Whenever I want to hastily evaluate how Europe is doing economically, I take a macro look at the French and German economies. The famous « couple Franco-Allemand ». Germany and France, are Europe’s locomotive, political scientists like to say. They pull the rest of the Union behind them. So if one of the two countries is stalling, the other needs to pick up the traction, or else we have a big momentum issue. Because of this momentum issue, the EU faces a situation today where the economic problems are here to stay.
That lagging country is France. After a period of local elections, political bickering, name calling, and a pinch of populism, the country finds itself facing raging issues. The entire EU is looking at France for a sign of structural reform, be it its OECD record high public sector as percentage of GDP, or its rigid labor market. The president François Hollande finds himself in a unique position in French history as the most unpopular president ever.
The personal approval ratings for French President Francois Hollande have hit a new low of 18 percent, compared to 58 percent enjoyed by his new Prime Minister Manuel Valls, according to an opinion poll from Sunday.
He is summoned by Brussels to present his deficit reduction path. His party, the French Socialists (Parti Socialiste), took a historical blow in April’s local elections. As a political response to the urgency of the situation, he designated Manuel Valls as his new prime minister, in a move that puts French’s social democrats, or the liberal tendency of the French left, in power for the first time since Michel Rocard.
At the same time, the contrast in Germany is staggering. The German Bundestag concluded a week of debating the Federation’s budget. Merkel’s government presented for the first time since 1969 a budget in equilibrium. This technically means Germany is contracting no debts, paying simply what it owes. Merkel seized the opportunity to congratulate Wolfgang Schauble her finance Minister
Merkel herself praised her finance minister, Wolfgang Schäuble, for submitting a budget in which the German government would take on no new debts. Should the predicted figures bear out, it would be Germany’s first such budget since 1969, fueled in large part by record tax revenues.
Situation getting critical for Hollande
Co-president. This was one of the headlines in the French press following Valls’ nomination . The President is in a very weak stature. The nomination of Manuel Valls is more of a strategy that has one objective: save what still can be saved from a catastrophic sequence of political management. I’ve written earlier about Hollande’s early 2014 shift towards a more liberal pro-market shift in economic policy. This shift followed two years of excessive taxation of the French enterprise structure that resulted in a series of popular revolts end of 2013.
Finding himself facing record high opposition, Hollande is playing his last card. Valls, a politician previously called « Baby Blair » for his admiration of the policies of former British PM Tony Blair, is often compared to Sarkozy in his pragmatic, proactive decision-making. Hollande, in a follow-up with the local elections results, which led to a crushing victory of the U.M.P, the french traditional right, designated Valls who is very well seen on the right of the political compass.
Mr Hollande turned to Mr Valls, from the right of the Socialist party, after a crushing defeat for the government in local elections last month. The former interior minister has consistently been the most popular member of the government since Mr Hollande was elected in May 2012.
Publicly, Valls is well perceived, and his early appointment installed a climate of confidence and discipline in Hollande’s management system. However, Valls arrives at the head of a government managing record high unemployment figures, coupled with record low growth figures. Add to that the political resilience of the population, you got yourself an explosive mix. Giving Valls the reigns of the country’s executive branch, in such troubled times, is a tricky move. No matter the good will and the confidence effect, Valls has no cushion to operate freely and efficiently. To resume, it’s a bit too late for innovative policies and time for crisis management.
The EU elections
No one doubts that the amplification of the EU’s economic problems is giving nationalists all over the continent momentum. People are increasingly turning towards politicians not entangled in the mainstream/europeist view shared by the traditional European left and right. The upcoming elections are going to be, as usual, a referendum on the Euro question. The single currency will be the center of the debate. Southern European economies are struggling to reignite the growth engine, seeing a lot of industries leaving their territories towards the east. The Euro at the same time, is flirting with the 1.40 critical level against the USD. There is a lot of friction between European economies, and the current European situation does not look like that of an integrated Federation.
