Today is “Europe Day,” the equivalent of our Fourth of July. America was founded on a document dated July 4, 1776. Modern Europe’s birth certificate is dated May 9, 1950, when French Foreign Minister Robert Schuman issued a manifesto (called the Schuman Declaration) that gave birth to the idea of a United Europe. The first baby steps came the next year with a coal and steel union, and then a six nation Common Market, the forerunner to today’s European Union, founded by the Treaty of Rome in 1957.
After the fall of the Berlin Wall in 1989, Europe accelerated its moves toward union through the 1992 Maastricht Treaty, giving birth to the European Union and then the launch of the 11-nation euro-zone in 1999 – since expanded to 17 nations, with Latvia slated to be #18 in 2014. But lately, Europe’s unity has reflected the kind of ‘union’ we saw in the U.S. in the 1850s – rancorous arguments about “state’s rights” and economic inequality. Still, you wouldn’t know that from looking at Europe’s stocks or its currency.
After cutting the euro’s interest rates last week – a move that usually depresses a currency – the euro has risen to $1.3178. European stocks have also soared. The European Central Bank (ECB) President Mario Draghi bragged about this during his Q&A session following last week’s euro rate cut: “Since July 26, 2012, stock markets have gone up in Germany, France, Italy, and Spain, from 22% to 38%. And just in the last month, stock markets went up again in Italy and Spain, by something like 10%.”
Draghi picked July 26 as his start date because that’s when he gave his famous “whatever it takes” vow in London, saying that he would do “whatever it takes” to defend the euro. Obviously, he is proud to have single-handedly lifted most major European markets by about 30% by uttering a three-word mantra, but where are the economic fundamentals to justify the robust (10%) rise in the euro since last July?
Europe’s GDP Has Been Declining Since 2011
Since the first Greek crisis exploded into our headlines in May 2010, we’ve seen almost three years of a continual “crisis of the month” parade of collapsing national economies taking turns scaring investors. So far this year, February brought us a comical election in Italy, March brought a crisis in Cyprus, and April delivered a high-court ruling in Portugal, reversing its once-hopeful attempts at budget austerity.
The euro-zone’s major economic statistics are bad and getting worse. Here are some of the key numbers:
The euro-zone’s GDP has fallen for five straight quarters, since late 2011. In the fourth quarter of 2012 (the last quarter available), the worst declines were in Greece (-5.7%), Italy (-2.8%), Spain (-2.0%), Portugal, (-1.8%), the Netherlands (-1.2%), Belgium (-0.4%), and France (-0.3%). First-quarter 2013 figures will be released May 15. For 2013, theEuropean Commission cut its euro-zone GDP forecast to -0.4%, which means the euro-zone will remain in a recession all year.
Euro-zone industrial production fell 3.1% in the latest-reported month. Their Manufacturing PMI hit a four-month low of 46.7, the 21st month below 50. Among the biggest euro-zone economies, Germany contracted at its fastest pace in four months, with its M-PMI falling from 50.2 to 48.1 in the last two months. The M-PMI numbers were even lower in France (44.4) and Italy (45.5).
The euro-zone jobless rate is at a record-high of 12% and rising, led by Spain and Greece, with 27% of their labor force unemployed and roughly 60% of their youth (under 25) without a job or much hope of finding a job. Back in 2007, Spain employed 20.5 million people, with a jobless rate of less than 10%. Now, only 16.6 million Spaniards are working, with a jobless rate above 27%.
Four euro-zone nations have debt-to-GDP ratios over 100%, and they keep rising rapidly. Since 2007, Ireland’s ratio more than quadrupled, from 24.8% to 106.4%, Portugal’s grew from 62% to 108%, Greece’s grew from 106% to 170%, and Italy’s debt/GDP ratio rose from 104% to 127%.
The U.S. economy is growing and our federal deficits are declining. Most of our economic statistics are improving. Rising corporate earnings and stock buybacks propel many stocks higher. I understand that math. But Europe is contracting, budget austerity hurts, and tax rates are high, so why is the euro still rising?
The “Austerity Wars” are Driving Europe Further Apart, Not Together
Enrico Letta, Italy’s Prime Minister, upon taking office last week said, “Fiscal rigor alone will kill us.”
In the last week, we’ve seen selective leaking of some rather mean-spirited internal documents among competing European nations, grousing about German-led austerity. Most recently, an internal document from France’s ruling Socialist Party said that German Chancellor Angela Merkel’s “selfish intransigence” over austerity is ruining the French economy, as France’s jobless rate has now risen to a painful 11%.
Another example comes from a secret Greek government report, commissioned by the Finance Ministry and then leaked to the press. It says that Germany owes Greece $200 billion in World War II reparations, which would neatly cover the amount needed to solve the immediate shortfall in Greece’s debt crisis.
Voices against German-led austerity have also been raised in academia, including economics and foreign affairs. Mark Blyth, Professor of International Political Economy at Brown University, has written a new book, Austerity: The History of a Dangerous Idea. A major excerpt was printed in the May/June, 2013 issue of Foreign Affairs under the title “The Austerity Delusion: Why a Bad Idea Won over the West.”
The evidence mounts: In a European Council on Foreign Relations paper, Jose Ignacio Torreblanca and Mark Leonard wrote: “… everyone in the EU has lost faith in the project, both creditors and debtors … In southern European countries, the EU looks like the IMF did in Latin America: a golden straitjacket … In northern European countries, the EU is increasingly seen to have failed as a controller for the policies of the southern rim. The creditors have a sense of victimhood that mirrors that of the debtors.”
According to the Eurobarometer, a public polling service of the European Commission, the number of Europeans trusting the EU is now at an all-time low. In a recent poll, 72% of Spaniards said they “tended not to trust the EU” vs. just 23% feeling that way in 2007. European Council President Jose Manuel Barroso admitted that “At a time when so many Europeans are faced with unemployment, uncertainty, and growing inequality, a sort of ‘European fatigue’ has set in, coupled with a lack of understanding: Who does what? Who decides what? Who controls whom and what? And where are we heading?”
Former U.S. National Security Adviser Zbigniew Brzezinski also told Globsec, a security conference in Bratislava, “there is a dearth of historical imagination and of global ambition. There is no Churchill, nor De Gaulle, nor Adenauer…. [T]he inspirational vision that is expected of democratic leaders is absent.”
In view of Europe’s checkered history, we can’t really hope for a “strong man from somewhere” to emerge, but Europe could use some far-sighted leaders now. In the meantime, global growth is still being led by China and the U.S., not Europe, and those facts are unlikely to change anytime soon.
Some Euro-Dates to Recall This Week: May 8-11, 1931-1950
May 11, 1931: The Great Depression reached Europe and the seeds of World War II were sown with the failure of Austria’s largest bank, the Credit-Anstalt, leading directly to the political ascent of Hitler.
May 10, 1940: Hitler invaded Holland, Belgium, and the Netherlands. That evening, Winston Churchill, First Lord of the Admiralty, was called in to replace Neville Chamberlain as British prime minister. In his first speech as Prime Minister, Churchill said, “I have nothing to offer but blood, sweat, and tears.”
May 8, 1945: “V-E Day” or “Victory over Europe Day” in most of the Allied nations. In the Soviet Union, however, May 9 was henceforth celebrated as their “Victory Day.”
May 8, 1949: A new, more liberal West German constitution was approved, with Konrad Adenauer as Chancellor, and the economic miracle-working (wirtschaftswunder) Ludwig Erhard as Finance Minister.
May 9, 1950: French Foreign Minister Robert Schuman proposed the creation of a European federation. His Schuman Declaration eventually led to the creation of the European Economic Community (EEC).