01 December 2011

Wim Boonstra: A huge embarrassment

Asking the rest of the world to help the EU illustrates the powerlessness of our political leaders. Europe does not have a financial deficit, but it does have a problem with leadership.

The crisis in Europe rages on. The brush fire that flared up in Greece less than two years ago has since turned into a forest fire. A degree of eurozone crisis fatigue is now discernable. It just goes on and on with no end in sight. European politicians, who have so far been continually overtaken by events, have yet to present a convincing solution. And the analysts’ assertions get wilder by the minute. For example, Bruno de Haas recently claimed in his column that saving Greece would cost every Dutch citizen one year’s salary. So it seems the time has come to put things into perspective because statements like these seem a bit off the wall to me.

But it is true that Europe’s political leaders seem to be doing their very best not to find a solution. The ball is now once again being placed in the court of emerging markets such as China, India and Brazil. They do, after all, have large foreign exchange reserves and should consequently be willing to pitch in.

I am gobsmacked when I hear reasoning like this. Let’s look at a few facts. The Economic and Monetary Union (EMU), which talked itself into a debt crisis, has an average government debt of nearly 90 per cent of GDP and a government deficit averaging 4 per cent. Just compare this to the UK (more than 80 per cent and 9 per cent respectively), the US (100 per cent and 9 per cent) and Japan (more than 230 per cent and about 10 per cent). This shows the EMU is in better shape on average than the other large Western blocs.

Plus the EMU has its external position (current account balance of payments) in reasonable balance, in contrast to the US that has a large savings deficit. So while we do have a problem within the EMU, the bloc as a whole is solid as a rock.

Purchasing power parity

And there are more interesting figures. Average per capita income in the EU is more than $30,000 (GDP per capita, measured in purchasing power parity). This makes it a wealthy bloc. Comparing the EU figure to that of the aforementioned emerging markets renders a shocking result.

While China is growing very rapidly and is quickly becoming richer, average per capita GDP is just above $7,500. The figure for India is even further away at $3,400. Brazil heads the pack as the rich relative at above $11,000. In comparison: average per capita GDP in beleaguered Greece is more than three times as high as in China and more than twice as high as in Brazil. And we then have the nerve to ask those countries to loan their hard-earned savings to us because we cannot put our internal house in order. It is absolute madness.

On our own strength

Asking the rest of the world to help the EU illustrates the powerlessness of our political leaders. Europe does not have a financial deficit, but it does have a problem with leadership. My advice is to forget the foreign aid and solve the problem autonomously.

If Europe is incapable of solving its own problems, it will collapse due to its own powerlessness. But if Europe still manages to tackle the problems resolutely, for example through an intelligent eurobond programme combined with a robust reform policy, foreign money will flow into the EU on its own. Because investors worldwide are eagerly looking for an alternative to dollar investments.

But confidence in European politicians must be restored first. So it seems that if you have to beg for confidence, you’ve apparently already forfeited it...

Article originally published in Dutch, "Het is om je dood te schamen", © Het Financieele Dagblad

© ELEC