Four years after the start of the financial crisis, the world economy has not yet found stable ground. The legacy of 20 years of uncontrolled globalization and extreme financial leverage is so huge that it will take at least another decade before the past excesses are digested. The actual situation, characterized by international trade imbalances, weak banks, increasing sovereign risks and the threat of trade and currency wars, is certainly not pointing to easy short-term solutions. The problems are as global and interconnected as the world economy, but all major economies struggle with specific symptoms. They were all tackled on their weakest spot. The United States has to get rid of its excessive debt. Japan must fight deflation and sluggish growth. China has to stop its addiction to investments and exports. But the weakest and most vulnerable of major world economies seems to be Europe, and that is strange.
In contrast to popular perception, the economic situation of Europe and, more specifically, the 17 nations comprising the euro zone, seems quite solid in comparison to that of the United States. Growth remains on average slightly lower than the U.S., but that is not surprising given that it is an equally highly developed but more mature economy. If current competitiveness is measured, Europe is clearly in better shape, as it maintains on average a balanced current account against a chronic deficit by the U.S. While government deficit is a problem for both economies, it is already down to 4.2% in the euro zone, against a frightening 9% in the U.S. The financial balance of the euro zone remains positive, while the U.S. struggles with a huge foreign debt.
The real problem of Europe is not the economy; it is politics. The European Union and the euro remain political projects, building an ever more integrated economy based on a peaceful process of consecutive international treaties between sovereign states for more than 50 years now. Starting in the 1950s with six member states and only focused on coal and steel, it now has 27 member states and includes all aspects of economic and social life. However, building the integrated European area is also a long story of impossible political compromises. Certainly, the decision in 1992 to create the euro was considered by all economists as a dangerous experiment. As history shows, any attempt to create a monetary union without a political union eventually fails. The euro could very well complete the long list of evidence, but politicians were convinced that it would automatically lead to more economic convergence and eventually a political union. Nice dreams.
At first sight, the euro's construction took care of the risk of disintegration. The Growth and Stability Pact adopted in 1997 defined clear rules for euro-zone members about low budget deficits in an environment in which a truly independent central bank, the European Central Bank, would guarantee the purchasing power of the currency through low inflation targeting. What else could go wrong? Well, clearly a lot. The favorable economic climate since the start of the euro made life too easy. Strong growth combined with low interest rates, both a consequence of globalization, reduced the pressure within the euro zone for disciplined behavior. Instead of economic convergence, divergence occurred. Some member states, like Germany, tried to optimize growth by becoming more competitive. In other member states such as Spain and Ireland, growth was boosted by credit expansion, leading to housing bubbles. Still other member states took advantage of low interest rates to expand government debt. …