‘Muddling Through’ Is the New Normal – And I Feel Fine

By Steven Hill, Social Europe Journal, March 22, 2011

It’s the end of the world as we know it.
It’s the end of the world as we know it.
It’s the end of the world as we know it, and I feel fine.
– REM, “It’s the end of the world as we know it“

Disappointment, as well as renewed pressure from the financial markets on Portugal, Greece, Spain and Ireland, greeted the recent deal on eurozone reform hashed out by European leaders. Financial Times columnist Wolfgang Münchau, adopting his typically anti-Europe posture, wrote that “you cannot muddle through a debt crisis.” Clearly, he has failed to note that Europe has been muddling through for over a year now. And fairly successfully, I might add.

Welcome to the era of muddling through. No doubt, market watchers, bonds traders, FT columnists and more are looking for a final resolution, a neatly wrapped end to this story. Well, they can forget about that, it’s not going to happen. The European Union is a work in progress, and so will be its resolution to its eurozone dilemmas.

And you know what? That’s just fine. At this point, too many of the experts like Münchau have become overly-obsessed with the eurozone problems. Sure, the debt crisis is complex and serious. But the reality is that the notorious PIGS only comprise four countries out of 27 in the European Union (or 29 if you include Norway and Switzerland). The four PIGS have a combined economy that is no more than Italy’s, and much less than that of France or Germany. The four together comprise a smaller share of the EU’s economy, about 13%, than struggling California does of the US economy.

So why focus so much attention on the Famous Four? Especially when in most of the other European nations things are going pretty well, considering the global financial earthquake that the world has suffered through.

In fact, 14 of the 23 European countries that are members of the Organization for Economic Cooperation and Development have lower unemployment rates than the US (I use OECD rates because their methodologies are harmonized). Those include Germany, the UK, Sweden, Italy, the Czech Republic, the Netherlands, Belgium and more; France, which often gets skewered for its economic failings, has an unemployment rate the same as the US (and let’s not forget that the US imprisons eight times as many people as Europe does, most of them unskilled and uneducated who would have great difficulty finding jobs if they weren’t incarcerated; prisoners are not counted in unemployment rates, which artificially lowers the US rate by approximately 1.2% compared to European countries).

While high unemployment is bedeviling American policymakers, the number of unemployed Germans has declined from five million to below three million, its lowest level in decades. Indeed Germany, which has defied the experts’ predictions by restoring its jobs market so quickly to pre-crisis levels, is a reminder of Europe’s capacity for pleasant surprises, despite what the doomsayers say. In Scandinavia, “socialist” Sweden’s economy expanded by over four percent in 2010 and is expected to see robust growth in 2011 and 2012, according to OECD estimates; Norway, Finland and Denmark also are expected to see strong growth. Poland avoided a recession altogether, and the Netherlands, Denmark, Switzerland, Poland, the Czech Republic and others have maintained their economic footing during this seismic upending.

Government debt and trade deficits? Europe has more of its head above water than America does in both categories. The current EU debt average stands at 73% of gross domestic product, higher than the target of 60% but quite a bit lower than the US at 93%. A few countries, like Sweden, project a budget surplus for 2011 or 2012. Even the PIGS are grappling with their debt problems better than the US is. President Barack Obama joined with Republicans to extend the Bush-era tax cuts for the richest 2% of Americans, which Obama had previously vowed to end. Keep in mind that the 400 wealthiest Americans now have $1.4 trillion in wealth, which is greater than the gross domestic product for the entire country of India and its billion people. Ironically “socialist” Europe, led by Germany, has become the land of budget discipline while maintaining the best of its social supports for families and workers (America still can’t figure out how to provide health care for the 45 million or so without it). The US also has a huge trade deficit, indicating that it doesn’t produce enough that the rest of the world wants to buy, while Europe’s trade deficit with the rest of the world is marginal.

A focus on Poland, the EU’s sixth most populous nation, with an economy larger than Ireland, Greece or Portugal, further illustrates why it’s wrong to obsess too much on the Fateful Four. Various analysts have noted the striking similarities between Poland today and Ireland in the 1990s, when the Celtic Tiger began to roar. Foreign capital is pouring in and investment banks are opening offices, attracted by stable growth and 39 million people with household debt that is relatively modest. Poland also has benefited from the strong economy in neighboring Germany, as have the other countries in Eastern and Central Europe, which are slowly shedding the “emerging market” label.

