Europe’s economic gains in peril if Le Pen wins
Will French voters leave sense and sensibility at home when they enter polling booths?
Amidst all the tumult surrounding recent events like the election of Donald Trump, Britain’s decision to leave the European Union, the Turkish referendum and North Korea’s belligerence, the Eurozone – the group of European countries that use the Euro as their currency – has been undergoing a quiet but significant economic recovery. At a time when good news is at a premium, this bit of cheer has gone largely unnoticed.
Though the Eurozone crisis is well known by now, it may be useful to look back quickly to 2007-08 when the financial crisis triggered by the collapse of Lehmann Brothers and the US subprime mortgage disaster morphed into the deepest and longest lasting recession since the Great Depression.
Even as the crisis hit, several Eurozone countries were already heading for trouble but could not (or did not) see the writing on the wall. Spain was going through an enormous property bubble fuelled by relaxed lending criteria, an excess of liquidity, overbuilding and speculation. Portugal was much the same though at a lower level. Greece was staring at a looming debt bubble caused by government profligacy and budget deficits. France and Italy were suffering from low growth and economic malaise. And all these countries, and others, have historically had high structural unemployment rates. Only the largest Eurozone economy – Germany – had the proper fundamentals in place to weather the coming storm.
Thus, conditions could not have been worse for much of the Eurozone when the world at large plunged into what is now called the Great Recession. Between 2008 and 2013, unemployment rates quadrupled in Greece, and more than doubled in Spain and Portugal. Youth unemployment in these countries and Italy was always high and reached levels of 40 to 50 per cent during this period. Interestingly, in Spain and other southern European countries, close family structures, where families come together to support those out of jobs, coupled with a thriving informal economy, helped ameliorate the situation and prevented it from assuming serious social dimensions.
John Maynard Keynes (1883-1946) was arguably the most influential economist of the last 80 years, if not of all time. Writing in the midst of the Great Depression in 1936, Keynes advocated government spending as a means of stimulating economies out of deep recessions, when private investment and consumption spending are too feeble due to uncertainty and poor expectations to raise aggregate demand in an
Despite their many differences, the countries of the Eurozone reposed faith in their common currency, and in each other, and this teamwork helped them overcome the worst of the bleak times that they went through
economy. Following his death, a lively intellectual debate ensued between Keynesians and opponents, which somehow missed the vital point that Keynes only ever advocated government intervention when the private sector could not or would not rise to the occasion in times of recession. In any case, when the full impact of the Great Recession sunk in, and countries were staring at an abyss, the United States, Japan and the Eurozone, among others, all resorted to Keynesian stimuli mechanisms even as they invented a new vulgarism for it – Quantitative Easing (QE). The Master had returned.
The European Central Bank (ECB) and the European Commission (EC) swung into action with stimulus packages for the worst hit countries, but these came with strict conditionality requiring extreme government budget tightening and other unpopular measures. Spain and Portugal took the bitter pill advisedly but in Greece, citizens took to the streets protesting the cuts that would take away privileges that had become part of their lives. The ECB straightened out badly hit banks across the Eurozone by injecting capital and restoring their balance sheets. Credit approval processes and lending norms were tightened. Annual stimulus injections into the Eurozone economies of about €800 billion a year began to work, albeit slowly at first, through the multiplier process.
The superstar of the Eurozone economic recovery is one of the countries that was hit the hardest by the recession and was all but written off only a few years ago. Spain grew by over 3 per cent in real GDP terms in 2016 and that without a real government in power for most of the year (maybe there is a lesson in this). Other countries are fashioning their own recoveries, and despite lingering high youth unemployment and continuing concerns over Italian banks and Greece in general, the Eurozone as a whole grew by 0.5 percent in the fourth quarter of 2016, higher than the US, and registered 14 consecutive quarters of positive real growth. More importantly, economic sentiment is finally in positive territory, as is manufacturing, after being in the doldrums for so long.
The key player in this unfolding drama is Germany. Assuming a low profile but pulling the funding strings in a big way, it was Germany (and its chancellor, Angela Merkel) that held the Eurozone together during the worst moments of the crisis. Greece, which was threatening to go under and sink, could easily have slipped out of the zone or have been shown the door and that could well have triggered an unraveling of the EU and the euro. But Germany stood firmly behind the principles of the union and was helped by the fact that it had avoided the recession itself and could thereby summon the economic and financial muscle and resolve to hold the group together. Despite their many differences, the countries of the Eurozone reposed faith in their common currency, and in each other, and this teamwork helped them overcome the worst of the bleak times that they went through.
But this is now under threat from another quarter. The French presidential election in less than a week could throw up a surprise winner in Marine Le Pen, who champions divisiveness, exclusion and prejudice - ugly attributes, all of which go against the grain of the European Union and the single currency. In such a situation, far removed from the teamwork that rescued the Eurozone from the recessionary crisis, the EU could once again be looking at a possible ‘Frexit’ and a general unraveling of everything it stands for. France is the second largest economy in the Eurozone, and together with Germany one of the chief architects of the single currency concept. All the good work of the past few years could go to naught if French voters this week, like some voters in other countries before, leave sense and sensibility at home when they enter the polling booths.