Gordon Brown: History will charge Europe's leaders with West's decline

When the history of the 21st century is written, people will rightly ask why it was that Europe was found wanting during its most intractable economic crisis.

They will ask why Europe slept as an undercapitalized banking system floundered, unemployment remained unacceptably high, and the continent’s growth and competitiveness plummeted.

Worse still, if a reconstruction plan does not come soon, Europe’s leaders will be charged with “the decline of the West” and then face accusations for being, in the words of Winston Churchill about the 1930s, “resolved to be irresolute, adamant for drift, solid for fluidity and all-powerful for impotence.”

There is, of course, no shortage of European meetings. Hardly a day goes by without a summit of European leaders discussing the latest crisis facing a member state. But each time they talk as though they are dealing with a calamity confined to the nation in the headlines – the Greek problem, or the Irish problem, sometimes the Portuguese or the Spanish problem – without an agreement on the true nature of the emergency, which is pan-European. By wrongly analyzing Europe’s woes, they end up implementing the wrong remedies too. For Europe’s deficit crisis is a real concern but just one of its concerns.

Europe has in fact three deep-rooted problems, each of which is entwined with the other, and each of which reaches systemically into every corner of the continent. Alongside the deficit problem is also a banking problem — not confined to a handful of banks or countries — and a chronic growth problem.

Beyond debt: Europe has a banking problem

First, banks: I was present in Paris in October 2008 at the first meeting ever held of the euro zone heads of government. The diagnosis of the banks I presented was of problems of liquidity but also of structure. But most in Europe at the time believed they were dealing only with the indirect consequences, the fallout, from an Anglo-Saxon financial crisis, and of course thought that a wayward Britain had allowed itself to be locked into the American financial boom.

They did not then know that half the sub-prime assets had been bought by banks across Europe. No one had yet fully appreciated the depth of the entanglements between European banks and other global financial institutions, or how big the banks’ exposure to falling property markets was. I remember the shocked looks which passed along the table when I argued that European banks were even more vulnerable than American banks because they were far more highly leveraged – and indeed still are.

And even now a fundamental truth about the current state of European banks remains unspoken: that German, French, Italian, and British banks that have lent recklessly to the periphery are owed billions not just by the Greeks but by the Irish, Portuguese, and Spanish, and have losses still to take from toxic assets and the real estate collapse.

And when, years from now, people explain why Europe slept, they will also explain how, out of short-sighted self-interest, we treated the Greeks’ problems as if they were ones of liquidity (addressed by giving loans), not solvency, and how by short-term maneuvers to delay the necessary denouement, we maximized the risk of a disorderly end-game. Indeed, with interest rates on the rise, capital outflows from all the periphery countries to the core are already making funding more difficult in each troubled country, dragging us into even higher interest rates, longer recessions and, possibly, higher deficits.

Europe's chronic growth problem

The third side of the triangle is, of course, low growth itself, which threatens to condemn the whole continent to a decade of high unemployment. The deficit reduction and bank stabilization we need to see cannot become entrenched without economies which generate trade, jobs, and growth. Yet, suffering from anemic levels of growth, Europe is slipping further and further down the world league – not acutely but chronically, which is more serious and much harder to reverse.

Today, European unemployment is stuck around 10 percent, with youth unemployment rising above 20 percent and as high as 40 percent in Spain. And it cannot come down fast. Europe now has a trend rate of growth which is almost one-half that of the United States and one-quarter that of China and India. Once, Europe represented half the output of the world. By 1980 this had fallen to one-quarter. Now it is less than one-fifth – just 19 percent. Soon it will be little more than a tenth – 11 percent by 2030 – and then it will fall to 7 percent.

By 2050 – less than four decades from now – the European economy could be smaller than that of Latin America. If European growth continues to run so far behind its competitors, then by mid-century it may be as small as Africa’s.

Yet Europe is only half as well equipped as America to export our way to growth. Despite Germany’s success in China, only 8 percent of our exports (in contrast to America’s 15 percent) go to the eight fastest-emerging market economies, what are now called the growth generators, that will account for the majority of future growth.

Three interwoven challenges need comprehensive strategy

It is clear that each of these three concerns – deficits, banking instability, and low growth – is interwoven with the other in a way that makes policies designed to focus on only one issue much less effective than a comprehensive strategy aimed at simultaneously resolving all three. And a pan-European strategy is all the more necessary because the euro was constructed without any mechanisms for averting or resolving crises – and with no agreement on who is ultimately responsible for financing crisis costs.

While a strong and passionate pro-European, I stood out from conventional economic opinion in doubting whether Britain’s best interests lay in joining the euro. The UK Shadow Chancellor Ed Balls led 19 separate assessments of the euro. Our major finding was that inside the euro there was insufficient flexibility to achieve sustainable and durable convergence between nations.

But we also demonstrated that the euro had no crisis prevention or crisis resolution plan in the event of convergence not being achieved. For under a single currency no nation – even one completely uncompetitive with the rest of the euro zone – can adjust its exchange rate, or benefit from an interest rate tailored to their specific needs. But nor had Europe adopted the US crisis-prevention model for damping down disparities in a single currency area – by labor mobility and wage adjustments, or by transfers to areas of need.

So if I am right, we must now exchange panic-driven responses for a long-term reconstruction, or we will face a lost decade of high unemployment with social discontent, anti-immigrant feeling, and secessionist movements.

Europe's 'moment of truth'

We must now achieve for Europe the same “moment of truth” that the world found with the pivotal G20 summit in 2009. As happened with the G20, Europe’s politicians should lead market sentiment by boldly and simultaneously agreeing to a Brady-bond-style solution for Greece and a European bank recapitalization. They must agree to a new Euro area debt facility (responsible for, say, the first 60 percent of each country’s debt) as part of a coordinated fiscal and monetary policy that permits, like the US, fiscal transfers.

And, above all, they must agree to a pro-growth, pro-enterprise strategy I call "Global Europe: Europe’s energies redirected outwards to exporting to the emerging economies", and re-equipping ourselves to do so with a clear timetable for – and inbuilt incentives and penalties to guarantee – labor, capital, and financial market flexibilities.

Why would Germany support this? Because far from being against their interests, it now has a European reason to restructure its banks; can set tough terms on economic reform; and, by acting now, it avoids far bigger costs later. Indeed, I would argue that without my concurrent plan to restructure Europe’s banks and insurance companies and to go for growth, the status quo or even a Brady plan for Greece still risks Europe-wide financial contagion.

History books about the “decline of the West” are not inevitable. But only a reconstruction that attacks deficits, banking liabilities, and low growth together will avoid the deadening grip of an inward-looking protectionism – and barren but avoidable years of unemployment and wasted lives.

Gordon Brown is the former prime minister of Great Britain.

© 2011 Global Viewpoint Network/Tribune Media Services. Hosted online by The Christian Science Monitor.