Download - A Global Rescue for Europe
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.
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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.
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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.
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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