Europe, unemployment and instability

DISCLAIMER: All opinions in this column reflect the views of the author(s), not of EURACTIV.COM Ltd.

Countries with relatively low wages ought to have a competitive advantage over German exports. However, many have negative balances of trade, writes George Friedman.

George Friedman is the founder of Stratfor, a Texas-based, global intelligence company. This commentary was first published here.

"The global financial crisis of 2008 has slowly yielded to a global unemployment crisis. This unemployment crisis will, fairly quickly, give way to a political crisis.

Europe is the focal point of this crisis. Last week Italy held elections, and the party that won the most votes – with about a quarter of the total – was a new group called the Five Star Movement that is led by a professional comedian. Two things are of interest about this movement.

First, one of its central pillars is the call for defaulting on a part of Italy's debt as the lesser of evils. The second is that Italy, with 11.2% unemployment, is far from the worst case of unemployment in the European Union. 

Nevertheless, Italy is breeding radical parties deeply opposed to the austerity policies currently in place.

The core debate in Europe has been how to solve the sovereign debt crisis and the resulting threat to Europe's banks. The issue was who would bear the burden of stabilising the system.

The argument that won the day, particularly among Europe's élites, was that Europe needed austerity and that government spending had to be dramatically restrained so that sovereign debt – however restructured it might be – would not default. 

One of the consequences of austerity is recession. The economies of many European countries, especially those in the eurozone, are now contracting, since austerity means that less money will be available to purchase goods and services. If the primary goal is to stabilise the financial system, it makes sense.

But whether financial stability can remain the primary goal depends on a consensus involving broad sectors of society. When unemployment emerges, that consensus shifts and the focus shifts with it. From my point of view, the Italian election was the first, but expected, tremor.

If you look at the map, the southern tier of Europe has been hit extraordinarily hard with unemployment, and Eastern Europe not quite as badly, but Germany, Austria, the Netherlands and Luxembourg have been left relatively unscathed.

How long this will last, given the recession in Germany, is another matter, but the contrast tells us a great deal about the emerging geopolitics of the region.

Germany, the world's fourth-largest economy, is the center of gravity of Europe. Germany sees the European Union's free trade zone as essential for its survival. Without free access to these markets, its exports would contract dramatically and unemployment would soar.

The euro is a tool that Germany, with its outsized influence, uses to manage its trade relations — and this management puts other members of the eurozone at a disadvantage. Countries with relatively low wages ought to have a competitive advantage over German exports. However, many have negative balances of trade.

Thus, when the financial crisis hit, their ability to manage was insufficient and led to sovereign debt crises, which in turn further undermined their position via austerity, especially as their membership in the eurozone doesn't allow them to apply their own monetary policies. 

This doesn't mean that they were not profligate in their social spending, but the underlying cause of their failure was much more complex. Ultimately it was rooted in the rare case of a free trade zone being built around a massive economy that depended on exports.

The idea that the German-mandated austerity regime will be able to survive politically is difficult to imagine. In Italy, with "only" 11.7% unemployment, the success of the Five Star Movement represents an inevitable response to the crisis.

Until recently, default was the primary fear of Europeans, at least of the financial, political and journalistic elite. They have come a long way toward solving the banking problem. But they have done it by generating a massive social crisis. That social crisis generates a political backlash that will prevent the German strategy from being carried out.

For Southern Europe, where the social crisis is settling in for the long term, as well as for Eastern Europe, it is not clear how paying off their debt benefits them. They may be frozen out of the capital markets, but the cost of remaining in it is shared so unequally that the political base in favor of austerity is dissolving. 

This is compounded by deepening hostility to Germany. The fact that we are seeing growing differentiation between the German bloc and the rest of Europe is one of the most significant developments since the crisis began.

The growing tension between France and Germany is particularly important. Germany wants to see the European Central Bank continue its policy of focusing on controlling inflation. France, with close to 11% unemployment, needs the European Central Bank to stimulate the European economy in order to reduce unemployment.

This is a debate over who controls the European Central Bank, what the priorities of Europe are and, ultimately, how Europe can exist with such vast differences in unemployment. 

Fascism had its roots in Europe in massive economic failures in which the financial elites failed to recognise the political consequences of unemployment.

They laughed at parties led by men who had been vagabonds selling post cards on the street and promising economic miracles if only those responsible for the misery of the country were purged.

Men and women, plunged from the comfortable life of the petite bourgeoisie, did not laugh, but responded eagerly to that hope. The result was governments that enclosed their economies from the world and managed their performance through directive and manipulation. 

This is what happened after World War I. It did not happen after World War II because Europe was occupied. But when we look at the unemployment rates today, the differentials between regions, the fact that there is no promise of improvement and that the middle class is being hurled into the ranks of the dispossessed, we can see the patterns forming.

History does not repeat itself so neatly. Fascism in the 1920s and 1930s sense is dead. But the emergence of new political parties speaking for the unemployed and the newly poor is something that is hard to imagine not occurring.

Whether it is the Golden Dawn party in Greece or the Catalan independence movements, the growth of parties wanting to redefine the system that has tilted so far against the middle class is inevitable. Italy was simply, once again, the first to try it out."

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