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European Turmoil and Prospects for Recovery

Speakers
Dr Dan Steinbock, Research Director of International Business, India, China and America Institute (USA)

 Date
18 Feb 2011

 Venue
Auditorium, Level 2, INSEAD Asia Campus, 1 Ayer Rajah Avenue, Singapore 138676

 Time
5.30pm – 7.00pm

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The media around the world has painted a mixed picture of the EU’s debt crises and recovery. Readers, even the more economically-oriented ones, may be forgiven for being confused at times. It was therefore timely for Dr Steinbock, an economics expert highly attuned to the current situation in Europe and Asia, to deliver his analysis.

The current predicament of Europe could well be part and parcel of a cyclical boom and bust phenomenon in the global economic system. While growth rates are low, EU countries remain competitive. Germany has been right to pay attention to ensuring European competitiveness, while also moving fast to invest in less advanced economies around the world, whose markets are less saturated. Dr Steinbock reminded the audience that the German economy has been doing rather well, and indeed, its growth rate in the past year has been the best since reunification in 1990.

But Germany’s current fortunes may be hard to replicate, either for other EU countries, or even for its own future. German growth is linked to that of the US and China, which themselves suffer from issues of volatility and inflation respectively. More worrisome is the likely shift in mood and change in politics with the upcoming German state elections that might make it hard to sustain political will and support for economic and financial reforms. This link between diminishing political capital and the difficulties of implementing much-needed economic reform is also to be found in France. President Nicholas Sarkozy’s political troubles and the impending presidential elections in 2012 make for an unfavourable climate for austerity measures, which France needs. The big hurdles Sarkozy recently faced when raising the age of retirement by two years provide a case in point. The domestic politics of Germany and France should concern us all, since the Eurozone’s recovery and growth drive now essentially rest on the shoulders of the two countries, even if this is not politically palatable to some.

Elsewhere on the continent, progress on economic restructuring has been made, but not quickly enough. The ‘grand social pact’ forged in Spain between the government, labour unions and businesses in February was clearly a strong move in the right direction, but the prescribed reforms only come fully into effect in the distant year of 2027. The permanent eurozone rescue fund, to be set up on 1 January 2013, may be a more promising development, but markets are now becoming impatient to see financial stability in Europe.

In countries with a communist past like Eastern European states, or in Mainland China, whose populations suffered from the inefficiencies of a centrally-planned economy, Steinbock sees that economic drive at the national level is fed by a ‘history of struggle’. He then hypothesized that the lack of similar national narratives in Western European countries has precluded the urgency of forging stronger political cohesion – so crucial when tackling the economic and financial crises. With the additional benefit of the critical mass which emerging economies like the BRIC countries (Brazil, Russia, India, China) are naturally endowed with, these places can quickly become competitive through the transfer of knowledge and technology from advanced economies.

Questions fielded by the audience extended beyond the realms of mere economics. There was, for instance, a discernible interest in the concern expressed by Europeans that closer economic ties with China would affect Europe’s own values on human rights. In response, Dr Steinbock pointed out that Sino-European exchanges work both ways. China would, in the process, become more open too – not just economically but also socially, and possibly even politically.