The European Union of Economic Strife

The European Union (EU) is a large trading partner for the US and so the EU’s economic health matters to American consumers and workers.  We exchange goods and services from comparably skilled labor forces and from well-capitalized industries with comparable technology.  Our trade with the EU is not about offshoring jobs to subsistence-wage workers.

While the US is still recovering slowly from our protracted recession, “The 17 countries that use the euro were in recession in 2012 and will probably contract further this year.”  In contrast, US growth during 2013 is expected to be 2% and our unemployment rate dropped to 7.6% in March 2013.  EU unemployment stood at 11.9% in January 2013, an alarming 57% higher than in the US today.  In some countries it is much worse, for example in Greece and in Spain unemployment stands at 27%.  It might get worse.  Greece announced it must let 15,000 civil servants go over the next 18 months.  The promise to rehire that many soon is likely a hollow promise meant to mollify left-wing activists.

In China, the 2013 Q1 GDP growth of 7.7% is considered a slump.   It was slightly below the 8% expected.  However China’s industrial production was off 2% points or a full 20% below expectation.  That is an omen of decreasing China-bound exports from the EU.  Slow growth in the US is another indicator of dismal growth prospects for the EU.

High national debt levels have led most individual EU nations to adopt fiscal austerity.  Consumers and workers are generally unhappy with this posture and are more tolerant of debt than are their leaders.  Germany is perhaps an exception.  Alternative for Germany, a new political party, has formed to seek exit from the Euro, reduce bailouts to other nations and to moderate Angela Merkel’s policies of austerity.  If successful, this new party is likely to remove support from Merkel’s coalition, and that will likely throw victory to German leftists – who tend to favor sharing German wealth with neighboring countries.

In France, austerity and reforms that would make labor more competitive are not welcomed by President Hollande’s supporters.  The nation lost much of its export-driven vigor over the past few years.

Looming across most of the EU is the long term problem of an aging population with a wide swath of entitlements.  That will be an increasing and heavy economic burden into the future.

Although it is a very small nation, the insolvency of Cyprus has illustrated the EU’s inability to act decisively.  At first Cyprus’ banking crisis looked like a $17B problem of which $10B would be loaned by EU and $6B was to be taken from bank depositors (they lack the equivalent of our FDIC).  But just two weeks later, that plan has come unraveled.  Now Mohamed El Erian reported on CNBC that it looks like a $23B problem where $13B is to be taken from bank depositors.  Cyprus will need a miracle to attract depositors in the future, and any who use its rescue plan as a model should expect bank runs!  Perhaps the bigger indictment of EU financial sorcery is that there is no credible plan for sparking growth that will lift Cyprus out of its massive insolvency and economic malaise.

The UK also is in an economic slump with national debt proportionately like that in the US.  UK voters have not been permitted to weigh in on EU membership.  David Cameron has promised they will be given a chance to vote on it in 2015 – if he is reelected.  That may be an effective vote-getter since the UK populace is not enthusiastic about being regulated from Brussels, and yet the other UK parties favor being tied up with the rest of Europe and thus are unlikely to schedule a EU-membership vote.   Indeed, substantial numbers of citizens in each EU country would prefer to return to self-government.

Spain remains stuck with a no-growth economy, high unemployment, and excessive debtItaly is similar with debt at 130% of its GDP and suffers a vexing stalemate over who will govern.

Americans should be grateful that our problems are not quite at Europe’s scale.

Alan Daley is a retired businessman who lives in Florida and who writes for The American Consumer Institute Center for Citizen Research

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