Home Financial News A Trio of Economic Problems Haunting Europe

A Trio of Economic Problems Haunting Europe

0 0

There is a specter haunting Europe: a trio of economic problems that threaten the continent’s prosperity and social stability, all of which revolve around the notion of the “One Percent.”

Similar to many other parts of the world, Europe’s first One Percent challenge involves the relative and absolute enrichment of an already fortunate class – the one percent who are Europe’s wealthiest citizens. The One Percent problems are the possibility of too many years of anemic economic growth of about one percent and “lowflation” — or an inflation rate that hovers around one percent.

Combined, this One Percent Troika translates into the persistence of excessively high unemployment and a damaging debt burden, accentuating what the European Central Bank president, Mario Draghi, has already described as a fragile and uneven recovery. And the longer this persists, the greater the damage to Europe’s political and social well-being.

All of this is the result of both history and current policies. With the notable exception of Germany, most countries have dragged their feet in implementing reforms to spark economic growth and create jobs. The situation has been further aggravated by an unbalanced economic and financial policy stance that favors those who already control substantial financial assets over the needs of average workers.

Given how close Europe was two years ago to financial fragmentation and economic implosion, some may be tempted to think that the One Percent Troika is not that bad after all. Worsening inequality is tempered by Europe’s welfare system; one percent growth is better than the recession that the region recently experienced; and stable lowflation is not as harmful as outright deflation or unanchored inflation.

It could also be that this troika is sustainable for a while – a sort of low-level, nominal GDP equilibrium that is acceptable to the mainstream political system because it maintains modest forward economic motion, avoids renewed financial crises and secures the support of the business elites.

But this is dangerously short-sighted.

Even if it were sustainable, such a low-level equilibrium would condemn Europe to structurally high unemployment, alarming youth joblessness, a lost generation and a worsening debt burden. Under such conditions, it is even more likely that the political system would be hijacked by fringe parties, causing greater instability and uncertainties. This is also a world in which Europe would find it hard to compete globally.

The One Percent Troika shouldn’t be seen as a signal that things have indeed improved in the last two years in Europe, and that the resulting economic and financial calm can be maintained. Instead, it should be seen as a call for action to pursue and intensify a pro-growth economic agenda. If Europe falls hostage to prolonged policy complacency, the mild stability it enjoys now will give way, at some point, to much harder economic, political and social times.

By Mohamed A.El-Erian, originally published in Bloomberg View on 6/24/14. Reprinted with permission. The opinions expressed are those of the author.
Mohammed El-Erian, Chief Economic Adviser of Allianz.

Comments

comments