D-days for the Europe experiment

LONDON

It wasn’t supposed to be like this. The euro was supposed to make trade quick and easy. The new, integrated Europe was supposed to contain Germany and protect France and cement the place of the old world in international affairs. And globalisation – well, that was supposed to open up markets and make everyone richer.
But the 10th birthday of the euro passed uncelebrated on January 1, like the birthday of a disgraced relative who has brought shame on the family name. The leaders of the European Union spent much of last year at one another’s throats behind closed doors and smiling frostily in public, barely keeping up appearances. And globalisation, some now say, has become Europe’s economic doomsday machine.
If last year was rough, with no fewer than 15 failed summits, each falsely trumpeted as the saviour of the euro zone, 2012 is destined to be even tougher. Take it from the leaders.
In their New Year addresses, the French President, Nicolas Sarkozy, said Europe was “without doubt [in] the gravest [crisis] since the second world war”, and the German Chancellor, Angela Merkel, said 2012 “would no doubt be more difficult than 2011”.
The managing director of the International Monetary Fund, Christine Lagarde, went further. She warned that if Europe failed to sort out its debt crisis, it could trigger “retraction, rising protectionism and isolation. This is exactly the description of what happened in the 1930s and what followed is not something we are looking forward to.”
Depression and mass unemployment? A spike in fascism and race-hate? Could it be that the rampant looting and arson of London’s August riots, and the months of street protests in Spain and Greece, are but a taste of what is to come?
Because the truth is Europe, including Britain, might not be suffering under temporary austerity measures. Prolonged economic decline may be the new reality as wealth and power shifts from the old world to the emerging economies of Asia.
Questions are being asked about how Europe’s democracies can thrive – or even survive – when its governments cannot hold out to their people the promise of a return to the prosperity of the past. The same goes for the European Union; support for the “European project” is at risk of falling at the very time its leaders most need to push for greater unity.
Sixteen million people in the euro zone are unemployed and voters are becoming angry and disaffected as austerity bites. In Greece, poor people who are diabetics cannot get insulin, cancer sufferers are missing out on drugs and even paracetamol is in short supply. The Greek Orthodox church this week reported cases of parents abandoning their children into care because they could no longer afford to support them.
In Britain, 2.85 million unemployed means the welfare bill has rocketed and austerity is expected to last at least a decade. The Coalition government now wants to means-test benefits for people with cancer and young people with disabilities – moves the Labour opposition is resisting, arguing people made payments to support those benefit schemes and should not lose them when they are most in need.
Schools, hospitals, police, defence and councils are being slashed. Anxiety is morphing into long-term pessimism: almost two-thirds of Britons believe this generation of children will have a lower standard of living than their parents.
The British are known for their stoicism in the face of hardship but this is not like World War II, when everyone was in it together. In Britain, as across much of Europe, there is resentment over the rise in inequality. For a family with three children earning £35,000 ($52,000), with both parents working, real household income has fallen by £3150 compared with 2010-11.
But, as ordinary workers see the pension age extended to 67, jobs disappear and workplace rights eroded, an estimated 2800 bankers in London are each earning more than £1 million a year.
For some, pessimism has spiralled into utter despair. Across Europe, the number of people committing suicide has jumped. Figures published in The Lancet show the British suicide rate increased 8 per cent between 2007 and 2009. The Greek Parliament reported its national suicide rate rose by 25 per cent in 2010.
Stephen Platt, a professor at Edinburgh University who has been studying suicide behaviour for 30 years, told The Guardian he fears a decade of unusually high suicide rates. “If you look at the research literature about suicide and economic recession, it’s pretty clear that there is a relationship,” he says. “The idea of a lost decade is quite possible.”
The West launched globalisation as a way to open markets and increase competitiveness – and it did both. But what was perhaps not so well foreseen was the degree to which capital and manufacturing jobs would move to countries with cheap labour. As billions of low-paid workers have been absorbed into the world economy, and productivity has risen due to technology, jobs have stagnated in Europe. Asia makes, and is booming; Europe borrowed, in order to consume, and is now going bust.
