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GORDON BROWN n GERHARD SCHRÖDER

NOURIEL ROUBINI AND NICOLAS BERGGRUEN

FERNANDO HENRIQUE CARDOSO

ERNESTO ZEDILLO AND FELIPE GONZALEZ

ZHENG BIJIAN

Europe and theGlobal Economy

The sovereign debt problem in Europe, ignited by Greece, has morphed into an

economic crisis challenging the solvency of major banks and countries as well

as a generalized crisis of governance. Lacking the legitimacy of public support,

the leaders of the European Union's fledgling institutions have been indecisive

and unable to contain the looming danger of financial contagion. Along with

the economic slowdown in the United States, instability and volatility in Europe

threaten to derail the fragile global recovery.

In this section, several former European leaders as well as political figures

from the emerging economies offer their ideas on how to fix Europe and stem

the global threat.

At moments of crisis, states-

men and stateswomen have

to lead markets and display

irresistible resolve.

How to Save Europe

GORDON BROWN is the former prime minister of Great Britain.

london —It was said of one 19th century British politician that he never missed a

chance to let slip an opportunity.

Will the Euro summit of 2011 be remembered as “the day European leaders faced

the crisis down”—or will it be viewed, in retrospect, as the turning point at which

history failed to turn?

Up against almost impossible constraints—the contradictory wishes of 16 Euro

members, German public opinion and the European treaty itself—it is to German

Chancellor Angela Merkel and French President Nicolas Sarkozy’s credit that they

brokered a deal which kept Greece liquid and calmed European markets down.

But these constraints—which mean there can be no bailout, no default, no deval-

uation and no more money—exist and seem unchallengeable because Europe has not

yet faced up to the scale of its crisis.All European leaders can agree on is that they face

a fiscal crisis hitting their periphery. Yet the European crisis is not one-dimensional

but three-dimensional: not just a fiscal crisis but a banking crisis—one of massive

unfunded bank liabilities—and a crisis of low growth, itself the result of the Euro’s

inbuilt impediments to recovery. Together and in lethal combination they threaten a

tragic roll call year after year of millions of European citizens unnecessarily con-

demned to joblessness.

At moments of crisis, statesmen and stateswomen have to lead markets and dis-

play irresistible resolve. The best example is when, pushing uphill against the con-

straints of the day, Roosevelt’s New Deal of the 1930s turned orthodoxy on its head

and pursued stimulus instead of austerity. In April 2009 at the London G-20 Summit,

the world had to underpin its economy by the boldest and most dramatic of measures.

Europe needS to break from its past constraints and agree to historic changes—

the costly restructuring of banks, the coordination of monetary and fiscal policies,

and reforms to the Euro itself to remove structural barriers to growth. Specifically,

the Brussels summit in July needed to accept the inevitability of fiscal transfers, pre-

pare for a precautionary facility for Italy and Spain, and, at a minimum, expand the

European stability fund, underpinning it with a backstop facility far bigger than its

current size. Yet not one of these items even reached the agenda.

Action, however, that is deferred at one point of crisis will mean even more rad-

ical action is required at the next juncture. What might have satisfied markets last

month—a Brady-style bailout for Greece—will next time not be sufficient to end

Europe’s economic agony. And I fear that in a few months’ time we will need a far

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bigger backstop—perhaps up to 2 trillion euros to cover the future funding needs of

Italy, Ireland, Greece, Portugal, Spain and Belgium. On top of this, bank restructur-

ing may cost as much as 200 billion euros in new capital, perhaps even 300 billion

euros, requiring an overall package—partly Euro-member-state-financed, partly

IMF-financed—equivalent to a quarter of euro zone GDP. Then we will also have to

create a European debt facility (perhaps for up to 60 percent of national GDPs) and,

as a sequel to that, greater fiscal and monetary coordination—which will, in turn,

mean fiscal transfers on the model of, if nothing yet akin to the scale of, the USA.

But, even if all these stabilization measures are agreed upon, Europe’s growth

will remain anemic, and, far from falling according to plan, deficits and unemploy-

ment may remain too high. So there is a final inescapable dimension, what I call the

“global Europe plan”—a determination that Europe stops looking inwards and looks

outwards to export markets in the eight fastest-growing economies (India, China,

Brazil, Russia, Indonesia, Turkey, South Korea and Mexico) that will generate most of

the world’s new growth. Today only 7.5 percent of Europe’s exports go to these fast-

rising economies that will create 70 percent of the world’s growth.

The key to achieving sustained growth is not only a repositioning of Europe from

consumption-led growth to export-led growth, but radical capital product and labor

market reforms to equip the Euro area for global competition — and a G-20 agree-

ment with America and Asia to coordinate a higher path for global growth.

None of this was discussed in any detail in Brussels. Yet without that agenda for

growth, even the most painful austerity is unlikely to prevent contagion to come.

