Europe’s economic predicament

Europe’s economic predicament

Europe was shocked this week when forecasts were reduced for what was already only tentative economic growth in the eurozone.

The news should actually be good. There is, in theory, a plentiful supply of money at close to no cost to enhance consumption, construction and investment in business. The price of oil - and other commodities - is dropping. Europe's economy is dependent on importing raw materials and energy and it should profit from that, writes Prince Michael of Liechtenstein.

But unfairly, the economy does not quite behave as we might naively hope it should.

Politicians in many European countries hoped to avoid the need for structural reforms in the economy through monetary measures. Deregulation in labour and competition laws are important. At the same time, new rules increased the amount of bureaucracy instead of reducing it.

Tax laws were not simplified and legal and planning security in the area of taxes were not strengthened but remained byzantine through their complexity.

Some quantitative easing by the European Central Bank was needed to provide liquidity to the financial system and to avoid sovereign default in many countries. Sovereign defaults would have undermined trust in the markets and disastrous for savers, especially the pension funds.

Quantitative easing and bond purchasing programmes could have bought the time to introduce reforms. But the help from the ECB in buying time has not been used by governments and legislators to drive through the necessary reforms. Instead, they have applied the principle of hope to avoid reforms which might be ideologically unwanted or unpopular.

This demonstrated a total lack of responsibility and statesmanship.

The result is that responsible business is reluctant to invest because of the insecurity in planning for the future and the high overheads caused by bureaucracy and regulations. The same applies to consumers.

Delaying reforms is causing more long-term pain. But courageous measures are being carried through responsibly by some.

Examples of positive action include Poland, which has one of the most robust economies in today’s Europe. Former finance minister, and then governor of its Central Bank, Leszek Balcerowicz applied shock therapy. This needed courage but was successful.

He was strongly criticised outside Poland, especially in western Europe where politicians and economists suggested gradual reform was required to a highly regulated social market economy.

They were wrong and Poland succeeded. The shock caused a lot less pain than a gradual process would have created. Canada carried out a similar reform in the 1990s.

The ECB has fired its gunpowder. This is tough news for the European economy.

There is still time for a remedy, but the longer the can is kicked down the road, the more painful it will be for everyone.

Related reports

Freedom of contract is key to getting Europe’s jobless back to work

Germany - the not-so fit man of Europe

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