It’s easy enough to prove that this is about more than debt. Let’s start with a puzzle.
Q: What do these six numbers stand for — 81, 100, 67, 121, 81, 84 — and what don’t they have in common?
A: According to the International Monetary Fund, those are the respective percentages of gross debt to gross domestic product for the U.K., the U.S., Spain, Italy, France and Canada. But the U.K., the U.S. and Canada can each borrow for 10 years at a rate slightly above 2 percent. Spain, which has the lowest debt-to-GDP ratio of the bunch, is paying more than double that. And note that the U.S. and the U.K., in addition to having larger debt-to-GDP ratios than Spain, also have the largest total debts of any nation on the list.
This is about much more than debt, and the Germans and the European Central Bank know it. They could stop the run on the European periphery. But they don’t want to. They see it as an opportunity. The run is exposing underlying deficiencies in the euro area and putting the periphery economies under enormous pressure, and that’s giving Germany and the European Central Bank the leverage they need to make changes to the currency union itself.
The institutional concerns were put quite starkly in a recent report from UBS. “The euro should not exist,” the report stated. “More specifically, the euro as it is currently constituted — with its current structure and current membership — should not exist.”
That’s basically the German take, too. You hear it everywhere you go. “You can’t have a currency union without a fiscal union.” Some say they need a political union, too.
But the truth is, Europe can have all that and still fail because the crisis has another powerful driver: slow growth. The Organisation for Economic Co-operation and Development projects that, continent-wide, Europe will grow 0.6 percent in 2012 and 1.7 percent in 2013. Remove the strong performers like Germany and the Netherlands and it’s quickly apparent that the growth prospects for the others are grim.
From about 1997 to 2005, Italy and Spain were actually cutting their debt-to-GDP levels. But then the housing bubble popped, and so too did their growth. The result was a drop in public revenue, a rise in spending and ballooning deficits. The austerity packages both countries are now implementing will cut growth prospects further.
And that’s where things really get tricky. Europe’s institutional crisis is tough but ultimately solvable. It’s not clear the same can be said for the European growth crisis.