Optimism over Europe may be overdone

John Paulson is not a man easily ignored - the hedge fund manager became a billionaire after accurately predicting the 2007 US sub-prime mortgage crash.

So, when Mr Paulson recently announced that he was taking "a substantial stake" in - of all things - Greek banks, the global investment community rushed to the only obvious conclusion: if Greece, the weakest economy in the euro zone single currency market, is now praised by Mr Paulson for being run by a "very favourable, pro-business government", then Europe's long drawn-out financial crisis must surely be over.

In similar vein, Mr Carsten Brzeski, chief economist at the ING bank giant, predicted in a note to clients: "Germany's economy staged an impressive growth comeback in the second quarter, which should be sufficient to have pushed the entire euro zone out of the recession."

The belief that Europe has emerged from its deepest recession since World War II is certainly growing. But optimism can be overdone.

First, it's worth remembering that most of the upbeat talk is not about truly good statistics, but about less bad ones. So, Spain's gross domestic product appears to be heading for a drop of "only 0.1 per cent for the rest of this year" - this is hailed by European officials as proof that the recession is "bottoming out".

Secondly, anyone who lives or travels through Europe is likely to have a less sanguine outlook than upbeat business analysts.

Most tourists visiting Spain are impressed by its beauty and its still passable transport infrastructure - a legacy of the boom years of the 1990s.

But the palm-fringed coastal towns of the Costa del Sol on the Mediterranean are dotted with abandoned construction sites, with holiday homes nobody wants, even though asking prices have halved. Many of these sites are now inhabited by gypsy migrants from Eastern Europe.

Outside Atocha railway station in Madrid, the pride of Spain's high-speed train system, hundreds of youngsters sleep rough. The station's toilet operator, a company which goes by the splendid name of "2theloo" recently announced that it would charge for its facilities, partly in order to keep street tramps out.

In Greece, the restaurant owners of Plaka, the old historic neighbourhood of Athens, are satisfied with the tourist season which has just ended; receipts this year are about 12 per cent higher.

But don't tell this to the residents of the city's vast slum around Petrou Rally Street, where thousands of local squatters mingle with equal numbers of illegal immigrants and stray dogs; locals claim that the dogs are always better fed.

Pickpocketing and drug-dealing are rife, the Greek police no longer venture there. "Welcome to the European Capital of Anarchy" a patch of scrawled graffiti proclaims.

According to official figures, unemployment throughout the euro zone fell from 21.2 per cent of the labour force in August, to 21.1 per cent now, a statistical twitch of no consequence to the roughly 20 million European adults now without a job.

But in Greece, Spain and Portugal, the nations which continue to be most affected by the crisis, adult unemployment is around 25per cent, and over half of all youngsters under the age of 25 have never had a job.

There is nothing European governments can immediately do to mop up this excess labour. They cannot raise taxes, since this will depress the economy even further.

And they cannot spend more, since this would require borrowing at punishing rates of interest. As it is, government debt is still going up.

When Greece first faced bankruptcy in 2010, its gross national debt was equal to 120 per cent of its gross domestic product (GDP); today, it is 170 per cent. Portugal's overall debt now stands at 122 per cent of GDP, compared to 90 per cent when the crisis first struck in 2011.

A recent poll conducted by Die Welt, one of Germany's top dailies, asked Europeans whether they could picture their country in a similar situation to Greece - considered Europe's nightmare. In France, 54 per cent of respondents said "yes", as did 56 per cent of Spaniards and 58 per cent of Italians. So much for rising confidence.

In the signs of recovery, Mr Paulson and his merry band of Wall Street investors see an opportunity for some rich pickings, but most Europeans know that penury, austerity and unemployment are their lot for years to come.

To be sure, the continent cannot be written off. Europe's banks alone have more than US$25trillion (S$31trillion) in assets, an amount 11/2 times larger than the entire US economy. Europe also continues to account for more than a quarter of the world's gross domestic product.

Yet the revival is still far too fragile and feeble to address the continent's fundamental problems. There are gigantic challenges of economic and political reforms which still lie ahead.

Indeed, one of the biggest dangers in Europe is that loose talk about recovery could stoke a sense of complacency among governments. Now is not the time to break out the bubbly.

Jonathan.eyal@gmail.com


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