And even now a fundamental truth about the current state of European banks remains unspoken: that German, French, Italian, and British banks that have lent recklessly to the periphery are owed billions not just by the Greeks but by the Irish, Portuguese, and Spanish, and have losses still to take from toxic assets and the real estate collapse.
And when, years from now, people explain why Europe slept, they will also explain how, out of short-sighted self-interest, we treated the Greeks’ problems as if they were ones of liquidity (addressed by giving loans), not solvency, and how by short-term maneuvers to delay the necessary denouement, we maximized the risk of a disorderly end-game. Indeed, with interest rates on the rise, capital outflows from all the periphery countries to the core are already making funding more difficult in each troubled country, dragging us into even higher interest rates, longer recessions and, possibly, higher deficits.
The third side of the triangle is, of course, low growth itself, which threatens to condemn the whole continent to a decade of high unemployment. The deficit reduction and bank stabilization we need to see cannot become entrenched without economies which generate trade, jobs, and growth. Yet, suffering from anemic levels of growth, Europe is slipping further and further down the world league – not acutely but chronically, which is more serious and much harder to reverse.
Today, European unemployment is stuck around 10 percent, with youth unemployment rising above 20 percent and as high as 40 percent in Spain. And it cannot come down fast. Europe now has a trend rate of growth which is almost one-half that of the United States and one-quarter that of China and India. Once, Europe represented half the output of the world. By 1980 this had fallen to one-quarter. Now it is less than one-fifth – just 19 percent. Soon it will be little more than a tenth – 11 percent by 2030 – and then it will fall to 7 percent.