The American political scientist Francis Fukuyama questions whether democracy can survive the resulting decline of the middle class. Writing in this month’s Foreign Affairs magazine, he argues the lightly regulated form of globalised capitalism has created new wealth and rising middle classes, with democracy in their wake, all over the developing world. But in the West, he says, it is eroding the middle-class social base on which liberal democracies rest.
In the same magazine, the professor of international affairs at Georgetown University, Charles Kupchan, argues globalisation is producing a widening gap between what electorates are asking of their governments and what the governments are able to deliver. Voters want them to respond to the fall in living standards and growing inequality, he says: “Globalisation has handsomely rewarded the winners but left losers behind.”
But he points out democracies have less control over outcomes in a globalised world. Traditionally, countries in economic trouble devalue their currencies to make their exports more competitive. The 27 nations of the euro zone, though, cannot do this individually; their currency is shared, and the euro’s settings are fixed by the European Central Bank.
So the only answer to date from Europe’s leaders has been to cut back and back, creating an age of austerity with no end in sight. As markets and voters watched in dismay last year’s agonised, ham-fisted talks over saving the euro, the standing of European institutions fell.
In Britain, pressure is rising on the Conservative Prime Minister, David Cameron, to leave the union, with half the nation’s voters and many of his own MPs wanting out.
There are now openly Eurosceptic parties in Finland, France and the Netherlands, and many voters perceive European institutions as foreign rather than shared. Their disaffection could fuel a retreat to isolationism and nationalism, which might be only a step away from xenophobia.
Kupchan says generational change is also taking a toll of popular support for European integration: “Europeans with memories of World War II see the EU as Europe’s escape route from its bloody past. But younger Europeans have no past from which to flee … current leaders and electorates tend to assess the EU through a cold – and often negative – valuation of costs and benefits.”
It is probably not in voting booths that Europe’s future will be decided, but in financial markets. It is not political analysts but economists who are being asked to cast the runes on the odds of the EU surviving in its present form.
Professor Douglas McWilliams, chief executive of Britain’s Centre for Economics and Business Research, earlier this month forecast a 60 per cent probability the euro zone will start disintegrating this year and a 99 per cent chance it will collapse entirely within the next decade. A BBC poll of leading economists put the chances of a break-up at between 30 and 40 per cent.
Any fracture would probably begin with the exit of Greece, which would come suddenly and without fanfare in order to prevent a run on its banks. Once Greece was gone, lairy investors would turn a harsh eye on Italy, which is also carrying high debt. If they refused credit to Italy and the huge Italian economy collapsed, the European Union in its present form would fall. The result: currency chaos and massive unemployment, possibly a depression. That kind of suffering risks resurrecting Europe’s old bogy, race.
Toughing it out with the EU will also be hard. Europe’s banks are suspected to be carrying large amounts of toxic debt. French and German banks might need to be bailed out to compensate for write-downs on sovereign debt, or even nationalised, as happened in Ireland. Either way, money will be tight for a very long time.
The architects of the EU always envisaged there would be crises over the euro and thought the crises would impel closer integration. The union’s true believers insist that is what happening here – if Sarkozy and Merkel can pull it off.
But Merkel is already hamstrung by domestic politics, with Germans furious at bankrolling bailouts for their neighbours, and Sarkozy is facing an election this year, so he must also have more of a weather eye out for local politics than usual. Already it is proving difficult to wrangle the rest of Europe into line, with Hungary and the Czech Republic warning they will join no new deal that means losing control of their tax policies.
Through that sliding door to an alternative reality – one in which the EU pulls closer over joint taxes and spending, which would stabilise the euro – we might one day see a “United States of Europe”. But right now, no one is offering odds on that happening.

First published in the Sydney Morning Herald.