As Europe Slowly Recovers, the US Heads off the Cliff
What at a year for the European Union. Europe has now fought its way through the worst of its fiscal crisis, and the year ahead will end up being more about recovery than austerity.
It may seem strange to hoist victory banners on the EU’s behalf since ten days ago the European Central Bank revised downward its economic forecast for 2013. As recently as September, the ECB had predicted growth of 0.5 percent next year. Now it sees – 0.3 percent for 2013.
But you have to compare that figure with the – 0.6 percent recorded in the third quarter of this year. As Mario Draghi, the ECB’s president and numerous other European officials have indicated, the new forecast reflects a more precise assessment of the start of the year while incorporating a widely backed expectation that the EU will move into positive growth late next summer or fall. The central bank thinks GDP will grow by 1.4 percent in 2014.
This is going to be very good news for the U.S. economy. A recovering eurozone will mean stronger markets, and this will benefit American business in two ways: First by way of direct exports, and second because a stronger Europe will yield a stronger China. A strengthened, euro will also help American exports compete. On the financial side, as European debt markets stabilize—and they have begun doing so already—risk will be re-priced downward, making bank capital (and hence borrowing) cheaper.
None of this is to suggest the hard work is over for the Europeans. They have three main tasks.
1. Accelerate efforts to achieve sustainable fiscal balances at the national level. Some economies, notably Greece’s, have not finished cleansing themselves of outdated laws and regulatory regimes, loss-making state enterprises, and other remnants of economic eras gone by.
2. Determine at the institutional level whether the EU will turn its currency union into a banking and monetary union. There will be some struggles over this, notably involving the Germans, because many German voters are loath to accept ownership of any portion of European debt.
3. Finally and far from least, Europe must find the right balance between austerity and growth stimulus as it administers its medicine to its members. This is no small matter. Unemployment in many cases remains at emergency levels. The need to ameliorate these conditions, spur demand, and incubate growth is pressing if the social fabric in endangered nations, notably in southern Europe, is not to shred beyond repair.
That is a hefty “things to do” list. And it is hard to say how much of it will get done. But a certain momentum has become apparent recently:
• Last week the EU made a major advance toward forming a banking union—a move many thought impossible at this stage. At a meeting of finance ministers in Brussels, members voted effectively to hand over banking oversight powers to the ECB in 2014—the single biggest step toward an enhanced union since the euro was created in 1999.
• Greece is now set to receive a $46 billion tranche of desperately needed debt relief after finishing a program to buy back privately held bonds at a steep discount. Here is the interesting thing: Athens wanted to purchase the paper at 30 euro cents on the euro, indicating a 70 percent discount on face value. Instead it bought $42 billion worth of bonds at 33.5 cents. The higher price meant that Athens missed its target by a small margin, but the nation’s lenders approved the new aid anyway. It is a good example of the new flexibility that the European Financial Stability Facility, the EFSF, now incorporates into solutions to the debt crisis.
• Ireland’s finance minister, Michael Noonan, has just pushed through the nation’s sixth austerity budget. Target: an additional $4.6 billion in spending cuts and revenue increases. Dublin hopes to leave behind the “troika” of international lenders—the International Monetary Fund, the European Union, and the ECB — and return to the debt markets in 2013, basket case closed. Noonan forecasts GDP growth of 1.5 percent for next year—not bad in the European environment.
• Chancellor Angela Merkel of Germany has just won her electorate’s support for her euro crisis policies. These policies have been highly attenuated, as anyone watching Merkel knows, because of tensions in the German political arena. She is the leader most capable of keeping Germany on board the EU project.
There are question marks ahead. Will Spain hold together or disintegrate under pressure from Catalonian separatists disenchanted with Prime Minister Mariano Rajoy’s austerity program? Who will succeed Mario Monti as Italy’s next premier if Monti, an accomplished technocrat, elects not to run himself? How will Merkel fare against her opponents in German elections next September?
It will not be a boring 2013 for Europe. But it will mark the transition back toward economic health and fiscal solvency we have all been hoping for. That is an accomplishment, hard won. You probably noticed that European leaders gathered in Oslo a few days ago to accept the Nobel Peace Prize awarded to the EU. Don’t scoff. For all its squabbling and infighting, the organization made up of once-warring nations deserves it.
Looking back over 2012 and forward to the year to come, the Europeans have got through a lot of hard work and will finish the year with big strides to their credit. Americans cannot say the same.
