Europe's many economic disasters

It is depressing thinking about Greece these days, so let us talk about something else, OK?

Let us talk, for starters, about Finland, which could not be more different from that corrupt, irresponsible country to the south. Finland is a model European citizen; it has honest government, sound finances and a solid credit rating, which lets it borrow money at incredibly low interest rates.

It is also in the eighth year of a slump that has cut real gross domestic product per capita by 10 per cent and shows no sign of ending. In fact, if it were not for the nightmare in southern Europe, the troubles facing the Finnish economy might well be seen as an epic disaster.

And Finland is not alone. It is part of an arc of economic decline that extends across northern Europe through Denmark - which is not on the euro, but is managing its money as if it were - to the Netherlands. All of these countries are, by the way, doing much worse than France, whose economy gets terrible press from journalists who hate its strong social safety net, but it has actually held up better than almost every other European nation except Germany.

And what about southern Europe outside Greece? European officials have been hyping the recovery in Spain, which did everything it was supposed to do and whose economy has finally started to grow again and even to create jobs. But success, European-style, means an unemployment rate that is still almost 23 per cent and real income per capita that is still down 7 per cent from its pre-crisis level. Portugal has also obediently implemented harsh austerity - and is 6 per cent poorer than it used to be.


IN SPAIN:Its economic crisis arose from private lending and a housing bubble. The unemployment rate is still almost 23 per cent and real income per capita is still down 7 per cent from its pre-crisis level. PHOTO: BLOOMBERG

Why are there so many economic disasters in Europe? Actually, what is striking at this point is how much the origin stories of European crises differ. Yes, the Greek government borrowed too much. But the Spanish government did not - Spain's story is all about private lending and a housing bubble.

And Finland's story does not involve debt at all. It is, instead, about weak demand for forest products, still a major national export, and the stumbles of Finnish manufacturing, in particular of its erstwhile national champion Nokia.

What all of these economies have in common, however, is that by joining the euro zone, they have put themselves into an economic straitjacket. Finland had a very severe economic crisis at the end of the 1980s - much worse, at the beginning, than what it is going through now. But it was able to engineer a fairly quick recovery, in large part by sharply devaluing its currency, making its exports more competitive. This time, unfortunately, it had no currency to devalue. And the same goes for Europe's other trouble spots.


IN PORTUGAL:Workers in Lisbon shouting slogans against austerity measures in May this year. The country has obediently implemented harsh austerity - and is 6 per cent poorer than it used to be. PHOTO: REUTERS

Does this mean that creating the euro was a mistake? Well, yes. But that is not the same as saying that it should be eliminated now that it exists. The urgent thing now is to loosen that straitjacket. This would involve action on multiple fronts, from a unified system of bank guarantees to a willingness to offer debt relief for countries where debt is the problem.

It would also involve creating a more favourable overall environment for countries trying to adjust to bad luck by renouncing excessive austerity and doing everything possible to raise Europe's underlying inflation rate - currently below 1 per cent - at least back up to the official target of 2 per cent.

But there are many European officials and politicians who are opposed to anything and everything that might make the euro workable, who still believe that all will be well if everyone exhibited sufficient discipline. And that is why there is even more at stake in Sunday's Greek referendum than most realise.


IN FINLAND:The country's crisis story does not involve debt at all. It is about weak demand for forest products and the stumbles of Finnish manufacturing, in particular of its erstwhile national champion Nokia. PHOTO: BLOOMBERG

One of the great risks if the Greek public votes "yes" - that is, votes to accept the demands of the creditors and, hence, repudiates the Greek government's position and probably brings the government down - is that it will empower and encourage the architects of European failure. The creditors will have demonstrated their strength, their ability to humiliate anyone who challenges demands for austerity without end. And they will continue to claim that imposing mass unemployment is the only responsible course of action.

What if Greece votes "no"?

This will lead to scary, unknown terrain. Greece may well leave the euro, a move which will be hugely disruptive in the short run. But it will also offer Greece itself a chance for real recovery. And it will serve as a salutary shock to the complacency of Europe's elites.

Or to put it a bit differently, it is reasonable to fear the consequences of a "no" vote, because nobody knows what will come next.

But you should be even more afraid of the consequences of a "yes", because in that case we do know what comes next - more austerity, more disasters and, eventually, a crisis much worse than anything we have seen so far.

NEW YORK TIMES

A version of this article appeared in the print edition of The Straits Times on July 04, 2015, with the headline 'Europe's many economic disasters'. Print Edition | Subscribe