It is time to start thinking about Europe rather than Greece. At some stage the Greek rescue story will be settled – it may be settled quite soon – and more normal life there will resume. But the outcome, whatever it is, cannot be stable. The main reason is that Greece’s debts are too great to be “sustainable”, which is a polite way of saying that they cannot be repaid. They will continue to overhang not just European politics but also the entire eurozone economy. But those debts cannot be written off because that is against eurozone rules.
Wolfgang Schäuble, the German finance minister, put the point with characteristic directness last week: “Debt sustainability is not feasible without a haircut, and I think the IMF is correct in saying that.” Then he added: “There cannot be a haircut because it would infringe the system of the European Union.”
Even when the banks reopen, and at the time of writing it was not clear when this would be, the debts will remain. You can fudge by stretching out the maturities still further and by giving even more concessionary rates. The advantage of that is that the losses are not crystallised and eurozone taxpayers are not notionally out of pocket. But if you maintain the letter of the law, that the capital value of debt cannot be reduced, you are maintaining a fiction. So, the outcome is unstable.
Unfortunately it is not just a matter of Greek debt, though this is the highest at 180 per cent of GDP under the Maastricht definition. The corresponding figure for Italy is 133 per cent, for Portugal 128 per cent and for Ireland 108 per cent. (And, let’s not forget, for the UK it’s at 91 per cent.)
There is no hard rule as to what level of debt is sustainable, and at what stage such debt seriously undermines growth. Near zero interest rates make the burden more manageable, though they create other distortions. But rather than focus on the numerical level of debt, the thing to do is to look at growth and demography. Crucially, if you can generate decent growth, debts can be chipped away. And if the size of the workforce rises, there will be more earners to do the chipping.
On growth, immediate prospects for Europe are not too dreadful. New forecasts from the Organisation for Economic Co-operation and Development (OECD) are encouraging. For example, Spain is expected to grow at just under 3 per cent this year and next, while Ireland may do a bit better at around 3.5 per cent both years. Spanish debt looks rather stuck, but Ireland’s debt, which peaked at 123 per cent of GDP in 2013, could be below 105 per cent next year. Portugal is forecast to grow at 1.6 per cent and 1.8 per cent, trimming its debts. But Italy is barely growing this year and may only manage 1 per cent next. National debt, as a result, barely moves.
You could summarise by saying that Ireland is the star performer, while the rest of fringe Europe is struggling. But note something else: Ireland’s recovery has been driven by exports. Its largest market is the US and its second largest, the UK. So, it has been able to escape the eurozone blues thanks to its non-eurozone exports.
We tend to lose sight, amid the high drama of Greece, of the more fundamental problem that the eurozone is only slowly pulling out of recession.
Look further ahead at demography, and concern mounts. Projections should be taken with a pinch of salt: remember how 30 years ago, the demographers thought the UK population would be shrinking by now? But UN figures for the changing workforce size by 2050 make troubling reading.
For example, the US, UK, Canada, Australia, New Zealand and Ireland are all forecast to have increases in the working population over this period. By contrast Germany, Italy, Portugal, Greece and Spain are all projected to have a shrinking workforce. Japan is the most extreme example, with the workforce shrinking by around 40 per cent, but in Germany the projection is for a workforce down 30 per cent, with Greece, Portugal and Italy down about 25 per cent. Obviously the more Greeks and Italians who come to the UK, the US or the rest of the English-speaking world, the more dangerous this trend becomes for continental Europe. Incidentally, both the previous Greek finance minister, Yanis Varoufakis, and his successor, Euclid Tsakalotos, spent much of their lives in the UK.
You can see the shenanigans in Europe this weekend in terms of bailing out Greece and saving the eurozone. Of course, that is the front-line story but behind it are longer-term and ultimately more important stories. They concern the sustainability of much European sovereign debt, not only Greece, and they concern the middle-term economic success of the entire eurozone, not just its southern fringe. The European economy must do better, because if it doesn’t, its best young people will continue to leave.Reuse content