The Euro zone lurches into yet another crisis, with fears of deflation and a further drop in output. There are several dominant explanations of why Europe has been unable to recover from the crisis. Most commentators subscribe to them either on their own, or in various combinations, depending on their tastes.
One puts the blame squarely on excessive public debt. Confidence can never be restored until this is tackled. Another perspective points to low productivity and high unit labour costs in the Mediterranean economies. Until they transform their economies, they will never be able to compete with the dynamic economies of Greater Germany – Poland, Austria, Sweden and the like. A related but separate argument puts the Euro itself in the frame. One size does not fit all, and some countries need to leave. George Soros has an original perspective on this, suggesting that Germany should exit, and a Deutschmark appreciation would make the residual Euro zone economies competitive again.
An intriguing new book by Philippe Legrain, European Spring: Why Our Economies Are in a Mess, challenges every single one of these ideas. At first sight, Legrain is the epitome of the successful Eurocrat. He is British, but his father is French and his mother Estonian. He, somewhat ostentatiously, has command of numerous languages. And he has just completed a spell as head of the strategic policy team advising Manuel Barroso, recently retired President of the European Commission.
But the first part of his book is a no holds barred attack on the two central institutions of Europe, the Commission and the European Central Bank. He documents in impressive detail mistake after mistake made by these two august bodies, before, during and after the 2007-09 financial crisis. For example, during the 2010-12 period, there were many similarities between the state of the UK economy and that of the Euro zone. Yet the latter suffered devastating financial panics, whilst we did not.
Legrain points accusingly to European level policy makers. They consistently misdiagnosed problems, treating the fact of Greek insolvency as a question purely of liquidity, and the liquidity issues of the rest of the GIPSIs (his marvellous phrase for Greece, Ireland, Portugal, Spain and Italy) as failures of solvency. Unlike the American authorities, who have closed down 475 banks since 2008, Europe continues to prop up zombie banks, which stymies the recovery. Further, they completely failed to control the narrative with which policy changes are received by the markets, and which is the key to the effects such changes have.
The second part is an impassioned plea to make Europe more competitive in ways which will gladden the hearts of many readers. Cut income taxes, scrap restrictive labour laws and revere entrepreneurs. The scale of the challenge of implementing such policies is shown by the recent decision by Luddites in Germany to ban the Uber taxi app. If Steve Jobs had been French, he would have ended up as a programmer in a nationalised industry with a job for life and a gold plated pension.
As published in City AM on Wednesday 9th September