Europe is unprepared for austerity

Most of the European Union is living beyond its means. Government deficits are out of control and public-sector debt is rising. If European governments do not use their new breathing space to control spending, financial markets will get dangerously restless again. Unfortunately, European voters and politicians are simply unprepared for the age of austerity that lies ahead.

I used to think Europe had got it right. Let the US be a military superpower; let China be an economic superpower – Europe would be the lifestyle superpower. The days when European empires dominated the globe had gone. But that was just fine. Europe could still be the place with the most beautiful cities, the best food and wine, the richest cultural history, the longest holidays, the best football teams. Life for most ordinary Europeans has never been more comfortable.

It was a great strategy. But there was one big flaw in it. Europe cannot afford its comfortable retirement.

Greece’s financial crisis is, unfortunately, an extreme example of a broader European problem. Investors have been looking nervously at debt-levels and budget deficits in Spain, Portugal and Ireland for months. But even Europe’s big four – Britain, France, Italy and Germany – are hardly immune from concern. Italy’s public debt is about 115 per cent of gross domestic product. Some 20 per cent of this needs to be rolled over during the course of 2010. Britain is currently running a budget-deficit of nearly 12 per cent of GDP, one of the largest in Europe. George Osborne, who is likely to end up as chancellor of the exchequer in the new government, has described Britain’s official economic forecasts as a “work of fiction”. The French government has not produced a balanced budget for more than 30 years. And one of the reasons for the deep bitterness in Germany at bailing out Greece, is the knowledge that Germany is already struggling to balance its own books. Read full article in Financial Times...

Opinion

Greeks sacrificed on altar of dogma

"Athens was struck down by a pneumonia whose symptoms were even felt on Wall Street," remarks a capital finance expert in the columns of Lidové noviny. Although Greece only accounts for 2.5 % of the European Union's GDP, Pavel Kohout notes that the recent turmoil has endangered financial markets all over the world, and further argues that to prevent the spread of a worsening sovereign debt crisis, the EU should have allowed Greece to default and leave the eurozone. "If from the outset, representatives of the EU had said that the crisis was an internal matter for Greece, and insisted that the eurozone would survive the bankruptcy of one of its members, the same effect would have been achieved. Other member states would have naturally responded with a more diligent effort to ensure greater stability in their financial systems," insists the economist.

"In the aftermath of the exit of its weakest member, market confidence in the euro would have been restored," and Kohout points out that Greece would have had the option of devaluing its currency, which remains "the simplest measure to relaunch economic growth." However, "Greece has been unable to abandon the single currency," which is why Kohout believes the euro has become "a dogma" maintained by a "political taboo" that effectively outlaws any discussion of its weakness." As result, Greece had no option but to accept the extremely "painful" austerity measures imposed by the EU.