Russia and Ukraine continue to confront each other along
their border. Iraq has splintered, leading to unabated internal warfare. And the situation in Gaza remains dire. These events
should be enough to constitute the sum total of our global crises, but they're
not. On top of everything, the German economy contracted by 0.2 percent last
quarter. Though many will dismiss this contraction outright, the fact that the
world's fourth-largest economy (and Europe's largest) has shrunk, even by this
small amount, is a matter of global significance.
Europe has been mired in an economic crisis for
half a decade now. Germany is the economic engine of Europe, and it
is expected that it will at some point pull Europe out of its crisis. There
have been constant predictions that Europe may finally be turning an economic
corner, but if Germany's economy is contracting (Berlin claims it will rebound
this year), it is difficult to believe that any corner is being turned. It is
becoming increasingly reasonable to believe that rather than an interlude in
European prosperity, what we now see is actually the new normal. The key point
is not that Germany's economy has contracted by a trivial amount. The point is
that it has come time to raise the possibility that it could be a very long
time before Europe returns to its pre-2008 prosperity and to consider what this
means.
Faltering Europe
The German economy contracted despite
indications that there would be zero economic growth. But the rest of Europe is
faltering, too. France had zero growth. Italy declined by 0.2 percent. The only
large European economy that grew was the United Kingdom, the country most skeptical of the value of EU membership. Excluding Ireland, which grew at a now-robust rate of 2.5 percent, no
EU economy grew more than 1 percent. Together, the European Union scarcely grew
at all.
Obviously, growth rate is not the full measure
of an economy, and statistics don't always paint the full picture. Growth
doesn't measure social reality, and therefore it is important to look at
unemployment. And though Europe is fairly stagnant, the unemployment situation
is truly disturbing. Spain and Greece both have around 25 percent unemployment,
the level the United States reached during the Great Depression. While that's
stunning, 15 of the 28 EU members have unemployment rates of more than 10
percent; most have maintained that high rate now for several years. More
alarming, these rates are not falling.
Half of all EU residents live in four
countries: Germany, France, the United Kingdom and Italy. The average growth
rate for these countries is about 1.25 percent. Excluding the United Kingdom,
their economies contracted by 0.1 percent. The unemployment rate in the four
countries averages 8.5 percent. But if we drop the United Kingdom, the average
is 9.2 percent. Removing Britain from the equation is not arbitrary: It is the
only one of the four that is not part of the eurozone, and it is the country
most likely to drop out of the European Union. The others aren't going
anywhere. Perhaps the United Kingdom isn't either, but that
remains to be seen. Germany, France and Italy, by population if nothing else,
are the core of the European Union. They are not growing, and unemployment is
high. Therefore, Europe as a whole is not growing at all, and unemployment is
high.
Five to six years after the global financial
crisis, persistent and widespread numbers like this can no longer be considered
cyclical, particularly because Germany is running out of gas. It is interesting
to consider how Germany has arrived at this point. Exports continue to grow,
including exports to the rest of Europe. (That is one reason it has been so
difficult for the rest of Europe to recover: Having lost the ability to control
access to their markets, other European countries are unable to compete with
German exports. It may be free trade, it may even be fair trade, but it is also
a trade pattern that fixes failure in place.) Employment remains strong. The German
financial system is viable. Yet consumer and corporate confidence is declining.
As we look at the situation Germany is facing, confidence should be decreasing.
And that in turn becomes a self-fulfilling prophecy: German employment has been
supported by exports, but there is a limited appetite for Germany's exports
amid Europe's long-term weakness and a world doing better but still not well
enough to float the German economy.
One of the things that should concern Germans
is the banking system. It has been the obsession of the European financial
elite, at the cost of massive unemployment, and there is the belief, validated
by stress tests, that the financial system is sound. For me, there has been an
ongoing mystery about Europe: How could it have such high unemployment rates
and not suffer a consumer debt crisis? The climbing rate of unemployment should
be hitting banks with defaulted mortgages and unpaid credit card debt. Given
the fragility of the European financial system in the past, it seems reasonable
that there would be heavy pressure caused by consumer debt.
The known nonperforming debt situation is
sufficiently concerning. Four countries have nonperforming loan rates
surpassing 20 percent. Six have rates between 10 and 20 percent, including
Italy's, which stands at 15.1 percent. The overall EU rate is 7.3 percent.
Obviously, the situation in Italy is the most dangerous, but there is the
question of whether these numbers capture the entire problem. Spain, with 24
percent unemployment, is reporting only an 8.2 percent nonperforming loan rate.
Portugal, with lower unemployment rates, has an 11 percent nonperforming loan
rate. France (with more than 10 percent unemployment) is reporting only a 4.3
percent nonperforming loan rate. The devil is in the details, and there may be
an explanation for these anomalies. But the definition for a nonperforming loan
has been flexible in Europe and other places before, and the simple question
remains: How can such long-term high unemployment rates not produce significant
problems in consumer debt?
It is simply unclear how Europe untangles this
Gordian knot. Considering the length of Europe's economic malaise, a strong
argument would be required to say this is a passing phase. Given Europe's
unemployment, Germany's need to export to the rest of Europe, and persistent
weak growth rates now spreading to Germany, it is simply not obvious what force
will reverse this process. Inertia is pointing to a continuation of the current
pattern. It is hard to see anything that will help Europe recover its vibrancy.
A Political Question
The question that follows is political. If the
economic premise of the European Union -- prosperity -- is cast into doubt, then what holds Europe together? This is particularly relevant as
the fault line between Russia and the European Peninsula comes alive and as
Europe is measuredly asserting itself in Ukraine. Poland's and Romania's
interest in Ukraine is clear. Spain's interest is less obvious. The idea of
pursuing common goals to preserve EU prosperity doesn't work when the bloc is
economically crippled and when signs of divergence are already evident. These
include British threats to withdraw from the European Union and the loss of
common interests that united the countries when prosperous.
One of the most important signs of divergence
is the emergence of anti-establishment and Euroskeptical parties, which did remarkably well in recent European Parliament elections. This political shift has been
dismissed by many as merely the result of a protest vote rather than a
harbinger of the future. In my view, protest votes of this breadth and
magnitude are significant in and of themselves. They remind us that the most
dangerous source of social unrest is not the young and unemployed but rather
middle-aged men and women who have suffered unemployment and lost their
investments. They live in a world of shattered hopes, convinced that others
engineered their misfortune. The young throw rocks and then go home. The
middle-aged and middle class, having lost their dreams with no hope of
recovery, are at the heart of fascism and are the real threat posed by the new
European reality.
Russia is important, and so is radical Islam.
But the fate of Europe is a vital force that will shape the world. Russian
power grows as Europe fragments. Europe has its own internal confrontation with
Islam. With long-term sclerosis of the economy and persistent unemployment, how
do the Europeans deal with the immigrants among them? How does the Continent accept open
borders? The implications are profound, and it is time to consider that a
Europe without growth, with high unemployment and with no way out might be the
reality for a much longer time than anyone expected.
George Friedman, Stratfor, Aug. 19, 2014
"Europe's Malaise: The New Normal? is republished with permission of Stratfor."
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