Friday, September 28, 2012

Europe Needs A New Idea of Itself

European politicians are desperate for good news.  So, today the consulting firm Oliver Wyman recast numbers from bank auditors and pronounced that Spain's banks need only  €54 billion euros to recapitalize themselves, and not €62 billion euros as previously thought. Oliver Wyman came to a happy conclusion.  Politicians hailed the news as a "great step forward."  Excuse me?

Meanwhile, a report from the European Commission shows that the magnitude of divergence in economic indicators among EU members has widened to historical highs. Using the unemployment rate, for example, the report notes that Spain's reported number of 25.1% is 20.6 percent above that of Austria at 4.5%, the widest divergence ever for this indicator. 

Our indoor soccer group welcomed back one of our players who just completed about eighteen months studying and working in Barcelona for a busy design firm.  We laughed about the American press giving even the slightest credence to the possibility of a Catalan secession.  On the more serious side, he noted that when he began his academic term in Spain, there were signs, though quiet, of well dressed young people walking through well-to-do parts of Barcelona looking for food in dumpsters, even as Catalonia was celebrating the success of FC Barcelona in La Liga and in Europe.
Now, as we know, the world has seen the photos. Problems have escalated into a much higher youth unemployment rate and to angry rioting in the streets.

There is talk among some economists of adjustment mechanisms to reduce the disparity between core and periphery performance among the EU members.  It revolves around, for example, higher inflation rates in Germany and France than in the peripheral countries, like Spain and Portugal.  The goal would be to force changes in real wages, which might recalibrate competitive advantage.  What would the mechanism be for this differential transmission?  In any case, it wouldn't be enough.

For all the freer movement of goods and capital within the EU, the labor markets are not free.  A combination of regulations, quotas and different work rules, as well as taxes serve to remove labor markets from the adjustment mechanism.

Without a freeer EU labor market, a move to budgetary integration is nonsensical.  Finally, the latter is highly unlikely to happen given the loss of sovereignty that will be politically unacceptable.  As time continues to pass, Greece, Spain, and next probably Italy will force Europe to come up with a vision of itself that may not include an omnipotent Brussels and a single currency for 500 million Europeans. 

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