Downward Spiral: Southern Europe Remains Stuck in Crisis

Photo Gallery: Southern Europe Stuck in Economic Doldrums Photos
AP/ DPA

For years, EU leaders have been trying to put a stop to the debt crisis that has been tearing apart Southern Europe. They have made little progress. Is it time for a change in strategy? By SPIEGEL Staff

Spanish top models strutted on the stage to the sounds of flamenco music. They were wearing tightly fitting clothes made by their country's most famous designers and presenting plates of bold tapas creations by Spanish chefs.

Staged in the middle of the European Parliament in June, the show represented a rebirth of sorts. "We have something to offer to the world. We are not just a land of crisis," said Foreign Minister José Manuel García-Margallo. And he hopes to use the blend of fashion show and cooking event to present the Spanish brand name, the "Marca España", to the world. It comes with a promotional video proclaiming that Spain has the "world's best bank," the largest number of installed solar panels of any country across the globe and a big heart. The Iberians, the video notes, are also unbeatable when it comes to the number of organ donors.

But will that be enough to lead Spain and the rest of Southern Europe out of the current crisis? There is plenty of room for doubt on that score.

Aside from the lender praised in the video, Banco Santander, Spain has a weak savings bank sector with an uncertain future, all efforts to rehabilitate it notwithstanding. And despite the many reforms, government debt and unemployment are still on the rise in Spain, while the economy remains stuck in recession. And Spain remains one of the more hopeful of Europe's many troubled economies.

The sovereign debt crisis has been eating its way through the Continent for the last four years, despite the various remedies prescribed by crisis managers in Brussels and Berlin, and at the European Central Bank (ECB) in Frankfurt. The situation in the euro zone eased somewhat after ECB President Mario Draghi's announcement last summer that he intended to do everything possible to preserve the euro. But it is now becoming clear how deceptive this period of calm was. Since US Federal Reserve Chairman Ben Bernanke announced his aim to gradually pump less money into the financial markets, interest rates have gone up considerably in both the United States and Europe.

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5  Photos
Graphic Gallery: The Euro Crisis Refuses to Let Go
With the sedative effect of cheap money now diminishing, it is becoming clear what risks still lurk in Europe's debt-ridden economies, and that many problems remain unsolved. Sovereign debt is rising rapidly, not just in Spain, but also in Greece, Italy and Portugal, despite austerity policies and impressive reform efforts. The countries have significantly reduced spending in response to pressure from the so-called troika, consisting of the European Commission, the ECB and the International Monetary Fund (IMF). But the recession has led to a concurrent decline in revenues. In addition, devastatingly high unemployment has led to higher government spending.

'Those Who Exit Will Lose Out'

It has created a vicious downward spiral. And economists have been left to argue over whether and how the countries in question might be able to emerge from it.

Hans-Werner Sinn, head of the Munich-based IFO Institute for Economic Research, favors a temporary withdrawal from the common currency area by crisis-ridden countries. Their products have become so expensive that it is impossible for them to compete within the monetary union, Sinn argues. After exiting the euro zone, the countries could devalue their new currencies, making imports more expensive and reducing the price of exports. It would be a drastic treatment, but in the end, at least according to theory, the patient would return to health and could even re-enter the monetary union later.

Thomas Straubhaar, head of the Hamburg Institute of International Economics (HWWI), calls such talk "cynical" and has made clear that he does not see "devaluation as a cure-all." In what areas, he asks, is Greece supposed to become competitive? Besides tourism and a few agricultural products, he says, the country has little to offer.

"Those who exit will lose out," says Straubhaar, which is why no country will voluntarily leave the monetary union. Straubhaar believes that establishing and developing adequate economic structures is much easier within a common currency area such as the euro zone.

But those efforts have made very little headway so far, and many politicians and economists in the troubled countries believe that this is the result of strict austerity policies, for which they hold German Chancellor Angela Merkel largely responsible.