Poland also is benefiting from an influx of European Union direct aid which has made Poland practically one big construction site. Poland has launched numerous road and bridge projects and other public works, including construction of new rail and train stations and a new subway line in Warsaw. In suburban Warsaw they are constructing the first ring road for the capital (until now vehicles were forced through the city on traffic-clogged surface streets). Poland eventually will double its kilometers of highways, with a final goal of about 2,000 km including two major east-west highways – from the German border to the frontiers with Ukraine and Belarus – and one north-south running from the Baltic sea to the Czech border. The completion of the A4 highway already is driving investors towards Rzeszow and other cities in the southeast corner. Some of the EU money also is going to the construction of new stadiums and other projects for the European soccer championship, which Poland and Ukraine will co-host in 2012.

Construction cranes seemingly have become the national bird, but not only Poland is benefiting. Besides Polish construction companies, construction firms from Germany, Austria, Spain, Portugal and other countries have gotten some of the building contracts. Europe has been criticized by Nobel economist Paul Krugman for not providing enough fiscal stimulus spending to jumpstart its economy and act as a bigger source of global consumption, but the amount of money being spent from these EU structural funds is substantial, €347 billion ($468 billion) over seven years, most of it targeted to eastern and central European member states.

Eastern Europe also is showing signs of vitality. The recessions in the Baltic states and southeastern Europe appear to be finally bottoming out. Countries that suffered double-digit plunges in economic output last year, including Latvia, Lithuania and Ukraine, have begun to grow again as bank lending has resumed and unemployment has eased. German and other western European exporters are profiting from the revival in the east; German exports to the region have jumped 20 percent, while exports to Russia also showed a strong turnaround, climbing 29 percent. Turkey has been a stellar economic performer, growing at a blistering, China-like pace, much of that due to increased trade with its European partners; in a recent visit to Istanbul I could see construction cranes stretching against the skyline in practically every direction. The latest data by the Vienna Institute show that German exports are getting close to pre-crisis levels, with the eastern regions both importing and exporting to Germany and western Europe. The small economies of Romania, Bulgaria and Croatia remain worry spots, but for the most part the “west to east to west” exchange that had flowed so vibrantly prior to the economic collapse is showing signs of revival.

With all this activity, it makes little sense to become too obsessed with the plight of four member states that in aggregate comprise such a small share of the EU economy. Those four countries, each for their own individual reasons, have dug themselves into a heck of a hole. Certainly, their European allies should do what they can to assist them. But there are no magical wands, and it’s going to take time and determination for them to dig themselves out of that hole. In the meantime, the success or failure of the European project is not dependent on the fate of the PIGS. That’s what the doom and gloom economists don’t seem to understand.

There’s something else they don’t understand: their prescribed “solution” for dealing with the debt problems of the Fabled Four – namely, creating a tighter fiscal union or transfer union where better-off states bail out troubled states – is not all that it is cracked up to be. Indeed, there are downsides to transfer unions. Just look at the United States, and the plight of poor California and other states like Illinois and New York. Despite their own struggling state economies, they are fated to perennially fork over buckets of cash to other states, as they have been doing for decades. And the perennially bailed out states, which disproportionately are low-population, anti-government conservative states that are quick to condemn tax transfers from rich to poor or whenever it doesn’t benefit them, do not act particularly grateful toward these progressive states for decades of largesse. In many ways it really has been a bum deal for California, where I live (for these reasons and more, I have previously made the case that California should exit the dollar zone).

So Germany is right to take this slowly, damn what the economists or financial markets say. A European fiscal union of sorts already is progressing in halting stages, but don’t automatically assume that the American model is best. European leaders should take however long is necessary to negotiate this and get it right. What the American experience shows, more than anything, is that the details of a fiscal union are not as important as the commitment and solidarity among member states; if the latter is present for the long haul, they will figure out the details.

But the critics are impatient with the pace, in part because they see Europe being so consumed by internal crises that it is incapable of leading on the world’s stage. While there is both some truth as well as exaggeration to this view, Europe can best show global leadership by evolving a sustainable economic as well as environmental development model. That is what the world urgently needs right now – a way to foster steady state economies for the 21st century that are not built fragilely on asset bubbles, overconsumption, mountains of debt and carbon-belching activities. Balance and sustainability must rank high among the ambitions of our times. The world does not need another hegemon that tries to settle conflicts in the complex brew of the Middle East with ineffectual bluster and blunder.

In short, Europe’s flaws and future challenges are very real and should not be minimized, but nor should they be exaggerated or obsessed over. This is no time to be complacent, but it’s also no time to panic. Rashly hitting the “Apocalypse Soon” button unleashes unfortunate consequences. Politics is about the art of the possible, and muddling through has its merits.

Steven Hill is a political writer whose latest book is “Europe’s Promise: Why the European Way is the Best Hope in an Insecure Age”.

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