Economics

Europe or Anti-Europe?

Feb 28, 2017 Michael Spence

Since the 2008 financial crisis, the conventional wisdom has been that a long, difficult recovery for eurozone economies will eventually lead to strong growth. But this narrative is losing credibility, as various trends suggest that Europe is trapped in a semi-permanent low-growth equilibrium.

MILAN – A knowledgeable friend in Milan recently asked me the following question: “If an outside investor, say, from the United States, wanted to invest a substantial sum in the Italian economy, what would you advise?” I replied that, although there are many opportunities to invest in companies and sectors, the overall investment environment is complicated. I would recommend investing alongside a knowledgeable domestic partner, who can navigate the system, and spot partly hidden risks.

Of course, the same advice applies to many other countries as well, such as China, India, and Brazil. But the eurozone is increasingly turning into a two-speed economic bloc, and the potential political ramifications of this trend are amplifying investors’ concerns.

At a recent meeting of high-level investment advisers, one of the organizers asked everyone if they thought the euro would still exist in five years. Only one person out of 200 thought that it would not – a rather surprising collective assessment of the trending risks, given Europe’s current economic situation.

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Michael Spence

Writing for PS since 2008
161 Commentaries

Michael Spence, a Nobel laureate in economics, is Professor of Economics Emeritus and a former dean of the Graduate School of Business at Stanford University. He is Senior Fellow at the Hoover Institution, Senior Adviser to General Atlantic, and Chairman of the firm’s Global Growth Institute. He serves on the Academic Committee at Luohan Academy, and chairs the Advisory Board of the Asia Global Institute. He was Chairman of the independent Commission on Growth and Development, an international body that from 2006-10 analyzed opportunities for global economic growth, and is the author of The Next Convergence: The Future of Economic Growth in a Multispeed World (Macmillan Publishers, 2012).

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0 Comments on this paragraph, 13 Comments on this article

Manuel G Samuel Mar 7, 2017

If the Euro breaks up the main reason is the huge influx of migrants from Africa, Middle-East, and, to some extent from Asia. Make no mistake, this is the harsh reality. There are always solutions for economic problems. But there is no silver bullet for the immigration problem. And yet we're only dealing with war, political and economic refugees. It won't long until environmental refugees get on board the train to Europe. Brexit happened because of migration. Wilders is riding high in polls, very much like Le Pen, because of migration. Sweden is trying to hide the harsh reality of trying to integrate a massive influx of refugees. Schengen Convention boarders are crumbling. Europeans are fretting over the massive influx of migrants. They suspect they won't be able to integrate them vis-à-vis language barriers, cultural barriers, religion, etc etc. And all this is happening in a time when jobs in Europe are being gradually more and more absorbed by automation and machines. Then most people say they do not want Islamic refugees in their cities. Why? Because they're too different and they do not integrate, with most ending up in ghettos. I, myself, I love to visit Islamic countries. I have lovely Islamic friends. I love Islamic food, music and culture at large. I like reading the Koran and going to a Mosque. It is an enlightening religion. But I cannot see how my Islamic friends would ever accept to see my teenage daughter going out in a mini-skirt. Their world Is too different from ours. We can relate and be friends, visit one another for some time, but we cannot live in the same house, my house, especially when they start to try imposing their values and rules. Make no mistake, this is not intolerance, xenophobia or religious exclusivism. It is just a clear evidence. You cannot cage a scorpion and a praying mantis (no pun intended) together. This is what makes people listen to Wilders and Le Pen. This is what Donald Trump so widely read from the lips of the silent majority who got him elected. Again, the Euro area and the EU will likely break up not because of economics but because of demographics.
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Mauricio Duran-Loriga Mar 3, 2017

The author forgot the unfathomable and fiscally irresponsible welfare state that is crowding out savings, euro for euro. What is spent in welfare state is not invested by businesses. Shot that elephant in the forehead and mainland Europe will stand up back on its feet.

