Europe Has Lost its Way

WASHINGTON, DC – Europe’s response to the strategic challenges it is facing – Russian aggression in Ukraine, refugees fleeing violence in the Middle East, disorder in North Africa – leaves the impression that its leaders have no idea what to do. And indeed, they may not – a reality that needs to be acknowledged, not papered over.

Simply put, the European Union’s stagnant economy is conditioning its response to the external pressures it confronts; internal crisis has left EU leaders little room for maneuver. Fortunately, Europe has the means to address this crisis, if it can summon the wisdom and the political will.

The origins of the EU’s problems lie in its response to the 2008 global financial crisis: two years of large-scale fiscal stimulus. While this did little for growth, it resulted in crippling public debt. Seven years later, EU output per person is no higher than it was at the start of the crisis. Meanwhile, average public debt has soared to 87% of GDP, leaving little space for policy flexibility or innovation.

In hindsight, it is all too obvious what should have been done. Greece, which carried out the biggest fiscal stimulus, is the country whose economy has suffered the most damage. Its depression continues, whereas countries like Latvia, Lithuania, and Estonia, which carried out early, radical fiscal adjustments and liberalized their economies, are enjoying strong growth.