European leaders, who assumed for 10 years that the stability pact was all they

needed to cope with a crisis, will find they also have to face up to unprecedented

constitutional change. One of the reasons I opposed Britain joining the Euro was that

it had no crisis-prevention or crisis-resolution mechanism and no line of accounta-

bility when things went wrong. Today we find Europe’s political leaders blocked

from expanding the already fragile European Financial Stability Facility because of a

voting structure that requires unanimity; still unsure who is responsible in a crisis

not least because of their ambiguous relationship with the independent European

Central Bank; and even now unable to contemplate the constitutional issues raised

by fiscal integration.

But every time the big questions are avoided, and every time the outcome is a

patchwork compromise, the next crisis gets ever closer and threatens to be more dan-

gerous. That approach can no longer suffice. From now onwards, no one can assume

that Europe’s past strength as a continent is enough to prevent the most difficult of

future outcomes.

European leaders, who

assumed for 10 years that the

stability pact was all they

needed to cope with a crisis,

will find they also have to

face up to unprecedented

constitutional change.

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THE ROLE OF GERMANY | I can well understand the defiant mood in

Germany today as it grapples with the crisis engulfing the euro zone. German anger

is obvious and well founded.

Over the last 10 years, while Spain, Ireland, Portugal and others partied on low

interest rates, the German people cut their wages, endured punishing structural

reforms and accepted the pain of 5 million unemployed in a drive to modernize their

own industries.Their sacrifices have brought them a large trade surplus and an 80 per-

cent rise in German exports to China.

No other country could have simultaneously borne the costs of bringing 16 mil-

lion people from Eastern Europe into a unified state, or joined the euro at such an

uncompetitive rate and yet still rebuilt their country’s exporting strength.

Germany now has Europe’s strongest economy, and Angela Merkel and the

German people deserve praise for the German export achievement. But if that were

the only story to tell, then the cure for the current crisis would be simple: follow the

German example: austerity, and, if that fails, even more austerity.

Three years ago, when the financial crisis first hit, the German government, like

the rest of Europe, quickly defined the problem as an Anglo-Saxon one, and blamed

America and Britain. A year later, as the financial crisis widened into a general eco-

nomic crisis, the Germans retreated into even safer, more familiar territory, redefin-

ing the world crisis not as financial but as fiscal—one of deficits and debt.

As a result, Germany has denied any culpability for what has gone wrong. Indeed

as long as it can argue that it is not a source of the problem, it can justify resisting

costly measures to resolve it.

Yet according to the Bank for International Settlements, Germany lent almost

$1.5 trillion to Greece, Spain, Portugal, Ireland and Italy. At the start of the crisis

German banks had 30 percent of all loans made to these countries’ private and pub-

lic sectors. Even today this one category of loans is equivalent to 15 percent of the

size of the German economy.

Add to that heavy German involvement in the credit binge in American real estate

(half America’s subprime assets were sold on to Europe), and in property speculation

across Europe, and it is clear that wherever parties were taking place, German banks

were supplying the drinks. The only party the German banks missed out on, one com-

mentator has joked, was Bernie Madoff’s Ponzi scheme.

As a result, Germany’s banks are today the most highly leveraged of any of the

major advanced economies, a massive two and a half times more leveraged than their

US banking peers, according to the IMF.

Indeed, worried about the impact of stress tests on their credibility, German bank

Three years ago, when the

financial crisis first hit, the

German government, like

the rest of Europe, quickly

defined the problem as an

Anglo-Saxon one, and blamed

America and Britain.

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regulators have been hostile to the same disclosure and capital accounting require-

ments agreed on by every other euro zone country, and one Landesbank—the state-

owned regional banks in Germany—went so far as to pull out of the tests the day

before the results were released.

But why should this concern Germany, which is competitive, fiscally sound and

economically robust? Because all across Europe the poor condition of the banking

sector is becoming a risk to recovery and stability. German banks like other

European banks rely on raising short term funds, and in the next three years these

already weakly capitalized and poorly profitable banks have to raise 400 billion euros

from the markets, an amount that is nearly one-third of the entire euro zone’s €1.4

trillion in wholesale debt.

More recently it was the turn of France—like Germany rated AAA by credit rat-

ing agencies—to face market pressure because of its high levels of exposure to the

euro periphery. Each country’s problems are unique, but, as the epicenter of the cri-

sis moves closer to Europe’s core, Germany too may find its once unchallengeable

image as a financial bastion called into question.

In the short term, Germany would be right to push for Europe-wide bank recap-

italization, from which it would itself benefit. But it is also time for Germany to

acknowledge that it must be integral to solving the problem because it is has been

integral to the problem itself.

Of course, no one should expect Germany to transfer a large percentage of its

wealth to the EU’s poorer countries on the same scale as other federal states—the

US, Australia and others—but it must be persuaded that the crisis cannot be solved

without a common Euro-bond facility, legislation for greater fiscal and monetary

coordination, and a role for the European Central Bank that takes it one step beyond

being the guardian of low inflation by adding a second role as lender of last resort.

In the end, Germany will have to agree to a common mechanism for Europe to

pay its way out of crises. Germany’s recent failure to act from a position of strength

endangers not only the country itself, but the entire euro project that Germany has

spent decades developing.

s

Germany’s banks are today

the most highly leveraged of

any of the major advanced

economies, a massive two and

a half times more leveraged

than their US banking peers,

according to the IMF.

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