SUMMER 20126

PETER SUTHERLAND � GERHARD SCHRÖDER

JAKOB KELLENBERGER � FÉLIPE GONZÁLEZ

MAREK BELKA � GORDON BROWN

NIALL FERGUSON AND NOURIEL ROUBINI

GUY VERHOFSTADT � ROBERT MUNDELL

Europe’s Next Steps

Because they have failed to address the fundamental economic imbalances within

Europe obscured by the single currency, each effort by European leaders so far to

resolve the euro crisis has only deepened it. Without a decisive move toward fiscal

and political union, accompanied by policies that push productivity and competi-

tiveness toward convergence while closing the democratic deficit, the Eurozone

will disintegrate.

To discuss the way forward, the Nicolas Berggruen Institute's Council on the

Future of Europe met in Rome on May 28 with Italian Prime Minister Mario Monti.

In this section we publish the contributions from that meeting by the former

European leaders, scholars and Nobel laureates who are members of the Council.

A Global Rescue for Europe

GORDON BROWN is the former prime minster of the United Kingdom. He is a member

of the Nicolas Berggruen Institute’s 21st Century Council.

london—This failure to so far resolve Europe’s crisis has its origins in a fatal mis-

diagnosis. From the start, Europe’s leaders have insisted that we face a public debt cri-

sis, that its solution is austerity, and that if that solution is not working it is because

we have not had enough austerity.

But Europe’s problem is not simply the one-dimensional problem they describe.

Europe also faces a crisis in the fundamentals of its banking sector, and another crisis

in the failure of economic growth and competitiveness that affects every country on

the Continent with the sole exception of Germany.

Europe’s propensity to delude itself was apparent four years ago, when, as the

global financial crisis began, European leaders convinced themselves that their finan-

cial system was basically healthy, and had been the unlucky victim of Anglo-Saxon

folly. At the first euro-area leaders’ meeting in October 2008, my assertion that

European banks were more dangerously overleveraged than America’s, far too

dependent on short-term market financing, and riddled with risk-laden subprime

mortgages bought from the United States was met with skepticism, even incredulity.

But because Europe took only a fraction—one eighth—of the action that

America took to recapitalize and write off rotten assets, its banks today are still poi-

soned by their high levels of debt (German banks today remain leveraged 32 times

their size, and French banks 26 times). Indeed Spain’s banks now require upwards of

100 billion euros of recapitalization even before we deal with similar pressures on

banks in Italy and even in France. And with banks now unable to provide good col-

lateral for their loans, the 2012 life raft—1 trillion euros of European Central Bank

support—may soon have to be scuttled. The specter of unstoppable runs on banks

will hang over everything until there is decisive action.

Every day we are seeing another abdication of responsibility: a failure to give con-

tent to a plan for growth to protect Europe—already in its second recession—from

what could be a decade of stagnation. Already European production is shrinking from

its pre-recession levels of 20 percent of world output to a projected 11 percent in a

decade’s time. More worrying, only 2 percent of Europe’s exports currently go to

China, and a total of just 7.5 percent of European goods and services go to India, Brazil

and other emerging markets that are responsible for 75 percent of global growth.

It may seem strange to propose that the world’s second-richest continent now

needs global support to lift itself out of an economic hole. But we know that today’s

Every day we are seeing another

abdication of responsibility: a

failure to give content to a

plan for growth to protect

Europe—already in its second

recession—from what could be

a decade of stagnation.

SUMMER 201220

European consumers are too fearful to spend and that European investment is falling

as banks deleverage at a faster rate than at any time in recent history. Worse still,

Eurozone members can no longer rely on pre-euro measures to boost their national

economies—the currency adjustments, increased money supply and interest rate

cuts that encourage growth.

Of course, at the next meeting of the European Council agreement will be

reached on what will be called “a growth strategy”—a 10 billion euro boost to the

European Investment Bank, a continental infrastructure fund, structural reforms to

liberalize markets, and possibly also the introduction of cyclically adjusted deficit

limits. But these measures will either take too long or be too slight to yield a big

enough boost to growth this year and next.

The unpalatable truth is that European countries can no longer rescue themselves

from stagnation without international support. What should have happened at the

G-8—and what must happen at the G-20 next month—is a coordinated global

response that will help Europe decisively address the two elements of the crisis that

are being ignored.

First, as their banks are restructured, the world must underpin Europe’s econo-

my with help for a firewall strong enough to insulate Spain, Italy and other countries.

Now that Greece has brought the Continent to its moment of truth, a financial re-

engineering is a prerequisite for the survival of the euro. But Europe’s stability fund

of around 700 billion euros, even when backed up by the IMF, is nowhere near large

enough to persuade the rest of the world that Europe can master the storms ahead.

A larger firewall is now needed as Europe considers afresh a French plan for the cre-

ation of Eurobonds, ponders Italy’s proposal for a European-wide system of deposit

insurance, and fights off a flight of capital from its periphery.

Second, to give weight to the European growth initiative, the G-20 needs to

return to the global growth compact first agreed in London and Pittsburgh in 2009.

Ten years ago the Western consumer could drive the world economy forward. Ten

years from now the Asian consumer will be the driver of growth. The G-20 should

plan to raise overall global growth by speeding up the opening of Asian and South

American markets. It should also seek IMF help to negotiate a deal in which China

creates more global demand by increasing consumer spending and India further opens

its markets to imports. In return, America and Europe should speed up capital invest-

ment in infrastructure, which would reassure Asia of the West’s commitment to

growth. A growth compact could make the West confident it can benefit from an

export-led drive to the East, and make the East confident there can be revitalized

demand in the West.

Ten years ago the Western con-

sumer could drive the world

economy forward. Ten years

from now the Asian consumer

will be the driver of growth.

SUMMER 2012 21

The whole world will benefit—and we will have helped pull Europe back from

the brink. The alternative—a lost decade of European unemployment and stagnation

—can and must be avoided.

�

We fear that the German gov-

ernment’s policy of doing “too

little too late” risks a repeat of

precisely the crisis of the mid

20th century that European

integration was designed to

avoid. We find it extraordinary

that it should be Germany, of

all countries, that is failing to

learn from history.

SUMMER 201222

This Time Europe Really is on the Brink

NIALL FERGUSON is professor at Harvard University and author most recently of

Civilization: The West and the Rest; NOURIEL ROUBINI is professor at New York

University and chairman of Roubini Global Economics.

rome—Is it one minute to midnight in Europe?

We fear that the German government’s policy of doing “too little too late” risks

a repeat of precisely the crisis of the mid-20th century that European integration was

designed to avoid.

We find it extraordinary that it should be Germany, of all countries, that is fail-

ing to learn from history. Fixated on the non-threat of inflation, today’s Germans

appear to attach more importance to the year 1923 (the year of hyperinflation) than

to the year 1933 (the year democracy died). They would do well to remember how a

European banking crisis two years before 1933 contributed directly to the breakdown

of democracy not just in their own country but right across the European continent.

We have warned for more than three years that continental Europe needed to

clean up its banks’ woeful balance sheets. Next to nothing was done. In the meanwhile,

a silent run on the banks of the Eurozone periphery has been underway for two years

now: cross-border, interbank and wholesale funding has rolled off and been substituted