Europe’s Options

The EU has three broad options as it confronts its economic malaise and increasingly frustrated voters. Unfortunately, the most likely option – business as usual, with improvised fixes to mini-crises – is the one least likely to deliver the growth that Europe desperately needs.

STANFORD – Many Europeans have come to believe that they have weathered the economic and financial storm. In the last two years, deficits and debt have stabilized. Yields on the sovereign debt of the eurozone periphery’s weak economies have fallen sharply. Portugal and Ireland have exited their bailout programs. Talk of Greece leaving the euro has subsided.

All of that is true, but there is a big catch: economic growth in the European Union remains anemic. GDP in Holland and Italy shrank in the last quarter, and France’s barely budged. Forecasters are revising down their estimates for 2014 eurozone growth to just 1% year on year. Unemployment remains at a staggering 11.6% in the eurozone as a whole, compared to 10% in the United States at the worst of America’s Great Recession. It is above 25% in Greece and Spain – and even higher among the young.

Europe’s economy remains shackled by three problems – sovereign debt, the euro, and wobbly banks – despite several new policy backstops: the European Stability Mechanism (ESM); the European Central Bank’s easy-money policies and holdings of sovereign debt; and the ECB’s takeover in November of supervision of the 130 or so largest pan-eurozone banks. None of these reforms has been sufficient to restore the stronger growth that Europe desperately needs.

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