Europe faces the perfect storm

 

Europe faces the perfect storm

July 22, 2022 Business 0 Views

https://newsbeezer.com/greeceeng/europe-faces-the-perfect-storm/

 

Populism is consolidating as a political force in Europe, although it fails when asked to govern. The fall of Mario Draghi in Italy disrupts the relationship of trust with the European Union and worsens the Italian economy. At the same time, the war in Ukraine, the interest rate hike by the ECB, disruptions in value chains and the energy crisis are reinforcing recessionary tendencies. Among others, the director general of ELIAMEP and professor at the Athens University of Economics and Business, Mr. Giorgos Pagoulatos, mentions this in an interview with Liberal.

 

Interview with Nikolas Tabakopoulos

 

Political instability is evident across Europe, from Italy to Spain and other European countries. Are you afraid of the return of populism? And if so, what does this mean for the European building?

 

I see the consolidation of populism as a political force that will occasionally claim power, despite its apparent failure when the time comes to wield it. The case of Boris Johnson is typical. He is a populist who has failed miserably in dealing with Brexit, but also in the elementary political behavior of a Prime Minister who puts all his political weight on the election of Liz Truss as his successor, who is stepping down to succeed Boris Johnson.

 

We have in Italy the collapse of the most serious government that the country has had in at least the last ten years and the most reliable towards Europe. A Draghi government that has raised Italy’s prestige to a level commensurate with the economic size of a G7 country for the first time in decades. Yet his government is collapsing on political games fueled by the power of populism.

 

On the one hand the populism of the Five Star left and on the other of the right with Meloni as the main protagonist and with a reappearance in this role of Salvini and Berlusconi. Both political forces abstained on a vote of confidence in Draghi, which led to his resignation.

 

We have failed to enshrine populism as a stable political force which, when called upon to wield power, fails, I remember the League and Five Star coalition government. However, populism is constantly trying to return to the political forefront, undermining every country’s efforts to build a workable relationship with the European Union and, most importantly, to respond effectively to one of the worst multiple crises (“multi-crisis”) the country has faced in its history EU.

 

Basically, Europe is facing the perfect storm…

 

Exactly, because we have a European economy that emerged from a eurozone debt crisis, which left wounds in its wake with high levels of debt and unemployment, especially in the south. And, of course, greater social vulnerability in many eurozone countries. Then came the crisis of the pandemic, to which Europe responded successfully with the Recovery Fund, which directs investment funds mainly to the most vulnerable economies, notably Greece and Italy. Post-pandemic crisis, fragmentation of global value chains is occurring, which has already caused problems in energy markets, trade and led to inflationary pressures.

 

Add to this, of course, the terrible war in Ukraine following Putin’s barbaric invasion, creating an energy crisis worse than the one we had in the 1970s and an inflationary crisis cumulative to all those before it. It is very difficult to imagine that there will be no socio-economic impact in this acute crisis of stagflation.

 

Is the ECB’s decision to hike rates contributing to all of this?

 

Exactly. And all this at a time when the forced return to normality of monetary policy, i.e. a return to positive interest rates and the planned management of inflation, are generating an economic slowdown that is being dramatically exacerbated by the corresponding recessionary effects of the war in Ukraine.

 

Do you think there will be new memoranda or commitments between North and South?

 

I think the current situation perhaps shows that the north-south divide, which was the axis of division in the euro zone during the first debt crisis, has been replaced by other divides. At the political level, we have a dividing line between “old” and “new” Europe. On the one hand, countries like Germany, France, Italy, which are trying to accelerate the end of the war in Ukraine as soon as possible. And on the other hand, countries like Poland and the Baltic States, which promote the need to defeat Russia militarily and comprehensively, even at the cost of a long prolongation of the war. That is one axis, the political one.

 

And there is another axis that divides Europe due to energy vulnerability to Russia. That is, dependence on Russian energy. And in this case, Germany is at the forefront of vulnerability. That said, interestingly and ironically, Germany is in a very weak position in the current crisis, unlike any previous crisis.

 

So do you think there will be memoranda like the ones we saw during the debt crisis?

 

Anyway, for the management and administration of the funds of the recovery fund there are programs of the countries, specific commitments and the monitoring of the implementation of these programs. There is always a logic of sectarianism when Europe allocates funds. This logic will return when we have a common fund, for example to deal with the economic and energy crisis. But I wouldn’t call them memoranda, and they won’t be austerity-focused like we saw during the debt crisis. Last but not least, this crisis has the character of slowing down the economy.

 

Finally, do you think that the political crisis in Italy will affect the eurozone economy and markets? Could there be a new debt crisis triggered by Italy?

 

Italy is the most vulnerable economy. Because of a debt of 150% of GDP, because it has a serious productivity problem and serious structural weaknesses, such as the functioning of the judiciary. It is also the economy with the lowest average growth of the other eurozone economies over the past two decades. However, Italy’s main problem and what aggravates the debt problem is the issue of political confidence. And confidence does not improve as Prime Minister-designate Meloni, like her colleague Le Pen, questions the supremacy of European law over national law – without which there would be no functioning European Union.

 

The deterioration in the Italian debt market is directly linked to political developments. We have seen spreads rise with the news of Draghi’s resignation as they had fallen significantly upon Draghi’s inauguration or given his successful and effective tenure. So the debt problem in Italy is related to the lack of accountability and the inability of the Italian political system to inspire trust among partners, markets and investors. This is now getting worse as the European Central Bank returns to higher interest rates, and it remains to be seen whether the anti-fragmentation tool for bonds will convince bond investors that the ECB will be ready to “do whatever it takes” to remind central bankers Draghi in 2011 when Italy faces a debt crisis.