BUSINESS Lab – I
Assignment
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Europe is on permanent decline.
INTRODUCTION:
Europe is a continent in crisis. The financial problems of
many European economies became visible to the rest of
world when Greece only narrowly escaped bankruptcy in
May 2010.
Ever since, more unpleasant data about the state of public
finances in Europe have emerged, putting pressure on
Europe’s common currency, the euro.
With the focus on finances, it is easy to overlook that
many of Europe’s current problems are not purely
economic. They are the result of some basic construction
errors of the European project.
European integration was a response to the catastrophes of the two world wars. By binding
European nations closer together and integrating them in the framework of the European
Union, it was hoped that former rivalries could be overcome and lasting peace and prosperity
be created.
As it turns out, despite these efforts Europe has remained a continent with countries so
different that they cannot be effectively harmonised under the EU banner. Above all, their
diversity and a lack of a common European identity make it impossible to organise European
affairs under the model of a national state. The European Union lacks the basic constitutive
element of a nation state, namely a people.
Given the inadequate structures of the European Union, Europe is unable to come to grips with
its three most difficult challenges: the state of public finances; the ageing of its population; and
the integration of migrants from other cultural backgrounds.
Each individual problem—debt, demography and disintegration—would be serious enough in
itself to cause severe trouble for Europe. Taken together, these problems make a European
recovery from its current malaise almost impossible. Europe’s current crisis could be the
beginning of a terminal decline of the European model. The continent that made the modern
world is about to undo itself
EUROPEAN FINANCIAL CRISIS: HOW DID IT START?
The Greek economy was one of the fastest growing in the euro zone during the 2000s; from
2000 to 2007 it grew at an annual rate of 4.2% as foreign capital flooded the country. A strong
economy and falling bond yields allowed the government of Greece to run large structural
deficits. According to an editorial published by the Greek newspaper Kathimerini, large public
deficits are one of the features that have marked the Greek social model since the restoration
of democracy in 1974. Since 1993 debt to GDP has remained above 100%.
In early 2010, fears of a sovereign debt crisis, the 2010 Euro Crisis developed concerning some
European states, including European Union members Portugal, Ireland, Italy, Greece, Spain, and
Belgium. This led to a crisis of confidence as well as the widening of bond yield spreads and risk
insurance on credit default swaps between these countries and other EU members, most
importantly Germany.
Concern about rising government deficits and debt levels across the globe together with a wave
of downgrading of European government debt created alarm in financial markets. In 2010 the
debt crisis was mostly centered on events in Greece, where there was concern about the rising
cost of financing government debt. On 2 May 2010, the Eurozone countries and the
International Monetary Fund agreed to a €110 billion loan for Greece, conditional on the
implementation of harsh Greek austerity measures. On 9 May 2010, Europe's Finance Ministers
approved a comprehensive rescue package worth almost a trillion dollars aimed at ensuring
financial stability across Europe by creating the European Financial Stability Facility.
Initially currency devaluation helped finance the
borrowing. After the introduction of the euro in
Jan 2001, Greece was initially able to borrow
due to the lower interest rates government
bonds could command. The global financial
crisis that began in 2008 had a particularly large
effect on Greece. Two of the country's largest
industries are tourism and shipping, and both
were badly affected by the downturn with
revenues falling 15% in 2009. To keep within
the monetary union guidelines, the government
of Greece has been found to have consistently and deliberately misreported the country's
official economic statistics.
In 2009, the government of George Papandreou revised its deficit from an estimated 6% to
12.7%.In May 2010, the Greek government deficit was estimated to be 13.6% which is one of
the highest in the world relative to GDP. Greek government debt was estimated at €216 billion
in January 2010.
EUROPE’S PERMANENT DECLINE:
Europe has floundered in many ways over the past decades. The European decline was not
inevitable. At its heart were political decisions and, therefore, European politicians have to
accept a great deal of the responsibility for producing the current crisis. Europe’s leaders have
weakened their countries through irresponsible fiscal policies, misguided migration programs,
and a shocking failure to react to demographic challenges.
The policy blunders in Europe are so severe that it was only a matter of time before the
continent imploded. The Greek crisis may have just been the catalyst for the rest of the world
to realise the severity of the European problems. Greece, however, was by no means a singular
case. It would be easy to dismiss the Greek crisis as just a budget crisis in a small country. In
fact, the recent economic history of Greece is the whole European tragedy in a nutshell. Greece
only foreshadows greater tragedies to come. It is the canary in the coalmine.
As it turns out, European citizens were less convinced. In the only referenda on the euro so far,
the Danes and the Swedes voted against it; and there were good reasons never to put the
question to, say, the Germans. Had they been asked whether they wanted to sacrifice their
beloved deutschmark for the euro, the answer would have been a resounding ‘Nein.’ The
monetary union project was doomed to fail from the beginning. That it was actually falling
apart faster than even most pessimists had thought was due to the fact that the Growth and
Stability Pact, which was meant to make the euro a hard currency, was never enforced.