In this current situation, in a Union of disintegrating economies, the nationalist/euroscpetic vote will emerge as the winner. All governing parties all over the EU are facing populist votes, making the political situation as unstable as the economic one. Here is Matteo Renzi’s current EU elections related problem for example:
The anti-establishment Five Star Movement (M5S) of comedian Beppe Grillo, which is courting recession-weary voters with promises to « send home » all professional politicians, hold a referendum on eurozone membership and withdraw from austerity pacts such as the Fiscal Compact, is the biggest threat to the PD.
When the crisis erupted and Europe’s economic problems surfaced, analyst were unanimous: The problem is a single currency union with absolutely no fiscal or economic coordination 6 years into the crisis, the problem is still here. How is Europe in a better situation? I don’t know. The electorate doesn’t know. Only a few people at the European Commission and a few chief economists see the amelioration in the European economy. Meanwhile, the current economic debates remain.
While some analysts see the EU economy as surely recovering, the persistence of the original problems tells a different story. Mohamed El-Erian for example, one of the prominent voices in the economic landscape, says the following about the EU economy:
With risk spreads compressing markedly, the region’s financial crisis has been relegated to the history books, and the region is again attracting the interest of foreign investors. Consumer confidence is recovering as well, and businesses are again looking to expand, albeit cautiously. Economic growth has picked up and unemployment, while still alarmingly high, has stopped increasing in most countries.
El-Erian, is clearly linking a run by institutional investors for European bonds to a recovery. He is assuming that the reason institutional investors are back to the European market is a perception that the crisis is behind us. However, in a small paragraph, he underlines the main issue in an economic recovery that the EU has not tackled yet.
Europe badly needs all of this good economic and financial news. The region has only just exited a recession that has devastated many livelihoods. Far too many citizens are still trapped in long-term unemployment, while a distressing number of young people struggle to secure a job – any job.
So we are approaching a parliamentary election, with a population in long unemployment lines, and an explosive political climate. I fail to see the recovery El-Erian is talking about. Of course if you look at the macro figures, you can scratch 0.2 points of growth here, low interest rates there, the stock market reaching record highs, and you can turn all that info into good news. The real economic indicators however, people, are just not doing that good.
Market pressure mounting on the ECB
El-Erian asserts however that the « recovery » he surely is seeing needs to be pushed further so it doesn’t die prematurely. So what does he advise? A European QE. You heard me, a whole Quantitative Easing Bernanke style program!
Second, the European Central Bank needs to pivot from financial-crisis prevention – an area where it has performed impressively – to striking the delicate balance of supporting growth (and countering currency over-appreciation) without fueling excessive risk taking. This may well involve renewed experimentation, which would again take many policymakers outside their comfort zone.
I emboldened two phrases: counter currency-over-appreciation means technically QE or monetary injection. Renewed experimentation is just a personal note: Do we really « experiment » with our children’s future?
So the rhetoric is the following. There is a deflationary risk. The ECB needs to intervene in financial markets activity to undergo some sort of proactive monetary policy, call it QE, open-market activities, or some sort of « exceptional » monetary measure.
Now I’ve already blogged before on how a program like QE is inefficient, unless you’re looking to buy political time. The amount of research on QE and unconventional monetary policy has shown that central bankers often take decisions that aggravate recessions. Friedman has already talked about this.
But the political elite, under popular pressure, are pushing Draghi and the ECB into adopting unconventional policies. Even though the technicalities for the ECB to do that are just unconstitutional at a European level. So any program similar to QE will have to pass through national parliaments. Who will benefit from QE? The real economy? Or financial markets, that have already been bailed out by the EU before? Allow me to be sceptical about these calls for monetary relief. A political relief is what the EU needs, and if the political elite are not aware of this fact, the European elections will sound the end of the single European project.
Conclusion: The (EU) economic crisis here to stay
Searching throughout Youtube for a video that I could share on EU’s unemployment problems, I found this piece of art.
It surely dates from October 2012, but I can assure you that the situation is not better. Europe is contemplating a lost generation. By eluding the political problem at the origin of the Euro crisis, countries and generations are being sacrificed. The upcoming EU parliamentary elections are critical for the Union’s future, especially with a main component of the EU symphony, France, performing poorly. As I « hastily » concluded in my first paragraph, EU economic problems are unfortunately here to stay. Unless political courage erupts within our political elite.