Europe risks going the way of Japan: Brown

London: Good news is that Europe is no longer going the way of Greece.

The sad news is that it is threatening to go the way of Japan.
After years of hesitation punctuated by panic, Europe has finally accepted the compelling logic that a single currency needs a lender of last resort.

Pro-euro voters in the
Netherlands have clearly been impressed as the president of the European Central Bank (ECB), Mario Draghi, braved the scowl of the ever-cautious Bundesbank and led his ECB directors to a pledge of unlimited -? if conditional -? short-dated bond-buying to avert another currency crisis.

The ECB acted in the nick of time; the fuse was set for an explosion next month with the market chaos of both a Greek and Spanish crisis. US President Obama has been spared a eurozone spanner in his campaign for re-election and the chances are we won't have a pre-November Greek euro exit or Spanish bankruptcy, plus a run on Italy and a French financial crisis just for good measure.

Indeed, now that the ECB is ready to intervene to level short-term bond rates for economies intent on reform and the German Constitutional Court has removed its objections to a bailout fund, there need be no European bust-up over who pays for it. So far so good -? but it is not far enough.

The net effect of the intervention is to halt contagion, not to end the recession; to stop disintegration, rather than start a recovery that would reverse Europe's downturn.

In the week after the market euphoria at the Bank's decision, private investors, worried about who is first to be repaid in a crisis, are not rushing to return and the ECB still has to address the moral hazard it has created by appearing to guarantee 'last resort' funding to countries still likely to go off track. They will now find it difficult to refuse a country support or to push them into an IMF programme.

Far more worryingly, France is likely to join half of Europe in a double-dip recession.

Without European leaders following on with a swift and vigorous effort to seize the initiative to grow their economies, Europe will continue to struggle.

Unemployment rates of ten per cent and over appear to be the new normal and the West will continue to drag the entire world economy, including China, down.

The temptation is to say that all will be fine, if only a second stage of the rescue -? a European banking union -? is agreed. Earlier this month Jose Manuel Barroso, president of the European Commission, wrote an impassioned article claiming that a banking union was indeed the game changer.

But a banking union requires more than common euro-wide supervision. It requires also a common resolution fund and common deposit insurance, and these in turn require an agreement to fiscal transfers.
Indeed, a banking union of the kind Europe is now discussing is not possible without a fiscal union. Europe's banks still have ???24 trillion of outstanding loans against US' ???11 trillion. - Reuters

In the four years since American and British banks recapitalised, added around four per cent more capital and wrote off bad debts (an equivalent four per cent write-off), Europe has added only half a per cent of new bank equity - and submitted to an even smaller write-off of toxic debts.

A bank recapitalisation -? upwards of ???200 billion -? looks necessary, and deposit insurance must be underpinned. This puts three steps firmly on the agenda: a fiscal union, a European finance ministry, and some form of Eurobond -? the very questions Germany has tried to side-step.

Such is the depth of feeling about the extent of these constitutional changes that I see the demands growing within the euro area for referenda, a process that will inevitably take years to resolve.

What has deterred the return of confidence is not simply the uncertainty over who is the lender of last resort but, more fundamentally, the continuing absence of the cyclical actions and structural reforms essential to restore European growth.

For four years, a one-dimensional obsession with public debt ('if austerity is not working, we need more of it') has led Europe not only to neglect the seismic tremors in its banking system but to underplay its underlying problems of low growth, diminished competitiveness and economic weakness.

Once responsible for 40 per cent of world output, Europe's share is now only 18 per cent. In the next ten years Europe ould decline so fast that this could reduce to little more than 11 or 12 per cent.

Indeed, with the exception of Germany, only a fraction of Europe's export trade is with the world's fastest growing economies. Just 7.5 per cent of its exports go to the emerging markets which account for most world growth.

Once at the heart of the global economy, Europe is increasingly placing itself on its periphery. Some say that by the early 2020s Asia will consume 40 per cent of the world's goods -? with Germany consuming only four per cent and France and the UK only three per cent each.

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Source: http://www.timesofoman.com/innercat.aspx?detail=12040

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