This stability pact with its rules for public deficits and debt was breached from the beginning,
even by countries like Germany. And the figures submitted to the European Union were
shamelessly manipulated by almost all member states, not just Greece.
As a result, out of the 16 Eurozone member states, only five are still below the 60% debt to GDP
mark that the Growth and Stability Pact allows. They are Cyprus, Slovenia, Slovakia, Finland and
Luxembourg. With all due respect, these are not quite the heavyweights of the Eurozone. This
year, not a single Eurozone country, not even Luxembourg, will manage to fulfil the 3% deficit
criteria of the treaty. In other words, the Growth and Stability Pact is dead. So the European
monetary union is yet another policy failure caused by European politicians blissfully ignoring
economic realities. It was also another instance of European leaders brushing aside the wishes
of their people.
The Greek crisis could have been the perfect opportunity for them to realize what a mess they
had created. But instead of cleaning up the mess, they are creating an even greater mess. Not
only are European politicians providing vast amounts of money for the stabilization of the euro,
but they have also ended the pretence of the independence of the European Central Bank.
Taken together, they are leading Europe into a new inflation and transfer union—a union that
no country had originally signed up for.
Europe’s monetary union is crumbling under the weight of public debt. There is a lot of finger-
pointing at Greece, Portugal and Italy. At the same time, these countries look to Germany to
restore their public finances. Unfortunately, not even Germany is strong enough to carry the
weaker EU members through their crises.
Population ageing and migration
The most pressing political challenge in Europe is the debt crisis, and solving it will require
extraordinary measures. But this is by no means the only problem. The most important long
term challenge will be its ageing societies. According to Eurostat, the EU’s statistical office, the
average age of Europe’s population is 40.4 years. By comparison, the average age is 36.3 years
in America and Canada, 27.6 years in Asia, and only 19.0 years in Africa. By 2030, Europe’s
average age will go up to 45.4 years.
An older population not only means more pensioners but also rapidly increasing health costs.
Given the already precarious state of public finances across Europe, it is quite clear that Europe
will struggle to shoulder these burdens. Population ageing and shrinking will also mean that
Europe can expect extremely subdued economic growth rates for decades to come.
Some experts argue that immigration could be used to correct this demographic imbalance.
Unfortunately, the scale of the problem is far too great for migration to offer a quick fix. Just to
maintain its current workforce-to-retiree ratio, Italy would need an annual influx of more than
700,000 migrants. All European countries show the same set of problems. On the one hand is
an ageing and less fertile native population. On the other hand, though, inward migration is
equally strong. Unfortunately, though, European countries have not managed to steer
immigration enough, so in effect they are getting a high proportion of poorly qualified migrants
who are unlikely to make a positive contribution to their economies.
Taken together, it means that European societies are segregating. On the one hand, there is the
native, ageing and shrinking population; on the other, there is a less integrated, less educated,
less productive but highly fertile migrant community.
A lack of leadership
The problems on the European front are numerous: the flawed monetary union, the disastrous
state of public finances, the rapidly ageing and shrinking populations, the failed integration of
migrants with a corresponding increase of informal segregation. All these issues would require
tough and decisive political action if they are to be solved but which is not forthcoming in the
near future, least of all from the European Union. The Europeans do not even have a political
mechanism to tackle these issues.
The European Union has become a bureaucratic organisation too busy dealing with itself. It is
extremely good at producing thousands of pages of new laws each year so that even defining
chocolate can take 15 years. It is also an institution with a serious lack of democratic legitimacy.
The European Parliament is still marginalized by the executive and national governments; its
proceedings are barely transparent. Even the newly installed European President, who was
meant to be the face of the Union, is only known to a handful of political insiders. The real
decision-making still takes place in European capitals—and the European Union is then used as
a tool to sell national self-interest as European solutions.
WHAT FUTURE FOR EUROPE?
A realistic assessment of Europe shows the continent to be in terminal decline and facing an
uncertain and unpleasant future. Whether these problems will culminate in a big, existential
crisis or repeat the Japanese experience of a few lost decades is hard to predict. Neither
scenario is particularly appealing, though.
Recent emigration levels from European countries show that the exodus from Europe has
already begun. Between 1997 and 2006, nearly two million Britons left their country, and that
was at a time when the British economy was still growing.15 In Germany, more than 160,000
people left the country in 2007, many of whom were highly qualified. A survey compiled for the
Economics Ministry revealed that a large proportion of German migrants named high taxes and
a complicated bureaucracy as important factors contributing to their decision—and this was
before the economic crisis.
If Europe’s problems do not get solved, the European brain drain will continue. This is bad for
Europe but potentially good for countries such as Australia. There will be thousands of well-
qualified British entrepreneurs, German engineers, and Polish doctors looking for a better life
elsewhere. The future of Europe looks bleak, no matter from which angle we look at it. The best
we can do is to watch the developments in the Old World carefully and make the best of them.
