![\"\"](\"http:\/\/www.sdaconseil.com\/blog\/wp-content\/uploads\/2011\/12\/Spark.bmp\" "\\"Spark\\"")
<\/a>02 December 2011<\/p>\nThe crisis in Europe is entering a delicate phase:\u00a0 Markets are nervous, politicians are trying to solve complex problems in a short span, funds are departing, banks are tightening and the clock is ticking.\u00a0 In a nutshell, the game is so tight that a simple trigger, such as a bank run or trouble in the non-banking sector, a downgrade in rating, troubles in Eastern Europe, a country calling it quits and leaving the Euro, a political stalemate could just throw the spark into\u00a0the tinder box.\u00a0 Out-of-the-box events and miscalculations could horribly conjure a column of falling dominoes, creating a momentum out of reach of the general will to stop it.\u00a0 Despite the recent call of duty from a string of central banks, we are now at the stage of contingency planning and the need to closely watch a possible eruption.\u00a0 A break-up of the Euro would create huge vibrations in interest rates, exchange rates and quite a legal tangle.\u00a0 We know the argument that the stakes are too high for a fumble, but then plenty of advocates have never lived through a real crisis before.\u00a0 Big events can go wrong.<\/p>\n
How in the hell has the European Union got into this predicament?<\/strong>\u00a0 For two reasons:\u00a0 Ballooning debt and falling economic growth.<\/p>\n In a matter of about a decade, the balance between acceptable sovereign debt and potential economic growth has moved from good to bad.\u00a0 From a comfort zone tolerated by economists and financial markets to a situation where the future of the Euro zone is under a big question mark.\u00a0\u00a0 The speed of this inflexion point has taken decision makers by surprise.\u00a0 On the one hand, debt, public and private, built up during the so-called golden age of private equity (2000-2007), or the golden age of leveraging when debt was a cheap currency. Extreme liquidity, speculation, corruption and bad<\/em> debt have mixed again in the history of finance to inflate and deflate another financial bubble.\u00a0 Then the financial crisis of\u00a02008-2010 called for additional debt, on top of budget deficits, to bail out and pad the banking systems.\u00a0 Several countries suddenly hit debt ratios in the range of 80 \u2014100% of GDP, setting warning lights.\u00a0\u00a0 All this would under normal circumstances remain within the manageable realm:\u00a0 A mix of austerity programs, weakened currency, export growth, recapitalisation of affected banks would have done the trick much like in the past.\u00a0\u00a0 But another force has been at play in the last decade.<\/p>\n Real prospects for economic growth have simply eroded with time.\u00a0 A sub-standard level of productivity, an aging population, a lagging performance in technology and R&D, the shocks of low costs from Eastern Europe and subsequently from China and an economy drugged with consumption have combined to form a landscape of mixed competitiveness within the European Union.\u00a0 The rise of China has been exponential and probably too fast for the comfort of the planning horizon of policy makers. \u00a0This drop in economic growth and competitiveness is creating two problems:\u00a0 the current social democrat system is becoming too expensive and keeps generating deficits, all in the face of a pile of accumulated debt that is reaching saturation.\u00a0 ‘There is not just enough growth to pay for all this’ is what financial markets are now saying.\u00a0 Investments and their growth options have moved to Asia and other BRIC nations, with expanding populations and middle classes.\u00a0 In Europe, we are now dealing with middle income countries stung with liquidity issues (Spain, Ireland, Portugal), solvency issues (Greece) and near solvency issues (Italy).\u00a0<\/p>\n As much as Asia is on an upswing reinforcement cycle fuelling economic growth, as much as Europe is on the edge of a dragging down cycle: austerity, mild recession, tighter credit, growing debt, rising bond yields, creeping unemployment, weakened demand, social tension, falling confidence index, and more austerity.\u00a0\u00a0 Stabilizing the sovereign debt problem and the Euro is the urgent priority. \u00a0It will most likely require external help, from the IMF and other central banks.\u00a0 Yet some thorny issues will remain outstanding for a while:\u00a0 under what shape can a fiscal union take place, how to restructure debt without crippling banks, etc. The lack of progress on the finance side is exposing the second weakness:\u00a0 Where will the new growth come from?\u00a0 Investments, exports, productivity, innovation, lower wages, protectionism?\u00a0 Politicians and policy makers are not used to producing smart economic growth strategies. \u00a0Most have honed their craft under the affluent society of the past century, before the rise of China came to challenge the world order in trade and investments.\u00a0 \u00a0Beyond the infrastructure stimuli, most options for growth will require toil and sweat.\u00a0 Inevitably austerity will bite the middle classes.\u00a0 With unemployment sticking up and bleak economic prospects ahead, no wonder those middle classes are throwing out politicians and parties that reigned under that damaging decade.\u00a0 The next couple of weeks will be crucial in Europe, as France and Germany will tango in their efforts to finally establish that firewall around the Euro.<\/p>\n At the end, structural reforms will make a difference,\u00a0like what Australia\u00a0did in the last decade:\u00a0 Along with the Asian boom, they restructured their economy to make it more competitive.\u00a0 They are happy about it today.\u00a0 Other countries endowed with natural resources will find some breathing space, just for a while.\u00a0 But the same fragile balance between\u00a0 debt & growth is present in a number of American states and Canadian provinces.\u00a0\u00a0 They are fortunate to be under the cover of full federal systems, unlike Europe.\u00a0\u00a0 But inevitably, deleveraging will take its toll for the rest of the decade. And perhaps beyond.\u00a0 Astonishingly, consumption as % of GDP is still at 71% in the USA, and 36% in China.\u00a0 The most fundamental structural imbalance in the world has not moved an iota in the last three years!\u00a0 The big powers are not moving from their model.\u00a0<\/p>\n This is really the crisis of the industrialized nations: Debt and growth.\u00a0 In the coming years we are going to witness an experiment amongst western nations about how best to solve the three following questions, which will craft their outlook for a generation:<\/p>\n \u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 1. How best to conduct austerity?<\/p>\n \u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 2. What structural reforms will have the best pay-off?<\/p>\n \u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 3. What set of economic policies will work best?<\/p>\n In the meantime, in Europe, lurks one spark, that could burn the recovery\u00a0 to ashes and make this decade really miserable.\u00a0 Again CFOs will spend some nervous vacation time at year end. Good luck.<\/p>\n Andre\u00a0 Du Sault<\/p>\n MBA (LBS), MPA (Harvard)<\/p>\n","protected":false},"excerpt":{"rendered":" \u00a0 02 December 2011 The crisis in Europe is entering a delicate phase:\u00a0 Markets are nervous, politicians are trying to solve complex problems in a short span, funds are departing, banks are tightening and the clock is ticking.\u00a0 In a nutshell, the game is so tight that a simple trigger, such as a bank run […]<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[1,8],"tags":[],"_links":{"self":[{"href":"https:\/\/sdaconseil.com\/index.php?rest_route=\/wp\/v2\/posts\/226"}],"collection":[{"href":"https:\/\/sdaconseil.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/sdaconseil.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/sdaconseil.com\/index.php?rest_route=\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/sdaconseil.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=226"}],"version-history":[{"count":3,"href":"https:\/\/sdaconseil.com\/index.php?rest_route=\/wp\/v2\/posts\/226\/revisions"}],"predecessor-version":[{"id":230,"href":"https:\/\/sdaconseil.com\/index.php?rest_route=\/wp\/v2\/posts\/226\/revisions\/230"}],"wp:attachment":[{"href":"https:\/\/sdaconseil.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=226"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/sdaconseil.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=226"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/sdaconseil.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=226"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}