Eurozone problems a symptom of geopolitical change
by Douglas McWilliams
19 October 2011
With the industrialisation of emerging economies, the west is facing a painful adjustment that could continue for many years
The interlocking eurozone crises of indebted banks with sovereign exposures, indebted governments with little chance of repaying and economies that have been made uncompetitive by the strength of the single currency occur against the backdrop of the largest ever world economic shift. When I was studying economics, the biggest ever event was the industrial revolution. This affected 8 per cent of the world's population and took 100-150 years.
What we are seeing today - the industrialisation of the emerging economies, is affecting two thirds of the world's population and is running about 2.5 times as quickly. With structural change now taking place on such a scale, it is not surprising that the west is facing a painful adjustment - with very slow growth as it absorbs the need to adjust to a very much lower real exchange rate, without letting inflation run out of control. In turn, while we absorb this change, we are likely to face much slower growth on average.
But this is what has changed the nature of the European debt crisis. Slow growth on average means no growth or even negative growth in the weaker economies, which are facing the biggest competitive hits. These are - in order - Greece, Portugal and Italy. Spain and Ireland, which have fairly competitive economies – especially, the latter - can probably escape the crises eventually. Though, it will be at the cost of a depressed domestic economy for about 10 years or so.
But Greece, Portugal and Italy have no serious prospect of achieving enough growth to generate the tax revenue gains that would permit the budget cuts that in turn would enable their debt gross domestic product ratio to start to fall - unless a rising tide of world economy growth floats them all off the rocks. And few think that there is much prospect of this at the moment. So the European economic crisis is merely one of the facets of the major world economic adjustment which we are facing at the moment. And this makes it so much more difficult for us to fix our problems.
Douglas McWilliams is chief executive of the Centre for Economics and Business Research, in the UK
The interlocking eurozone crises of indebted banks with sovereign exposures, indebted governments with little chance of repaying and economies that have been made uncompetitive by the strength of the single currency occur against the backdrop of the largest ever world economic shift. When I was studying economics, the biggest ever event was the industrial revolution. This affected 8 per cent of the world's population and took 100-150 years.
What we are seeing today - the industrialisation of the emerging economies, is affecting two thirds of the world's population and is running about 2.5 times as quickly. With structural change now taking place on such a scale, it is not surprising that the west is facing a painful adjustment - with very slow growth as it absorbs the need to adjust to a very much lower real exchange rate, without letting inflation run out of control. In turn, while we absorb this change, we are likely to face much slower growth on average.
But this is what has changed the nature of the European debt crisis. Slow growth on average means no growth or even negative growth in the weaker economies, which are facing the biggest competitive hits. These are - in order - Greece, Portugal and Italy. Spain and Ireland, which have fairly competitive economies – especially, the latter - can probably escape the crises eventually. Though, it will be at the cost of a depressed domestic economy for about 10 years or so.
But Greece, Portugal and Italy have no serious prospect of achieving enough growth to generate the tax revenue gains that would permit the budget cuts that in turn would enable their debt gross domestic product ratio to start to fall - unless a rising tide of world economy growth floats them all off the rocks. And few think that there is much prospect of this at the moment. So the European economic crisis is merely one of the facets of the major world economic adjustment which we are facing at the moment. And this makes it so much more difficult for us to fix our problems.
Douglas McWilliams is chief executive of the Centre for Economics and Business Research, in the UK
COMMENTS
Indeed. What also makes it difficult to fix our problems is the inherent slow decision-taking process and internal divisions among the EU member states. Europe is like Belgium, but enlarged. There is lack of sense of unity and politicians look in the first place to please their electorate. Add to that a certain European complacence, maybe even arrogance, based on past achievements and wealth - an unparalleled enthusiasm for regulations that stiffles progress. This is not merely a crisis, but an adjustment to a new world order.
Ivan Ingelbrecht - Gent, Belgium
