Europe's three-dimensional crisis

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by Gordon Brown, The Guardian 26/01/2012

In the rush to define Europe's problems as fiscal, our deep-seated banking and competitiveness problems have been largely ignored.

In the search for a simple, one-dimensional answer – austerity and, if that fails, more austerity – to what is a three-dimensional crisis, Europe's leaders are failing to grasp the profound historical forces now reshaping Europe's role in the world. For without complimentary action reshaping our financial sector to serve the wider economy and reigniting growth, no amount of public spending cuts and no number of rigid fiscal rules will prevent a lost decade of high unemployment and long-term decline.

Liquidity support from the European Central Bank (ECB) is welcome, but it is a temporary palliative and not a long-term solution. Already in 2012 a new wave of bank deleveraging is liquidating large numbers of companies and jobs and depriving the world of the finance that makes trade continue to flow.

There is, at least, now a dawning recognition that Europe is facing more than a short-term fall. Instead, a great global restructuring is happening before our very eyes and Europe's stagnating economy is in the throes of the transition from our 20th-century western-dominated economy to an Asian-led world. Once Europe was responsible for 40% of the world's output; already it is down below 20%. Within a decade – if we do nothing – it will be little more than half that, 11%. We are, in fact, at the sharp (and currently losing) end of huge historical processes moving production investment and trade from the continent of the first industrial revolution to the new Asia. And the jury is still out on whether Europe will face absolute – and not just relative – decline and whether today's crisis is, in effect, writing its own penultimate chapter in a story that will be entitled "the decline of the west".

A strategy for growth through radically reforming our competitiveness would have been – and still is – Europe's best way of meeting and mastering this challenge, for without such a shift Europe will become so marginal to global growth that in the early 2020s Asia will consume 40% of the world's goods and services. Germany will consume only 4%, and France, Britain and Italy just 3%.

But the heavy bank deleveraging that is under way is also signalling that Europe's banking model is now obsolete, unsuited for this new world, now incapable of serving a growth agenda. To survive, we will have to leave behind those highly leveraged financial institutions, which depended on short-term wholesale market funding and enjoyed, for a time, a common euro-area rate of interest.

Ever since 2008, when American and British banks recapitalised and shed their rotten assets, European banks have struggled. Some of them have liabilities 30 times their capital. In fact, European banks did less than half the recapitalisation and much less than half the write-offs of their Anglo-Saxon counterparts. Now many European banks will have to be taken over and rebuilt on a new model with far lower levels of debt and more dependence upon deposits and equity.

But the path leaders are now choosing ignores these fundamental flaws and Europe has descended into what no lesser a figure than Jürgen Habermas has called a "post-democracy" politics. Perhaps, over time, proposals for the direct election of the European commission and council president will emerge. But in the last few months large countries have encouraged democratic leaders in Italy and Greece to be cast aside and the European commission has been relegated in favour of presidential or chancellorial agreements between Germany and France.

With Germany conceding to French demands for political integration in return for French acquiescence to German-led fiscal austerity, a lethal combination of German economic liberalism and French statism now dominates Europe. But if under this policy growth remains low or nonexistent for years, then youth unemployment in particular will rise, causing massive social discontent, and deficits will not come down quickly either.

Yet this low-growth Europe still has to find a way of funding government deficits and bank liabilities – possibly 5 trillion euros of borrowings in total – and even today after months of discussions the question of who guarantees them and who funds that at the necessary level – EFSF, ESM, ECB (and whether with or without the International Monetary Fund) – remains unresolved.

This should have been a moment for Britain to help guide Europe to a more outward-looking, growth-led economic response to the new downturn – never denying the need for fiscal consolidation, but ensuring that it does not imperil the prospects for growth.

One constant in centuries of our troubled relationship with the mainland of Europe has been Britain's determination that never for any length of time should France and Germany be left to control the destiny of Europe alone. And in normal times we have believed that being at the heart of Europe – and not marginalised on its economic periphery – is an essential precondition of our global role.

There are some who say that today, in 2012, the fates of France and Germany are so tied together that they will insist on running Europe and preventing Britain from being influential. This is not, as a general pattern, how I found it – even when I refused, despite considerable pressure, to embrace the euro.

In recent years, even outside the euro, Britain worked with Germany to temper the French demand for "a core Europe" and we have worked with France to temper the worst of German depression economics. But because British politicians are now unable to argue for anything that has the adjective "European" in front of it, and because we are now glorying in isolation, we have abdicated our natural role in Europe and today there are far too few voices arguing for a common globally oriented European Union growth strategy and against protectionism and insularity.

The leaders of the major international institutions have rightly argued in their call to action that a co-ordinated global growth plan should and could be agreed. They want us to build a new firewall to prevent contagion, underpin trade finance as we did in 2009 and champion the new growth that can come from low-carbon technologies. And the starting point for their vision of a world coming together is a Europe that finally faces up to all three dimensions of its crisis.