Need to drain the swamp first.
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Mauricio Duran-Loriga Mar 3, 2017

When I hear about political corruption in the US, the "swamp", it makes me smile. European political elite is perennial gold medallist in corruption, setting new world records by the day. History books ladies and gentlemen.

At any occasion when the European political swamp was endangered, it managed to choose a dictator to run the show, hoping the swamp will not be drained. With horrendous outcomes, on every occasion.

European breakup will come the same good old way. The corrupt elite will lengthen putrefaction as much as posible, and at the last minute they will appoint a corrupt theatrical populist hoping to control his strings. Not a single European mainland country has escaped this pattern in 20th century.

The UK is cleverly jumping ship before iceberg collision.

Even the absolutely programmed breakup of Checkoslovaquia produced GDP to shrink by at least -25% in both new republics.

Yeah peacefully...
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John Brian Shannon Mar 1, 2017

Hi Michael,

Well said on all counts!

It's my contention that Europe's growth is being choked-off by high government debt that accrued over many decades due to fiscal irresponsibility.

I consider any debt-to-GDP ratio over 75% to be irresponsible, in any country that isn't enjoying robust growth

High debt loads up to 75% of GDP are fine (even welcomed) in rapidly growing economies that run surpluses every year.

My statement applies even if those surpluses (that are based on maintaining basic government services) are then spent on stimulus during recessionary years (only) with a return to unspent surpluses during growth years. At which point, half of each surplus should be spent on paying down government debt.

If the EU ever 'dies' it's epitaph will read: "Debt killed the EU."

Your statement rings so true: "Sovereign debt levels, meanwhile, have approached or exceeded 100% of GDP (Italy’s is now at 135%), while both inflation and real growth – and thus nominal growth – remain low. This lingering debt overhang is limiting the ability to use fiscal measures to help restore robust growth." -- Michael Spence

1) Removing impediments to foreign investment could break European nations free from 10 more years of sluggish growth and save incumbent politicians from their increasingly restive voters.

2) A 20-year legislated and mandatory plan for each EU country to paydown their debt-to-GDP levels to 75% will increase growth and put governments in a powerful position to address the next recession via generous stimulus programme spending at the onset of such downturns.

3) A special focus on economically empowering those left behind by globalization, will return (probably) 12 euros for each 1 euro spent on GBI by governments.

A Guaranteed Basic Income of 1088 euros per month for each adult who reports less than 13,056 euros on their yearly income tax return will make every local shopkeeper, landlord, and transit system operator sing praises to the Guaranteed Basic Income!

For people in the bottom quintile, every single euro will be spent in the local economy, and in the most efficient manner -- FAR, FAR, more efficiently than if the government spent the same amount of money.

4) Each EU government should add .5% of GDP to their defense spending to hire anyone (especially young people wanting to earn money for college) who wants a job -- for the express purpose of infrastructure construction and maintenance.

Rather than paying unemployment insurance benefits to millions of EU citizens, governments could be spending the same to rebuild their deteriorated infrastructure and to build new infrastructure, and taxing those workers on their earnings, while local governments collect sales taxes on their spending. A quadruple-win!

Initiating these 4 simple steps, would mean nothing less than changing the entire narrative in the EU -- and would result in a new economic boom similar to that seen in Europe during the 1980's and 1990's.

Failure to act decisively now, means ever EU country will exit the EU (whether that fixes the problems, or not, voters WILL have their say -- as we have seen) and Europe will be the weaker for it.
___

I'll be re-reading your poignant essay many times, Michael. Thank you for writing with such knowledge and clarity.

As always, very best regards, JBS
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Walter Gingery Feb 28, 2017

Coming from a relative outsider, this will serve as an adequate summary. From the inside, of course, things will look considerably different.