'Weak Economic Situation'

"Portugal has done a large share of the dirty work, and yet it still has high debt levels and high unemployment," says Pedro Santa Clara, a professor at the Nova School of Business & Economics in Lisbon. "There is only one solution to our problems: growth and investment." Portuguese Economy Minister Álvaro Santos Pereira also wants to see new ideas in crisis management. "Europe has to find its way back to growth and establish confidence to stimulate consumption and investment," says Pereira.

But the German government is determined to stay the current course. "The weak economic situation in the euro zone is no reason to deviate from the dual strategy of ongoing fiscal consolidation combined with structural reforms," reads an internal document from the German Finance Ministry, which argues that the present strategy has been successful.

According to the document, the structural deficit in the euro zone has been reduced by more than half since 2009, and unit labor costs, a key indicator of competitiveness, have "declined significantly." The ongoing weak growth in the common currency zone is an "expression of a deep-seated adjustment process that the euro zone is currently undergoing, and is by no means solely attributable to budget consolidation." This development is "conducive to growth in the medium term." The paper warns sharply against curbing "the necessary adjustment process," saying that a departure from the current austerity policy would "jeopardize the positive development of the last few months."

Klaus Regling, head of the European Stability Mechanism (ESM), comes to Schäuble's defense. "The euro program countries are experiencing what IMF program countries like Brazil, South Korea and Turkey experienced a few years ago." Those affected, says Regling, should consider that these countries are now growing at impressive rates, thanks to structural reform and patience.

Persistent Unemployment

At last week's European Union summit, Merkel also reined in every initiative to quickly free up more money for economic stimulus programs. "First we have to develop a common understanding of what is important for growth," Merkel said. She told fellow European leaders that she wanted to see a more in-depth debate at the next summit in October. Everyone wants growth, but some of her counterparts believe that ramping up government spending is enough to achieve growth targets, Merkel scoffed after the meeting.

The basic elements of agreements between the European Commission and individual EU countries are to be established in December, at which point a sort of solidarity fund will exist among the individual euro-zone member-states. Under Merkel's plan, more money will only be provided in return for reforms that are legally binding and subject to fixed agreements. In Brussels, the chancellor steadfastly refused to even discuss concrete amounts before such agreements are reached.

At the summit, the European leaders did approve €6 billion ($7.8 billion) in new spending to fight youth unemployment and facilitate lending to smaller companies. But this does little to change the underlying problems. A few additional billions are not enough to fix the crisis in the labor market and the financial sector, the recession and political paralysis in a few Southern Europe countries.

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1. Who created Austerity logic?
Manish Gupte, PhD 07/03/2013
Work creates wealth. Lower taxes means people have more money in their wallet. They spend that on products. Those products have to be manufactured. That creates employment. Excess outsourcing and imports took those jobs and investment in such factories to other countries. Once that goes down, jobs come back. Then, the economy has more wealth. That means there is growth. Then tax revenue goes up. So..the debt can be paid back. Higher taxes make hiring difficult and spending is also less. So how can Austerity logic work? Who created this logic? Money for countries like Greece can be seen as investment. So, other EU countries should prefer "imports" from Greece. That will create more growth and higher return on investment.
2. Is politics blocking entreprenuers?
Manish Gupte, PhD 07/03/2013
I saw a Twitter comment in which a young person in Greece wanted to start a business. He had a Govt job. The Govt people did not let him leave and created problems. This stops any development! People who want to start businesses should be encouraged. Govt grants to support them? It creates employment. Buying is a voluntary process. Yes, products made within "developed countries" will be costlier than imports from other places, however, if one buys them then the economy as a whole will develop.
3. Austerity logic
dnharris 07/03/2013
Until Greece and Spain can unite on a plan internally that also makes sense to Germany, nothing should be done--this signals they are not ready for change. Wait. Yes, it only gets worse, but they are not ready to change.
4. The Neuro and the Seuro.
yiannaki 07/03/2013
To my opinion we have to split the euro. In one for the North and a devaluating one for the South.
5. EU austerity
paullang 07/03/2013
A solution is for excess workers in the EU to migrate to the USA. This is already happening in Ireland. This is a traditional way to deal with the economic realities in the world.
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