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Europe's dog days

Gavin Hewitt | 17:32 UK time, Thursday, 29 July 2010

French TGV high-speed train - file picEurope's dog days are here. Not those sultry, cloying, enervating weeks of the Washington summer. Not the oppressive stillness. But the sparseness of Brussels's streets, the absence of traffic, the empty tables where only weeks ago they doled out moules at 25 euros a throw. There is that feeling of somehow being left behind. Most of the Eurocrats have caught the fast train to the coast.

By reputation the dog days bring no joy; they come with a bad rap. These were the times "when the seas boiled, wine turned sour, dogs grew mad, and all creatures became languid".

So far the wine seems to be holding up, but these are certainly weeks of languor, a dreamy, lazy time-out. And Europe's elite are gliding off to their gites, villas and palazzi in surprisingly good spirits.

The worst didn't happen. The euro has not only survived - it is at a perky 11-week high. The European project which wobbled for awhile has settled back again, weakened surely, but out of danger. There are green shoots everywhere.

Business confidence in places like Portugal is at its highest since 2008. In Italy sentiment is at its peak for two years. The German economy is booming. The costs of insuring against countries defaulting (the much-accused credit default swaps) are at a two-month low. The bond spreads are tightening and the cost of borrowing for hard-up governments is falling. Growth forecasts are being rounded up. It may reach 1.5% by the last quarter. The talk of a double-dip recession is fading.

The European good life under a Tuscan sun can be resumed. There is a quiet satisfaction abroad. Earlier in the year the President of the European Commission, Jose Manuel Barroso, had railed against the intellectual glamour of pessimism. The French Prime Minister Francois Fillon said only last week that "we must not underestimate the climate of scepticism surrounding the EU, which could be fateful for it".

Some say that in the past few weeks Europe has started defying its critics. Others are counselling "not so fast".

The New York Times in an editorial this week was among the unconvinced. "In just a few months, " its editorial opined, "Europe's leaders have gone from panic to complacency about the future of the euro". "Today's complacency," it went on, "is so dangerous since none of the euro's basic problems... have been addressed".

Economic growth has reappeared, but it is uneven. Germany is pulling away; its unemployment is the lowest since November 2008. The words "economic miracle" have reappeared. Meanwhile in Greece growth and consumer confidence are flat and the economy only splutters in Spain.

The differences between Germany and some of the other euro countries are widening, not narrowing.

Then there is austerity. Much of it has still to kick in. In Italy MPs have only just approved their austerity package. Elsewhere it has yet to bite. There is wide disagreement as to its impact. Some believe the spending cuts will choke the recovery just as its starting. Others believe that confidence will only return when the deficits are reined in.

The crisis in the eurozone has raised again the question of how countries that are so different can inhabit the same monetary union. International bodies, like the IMF, have insisted that countries like Greece and Spain have to become competitive. This will not only mean wage cuts but "structural reforms" - making it easier to hire and fire for instance. In Greece they are trying to open up road freight to competition. The result is that Athens is running out of fuel as the fuel delivery drivers strike.

We do not know how Europe's workers will take to "structural reforms". Neither do we know how Europe's public sector workers will react to change. In France, which has hardly begun an austerity programme, there is widespread resistance to raising the pension age. The autumn will see public sector workers returning - and in what mood it is hard to predict.

Outsiders still see the heart of Europe's crisis as that it cannot sustain its comfortable way of life.

My eye was drawn to some analysis in the China Daily. "It was not widely known until now," the article read, "that the average wage of workers at the government-owned railway company in Greece was $75,000 a year. Some train drivers were paid as much as $130,000. That's about 10 times the average salary of the highly qualified ...train drivers in Hong Kong."

Now I've no idea whether these figures are true, and it is necessary to point out that China's workers have increasingly been complaining about their own working conditions, but the perception remains that Europe has been living beyond its means. Social programmes will be cut back. Countless painful questions will have to be asked. For instance, can it be sustained that staff in Belgium are paid travelling-to-work expenses?

When Europe's leaders return from their holidays they will immerse themselves in trying to prevent the eurozone crisis occurring again. Budgets and spending plans will be monitored. Those who break the euro's spending rules will be disciplined. Will that be enough to ensure the survival of the single currency, or will there be a push for fiscal union? And if so, what strain will that put on already frosty relationships?

Others see Europe's growth spurt dying away towards the end of the year. Gilles Moec of Deutsche Bank says "there's no big change in terms of the underlying macro picture; we're in for slow growth."

Slow growth will pose a huge challenge. Most observers accept that Europe cannot sustain its way of life with growth under 2%.

Two final thoughts. One of the stories of this crisis has been its unpredictability. All of us, officials, observers, politicians have reacted to events. We have been unable to see the twists and turns and the autumn looks no easier to predict.

The debate so far has been about crisis management. Considering the fundamental questions that are being asked, there has been relatively little soul-searching about whether the EU is on the right road, how it prospers in a world where power is moving to the nimble and politically ambitious countries like Turkey, Brazil and India.

On that note I, too, will join the ranks of the languid for a couple of weeks and head to Europe's hills. For those also finding ways to escape, bonnes vacances and thank you for taking part in this conversation.


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