Sleepwalking into Eurozone Crisis

With talk of bailouts, restructuring, and austerity, Europe and the world breathed a collective sigh of relief earlier this year that the Euro-crisis did not reach critical mass.  Many thought, and maybe still think, that things were getting better.  Good news of a U.S. recovery may lead some to figure a recovery in Europe won't be too far behind.  Nothing could be farther from the truth.  Europe is in crisis and people are kidding themselves.  It will get far worse before it gets better.

Tuesday's Financial Times had a host of articles based on a raft of bad news that explained all of this.  Part of the problem with understanding the Euro-crisis is that the news is fickle, proclaiming doom one day and good tidings the next.  The doomsayers have far more to commend their position, however.  Europe is returning to recession.  Demand is collapsing, purchasing managers' indices (a measure of manufacturing growth or retreat) are generally below the 50 mark - indicating retreat, and public spending is likewise in significant retreat as governments try to right their budgets.  As I have described before, the crisis is one of the balance of payments, rather than a debt crisis.  This stems from a larger structural imbalance in which some countries were perpetual deficit consumers and others were surplus producers.  When the private sector funding ran out, much of the debts of this imbalance were transferred to public rolls.  Thus, governments trying to right their books are turning to stark austerity programs, just as imbalanced, consumer economies are facing crisis.  As a result, unemployment is skyrocketing in the problem states, especially in the young population.  While states like Germany have a modest 5.7% unemployment rate, Greece and Spain both have over 20% unemployment.  In the 15-24 sector, unemployment in Spain and Greece has reached over 50%.  These are crushing, society-rending numbers that won't be fixed soon.

The move into recession makes the predictions of austerity programs launched last year far too rosy.  More bailout cash will be needed, budget deficits will grow, and short term financing will come due without the cash to pay for it in the problem states.  People are once again seriously considering at least a partial breakup of the EU, with FT's entire comment page dedicated to this with the titles, "A Blueprint for an Amicable Divorce Settlement," "The Euro is a Time Bomb that No One can Defuse," and the lone positive contribution, "Forget Break-up: It Just Needs More Parental Love."  But parental love is not forthcoming in a divided, divisive, and polarized Europe made up of states with very different priorities and plans for the future.  While global policy elites worry about an Iranian nuclear program we probably will not make go away, a pivot to Asia, the "threat" of a rising China, and our continued lunacy in Afghanistan, we are sleepwalking into a breakup of the Euro zone, which will make all other problems worse, and will make them pale in comparison.  We could see a 1930s style depression return to most of Europe in the coming years, the erosion of the common market and common goals that has kept the continent moving in the same direction for over half a century, and the spin-off effects of one of the world's leading economic zones falling into chaos.  The greatest threat today is depression and break-up in Europe, but few are paying attention or giving it the consideration it is due.