century onwards, came to a shuddering end on June 28, 1914, when an unknown Serbian, Gavrilo Princip, forged himself a permanent place in history, when he assassinated Archduke Franz Ferdinand, the heir to the Austro-Hungarian throne, in Sarajevo. The actions of Princip and his ‘Black Hand’ revolutionaries precipitated a war across the European continent that achieved little but the deaths of countless fighting men.
Unfortunately, the so-called ‘war to end all wars’ did not match its billing and, the conditions enshrined in the Treaty of Versailles and, subsequently imposed upon a defeated German nation, virtually ensured another depressing chapter in Europe’s bloody history. Needless to say, the harsh programme proved self-defeating as, a downtrodden people in their search for leadership amid the chaos, propelled Adolf Hitler and his henchmen to power. There is no need to expand on their drug-fuelled exploits.
Fast forward to today and the roles have been reversed. The Germans, under the helmship of Chancellor Angela Merkel, wish to impose their will upon the rest of Europe but, what is demanded is neither achievable nor desirable given the unacceptable social costs. One need look no further than Greece to see the destruction that is a direct result of the austere policies imposed by the troika and endorsed by Merkel – the outcome, it is fair to say, is a failed economic state.
The demands placed upon Greece were never likely to work and basic arithmetic said as much. A high marginal propensity to consume that is moving lower as desired savings rates edge higher, combined with a low marginal propensity to import and uncompetitive export base means that the aggressive fiscal consolidation was doomed from the outset. All told, the medicine prescribed has killed the patient.
The world’s capital markets will move on of course and, investors will almost certainly have Portugal in their sights, as the deep-seated problems in that economy don’t look much better than Greece. Meanwhile, Ireland has decoupled from its troubled brethren in the euro-zone and not simply because of any public sector achievements but, a return to current account surplus and less dependence on foreign sources for financing.
Be that as it may, the turnaround in the Irish situation is wholly dependent on no recession across the euro-zone from here to infinity. Non-financial private sector debt as a percentage of GDP accumulated to obscene levels in this country, under the watchful gaze of those who should have known better and, still remains off the charts compared to the rest of the developed world – despite the aggressive deleveraging that has already taken place.
Unfortunately, a European recession is almost certainly written in stone at this juncture. Dithering by policymakers, who seem incapable of distinguishing between liquidity and solvency crises, has undermined market confidence to such a degree that the resulting financial market stress is almost certain to produce the dreaded double-dip. More to the point, recent data releases all suggest as much.
A further downturn in economic activity, before the region even comes close to recovering its pre-recession peak, could well put an end to the European project. Even before a recession is considered, back-of-the-envelope calculations indicate that Greece will not recoup its lost output for ten years and, both Ireland and Portugal should not expect to see expansion from former glories until the second half of the decade.
Of course, those predictions are predicated upon a ‘softly-softly’ upward trajectory in each individual economy’s fortunes. It is safe to say that such an approach rarely matches the subsequent reality and, will ultimately prove to be fantasy in the context of an all but certain downturn.
The crux of the matter is not a renewed downturn of itself but, the unacceptably high levels of unemployment to begin with and, particularly among the young. The latest reading on unemployment rates across the euro-zone is hardly pleasant reading at ten percent but, youth unemployment can be described as nothing less than a social tragedy and, fiscal consolidation programmes across the region as endorsed by Germany, will almost certainly make matters worse.
Digest the numbers but be warned, they are not pretty. The latest readings show that the highest rate of youth unemployment begins with Spain at 45 percent and, then Greece at 43 percent. Ireland, Portugal and Italy hug closely behind with levels close to 30 percent. No matter what economic leaning one comes from – left or right – these numbers are unacceptable.
The euro stands at a crossroads but, no matter what is accepted by the yellow-bellied politicians that yield to German demands, nothing can escape the fact that such prescriptions have already delivered one failed economic state. Be warned, Ms Merkel, Europe’s future may well be decided on the streets.
Previously posted on www.charliefell.com
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