Europe is in crisis. After a reasonably calm last few months, massaged by a trillion-euro stimulus from the European Central Bank, it seems as if the dark clouds are once again forming over the continent.
This comes after the news that Spain’s bond yields have skyrocketed based on concern that the country (which is the fourth largest economy within the Eurozone) may follow Greece, Ireland and Portugal in being bailed out by the rest of the European Union (EU) and the International Monetary Fund (IMF). In addition, Greece has just elected yet another interim government and there is a real chance that before the end of the European summer, the island nation will abandon the Euro currency completely and revert back to the Drachma. PIIGS, the unfortunate acronym for this coterie of financially misfit states (including Italy), continue to lay bare the economic and fiscal faultlines that make the Eurozone crisis so volatile.
The precipitous decline of the Eurozone continues to draw attention to the economically ideological debate about how to arrest the slide. The two options: austerity versus stimulus.
The austerity approach to the crisis follows the doctrine that governments with large budget deficits must simply reduce those deficits. In other words, cut spending; the theory being that if budgets are not cut and spending brought under control, these countries will not be able to borrow money. This, in turn, would lead to a fiscal meltdown based on rising interest rates. Sounds like common sense and simply enough right? But there’s a problem.
When governments tend to cut spending in declining economies, it has the knock-on effect of causing overall economic growth to slow to a snail’s pace. It’s basic economics. So when employees are retrenched due to budget cuts, these same people tend to have less disposable income to buy goods and services. Basically they’re spending even less money now, with the result that falling tax receipts lead to bigger deficits.
The other – albeit less attractive alternative up to now – has been stimulus. This approach would result in governments spending more and worrying about getting budgets in order only once the economy has recovered sufficiently. In other words, stimulate the economy and get people spending money on goods and services. This would result in businesses getting back on their feet, in turn being able to employ more people, meaning more people are working and that leads to increasing government’s tax base. In a nutshell, positive, job-creating economic growth.
But with Chancellor Merkel and Germany driving the push for the former approach and not the latter and a changing of the guard in France (Germany’s biggest ally in the austerity approach) from conservative-right to the incumbent left-leaning socialist in Francois Hollande, it seems that no one really has the answer for the challenges facing the EU, and how long in fact the austerity approach will continue.
Indeed, European countries outside of the Eurozone – namely Britain – are not immune to the threat of contagion. Tight trading and financial relationships have resulted in the United Kingdom, despite their “splendid isolation” from the rest of mainland Europe, also feeling the pinch from the crisis facing the European continent.
Across the Atlantic, the US still remains in a more favourable position compared to Europe. The US is expected to outperform Europe in terms of growth and financial stability. However, with the White House up for grabs this November and the political jockeying that accompanies a national election cycle, concern will remain about growth, jobs, inequality, debt and budget deficits.
Amidst all the doom and gloom there may be a third option, however. But this approach would entail a closer working relationship between the EU and the new capitals that influence global decision-making, namely now found in Asia, Latin America and Africa. However, a required common-ground approach will be required on key issues in an ever increasing multipolar world.
Either through self-comforting dismissal or wanting to maintain the status quo, the EU and the rest of the West have maintained that they share little in terms of “common values” with the Brics regional formation – in particular Russia and China. This indifference is rooted ideologically in principle, but is simply not sustainable anymore.
The differences of opinion are numerous. The Brics group of countries maintain that there must be a stable external environment that should not be threatened by partisan interventions in countries such as Iran or other sovereign nations within the Middle East and Africa. We experienced this with Nato’s intervention in Libya which was highly criticised by Brics. Additionally, the Brics group of five has stressed that an accountable and stable global financial system must evolve. This evolution would entail far more decision making power being afforded to the rising economic powers of the 21st century, specifically centered within the Indo-Pacific region, including China and India – something that was promised to be reformed in 2008, but has not yet materialised.
It would seem that out of desperation and crisis, now is the time for the EU to remove the anchors of the past and gravitate to a more workable paradigm of shared interests and resultant shared prosperity with the Brics region. This realisation and approach would potentially offer a far greater opportunity for global powers – both old and new – to collaborate and co-operate, replacing the old and stale parochial values-based approach which is viewed by most countries outside of the EU as a thinly veiled attempt to propagate Western special interests. In return the Brics and other emerging powers within the 21st century will see this transition period – resulting in their relative rise – as the time to consolidate their own sense of nationhood as well as reclaiming their own sovereignty from a traditionally Western-centred world.
However, this seismic shift in global change will also take place within the context of a continuum. It will still take a few years for the full transition from a Western-dominated world to a world with many powers – with the Brics contingent leading the way – to be completed.
But as the global financial crisis as well as the disaster of the Eurozone attests to, change is already occurring faster than anyone of us would have imagined.