Germany
and France are in crisis – is the next global financial crash brewing?
Larry
Elliott
The
eurozone’s flaws and a lack of growth in the EU have combined to malign effect.
‘More Europe’ is not the solution
Thu 19 Dec
2024 07.00 GMT
Things are
not quite going according to plan for Rachel Reeves. The economy has contracted
for the past two months and inflation is proving hard to shift. The first
Labour budget in more than 14 years received a frosty reception. But everything
is relative; at least the chancellor had no trouble getting her measures
through parliament, which is more than can be said for Emmanuel Macron in
France. And if opposition MPs at Westminster were to call a vote of no
confidence, Labour’s massive majority means it would be spared the defeat
suffered by Germany’s chancellor, Olaf Scholz, earlier this week.
In Germany
and France, support is growing for parties of the hard right and the hard left,
and it is not difficult to see why. A crisis that affected countries on the
periphery of the 20-nation eurozone 15 years ago – Greece, Portugal and Ireland
– has now worked its way to the core of the single currency zone. Let’s be
clear: France is not the new Greece. The European Central Bank would probably
step in to buy French bonds in the event of a full-scale speculative attack,
and is now better equipped to do so than during the last crisis.
Even so,
there are signs of history repeating itself. The global financial crisis that
erupted in 2008 didn’t appear out of nowhere, and there were plenty of warning
signs in the 1990s – from Mexico to Thailand, and from South Korea to Russia –
of trouble ahead. In spite of these red flags, few imagined that the crisis
would spread to the world’s biggest economy the US, until it was too late.
There are red flags flying now too. It matters that Scholz faces being ousted
as chancellor in February’s snap election, and it matters that Macron can only
get MPs to pass a stopgap budget. These are not minor squalls; they are signs
of a coming storm.
The problem
for the eurozone’s big two is that they have near-stagnant economies alongside
generous social welfare systems that date back to the postwar decades, when
growth was still strong. Low levels of unemployment ensured there were the tax
revenues needed to pay for pensions and other benefits. The arrival of the
baby-boomer generation meant there were plenty of workers for each retiree. The
US picked up most of the tab for Europe’s defence during the cold war, allowing
European governments to prioritise welfare spending. But those favourable
conditions no longer apply. Birthrates have fallen, and the baby boomers are
getting older. Europe is being forced to dig deeper to pay for its own defence
in the face of the threat posed by Russia.
Most
important of all, growth rates have slumped. Germany’s economy is no bigger now
than it was before the start of the Covid pandemic, five years ago; over the
same period France has grown by less than 1% a year on average. Stagnant living
standards mean unhappy voters, as Scholz has found to his cost. Weak growth
also means governments have difficulty balancing the books, leading to pressure
to cut benefits and raise taxes. As Macron is finding, this approach doesn’t go
down well either.
The eurozone
wasn’t supposed to pan out like this. The rationale for the single currency
when it was launched a quarter of a century ago was that it would lead to
faster growth and close the gap in living standards with the US. In fact, the
opposite has happened: growth rates have been weak and the gap with the US has
widened.
Design flaws
in the euro were obvious from the outset: it was a one-size-fits-all approach
for countries that had different needs, and it was based on the neoliberal
principles that low inflation and balanced budgets would deliver stronger
growth. The lack of a common fiscal policy to redistribute resources from
richer to poorer eurozone countries hasn’t helped either.
The euro’s
failure to deliver has had significant consequences. First, slow growth has
made member states more conservative and more resistant to change. Europe has
lacked the dynamism of the US and has stuck with old industries for far too
long. That is especially true of Germany, which has been painfully slow to
enter the digital age and to recognise the threat to its fossil-fuel-dominated
auto companies. Second, while there has been some recognition of the need for
change, it is not obvious that it will actually materialise.
Mario
Draghi’s recent report on Europe’s lack of competitiveness is a case in point.
The study identified the problems well enough: there is a lack of investment,
and Europe needs to break out of its “middle-technology” trap, whereby it is
stuck producing goods like cars. But Draghi provided little in the way of
solutions that would actually make a difference.
It is one of
the curiosities of Europe’s recent economic history that every step towards a
closer union – the creation of the single market in 1985, the launch of the
euro in 1999 – has been followed by a weaker economic performance. The
explanation given for disappointing results is not that the integration process
has gone too far, but that it hasn’t gone far enough. It is no surprise that
Draghi says the cure for Europe’s lack of competitiveness is a top-down,
EU-wide approach, but his conclusion flies in the face of evidence. The idea of
“more Europe” has been tried – indeed, it has been tested almost to the point
of destruction. Voters are deserting mainstream parties in their droves. It may
be time to try a little less Europe before it is too late.
Larry
Elliott is a Guardian columnist
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