But the main point, I think, is the recognition that *something* has got to change. If this were a (badly written) morality play, we'd find ourselves at the end of the second act, Act Three, the Conclusion, to follow.
- Steve Hurst Feb 28, 2017
  
  Sorry Walter the bit in the post below was for M M on an earlier post
  
  In response to you I would say the people of Europe have seen the Flagellants in the 14th century and will once again get tired of those sort of requests when there is a lack of positive outcome. Austerity is supposed to be a temporary event but without uptick will become the norm
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- Steve Hurst Feb 28, 2017
  
  M M
  
  Yes they are good at street parties. The French pay people to be clowns at clown schools, but do actually call them clowns, whereas we vote for them after Oxford
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Paul Daley Feb 28, 2017

It's hard to argue that European countries used debt-fueled housing bubbles to compensate for demand shortfalls, and that they need fewer constraints on banking operations or anything else. European economies, like the US, were not too much managed. They were badly managed. Spence has cited some of the problems, but there is no silver bullet. Some constraints have to be tightened, others loosened, and new tools of economic management have to be devised.
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M M Feb 28, 2017

In the current climax, the one thing that saved the EU and the Euro is the dysfunctional set up of the EU. One cannot create havoc where havoc already exist. Mind due, if LePen makes it in France, this shall be a major shift and a real threat for the EU. Brexit is a special case, it would not have happened had it not been for the mishandling of the migrant problem by all concerned, including the British establishment and the manipulation of the whole Brexit process by the British establishment, whom incidentally are continuing to make very grave mistakes. Trump is a different case, yes people are disinchanted by the status quo but two main factors helped him propel to power and without them he would not have been elected. So in short, the EU is here to stay so will the Euro, unless "Egualite, Fraternite et Solidarite" collapses and sinks the ship....
- M M Feb 28, 2017
  
  Steve a good response, alternatively, there is also a very good possibility of a rendezvous "a la Bastille"..
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- Steve Hurst Feb 28, 2017
  
  M M
  
  On the good ship EUropean the question is the state of the crew as they chase down the fiscal Moby Dick aka Euro with a long succession of Captn Ahabs on the poop deck accompanied by Starbucks. Of course the First officer Fletcher Christian on the sister ship The Brexit has mutinied and sought an island refugee, we can only hope it is better than Pitcairn. Remainers from The Brexit are at at sea in a lifeboat somewhere
  
  Of course the Europe will exist it is a landmass, as for the Euro we simply have to wait for it to blow
  "'There she blows!- there she blows! A hump like a snow-hill! It is Moby-Dick!'" Captn Ahab
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Steve Hurst Feb 28, 2017

Re the West -

'We have been through a protracted period of stagnant productivity growth, particularly in the developed world, driven largely by the aging of the ‘baby boom’ generation. Social benefits (entitlements in the US) are crowding out gross domestic savings, the primary source for funding investment, dollar for dollar. The decline in gross domestic savings as a share of GDP has suppressed gross non-residential capital investment. It is the lessened investment that has suppressed the growth in output per hour globally. Output per hour has been growing at approximately 1⁄2% annually in the US and other developed countries over the past five years, compared with an earlier growth rate closer to 2%. That is a huge difference, which is reflected proportionately in the gross domestic product and in people’s standard of living.

As productivity growth slows down, the whole economic system slows down. That has provoked despair and a consequent rise in economic populism from Brexit to Trump. Populism is not a philosophy or a concept, like socialism or capitalism, for example. Rather it is a cry of pain, where people are saying: Do something. Help!'
Alan Greenspan 2017

In other words a big part of the problem is demographics and it is not going away

If we then look at the rest of the World we have UN population forecasts of population doubling in three decades. Alongside that there is due to be a doubling of internal migration to cities, some 2.7billion new rural migrants into urban locations with no infrastructure and no work and half baked plans to industrialise and export goods and services. Again the problem is demographic but the reverse of the West and again it is not going away

Europe or Anti-Europe? The economy(s) is (are) linked to demographic developments
- John Brian Shannon Mar 1, 2017
  
  Hi Steve,
  
  Well said, as always.
  
  Cheers, JBS
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