City Focus, Daily Mail, Featured Work, United Kingdom - Fri January 7, 2011

CITY FOCUS: The Europeans stuck in reverse

In 1952 the French historian Alfred Sauvy was searching for a term to describe poor areas of the world – nations hampered by low economic growth and scarred by war and corruption.

Eventually he stumbled across a simple phrase that resonated. The ‘Third World’ immediately conjured up images of economically barren stretches of Africa, South Asia and Latin America.

In recent decades, Sauvy’s single definition has been broken down into subdivisions. Genuine third-world nations – say, Somalia or Yemen – have become ‘failing states’, while former basket cases like China and India have become emerging or ‘growth’ nations, their economies expanding at a faster rate than ‘developed’ countries such as Britain or America.

We may now have to add a new grouping onto this list. With the financial crisis continuing to linger, power and influence is leaching away from some European states. Greece, Portugal, Romania, Hungary and even Ireland: is this the world’s new band of ‘receding nations’?

‘It’s probably premature to call them ‘failing states,’ says Vanessa Rossi, a senior research fellow at think-tank Chatham House, ‘but it’s clear that these countries are no longer emerging markets. And some of them, Portugal included, stuck with a moribund economy and low growth, never even made it to the position of being a developed country.’

Seen from any angle, the economic challenge facing this new and unhappy band is immense.

Portugal, one of the poorest countries in Europe, is groaning under external debt worth 61.8 per cent of GDP. At 93.5 per cent, only Greece’s debt levels are higher.

But the problems don’t end there. Challenges, both financial and ideological, face Europe’s weakest links.

In 2010, patches were simply placed over the worst bits. Ireland’s recent £72billion international bailout was essential but may not be enough to stave off bankruptcy. Greece, warns Rossi, will ‘not be able to pay back all the debt it owes’. Recent attempts to cut public spending brought missile-wielding mobs to the streets of Athens.

Here, the worst case scenario is that parts of Europe could become de facto banana republics, countries hamstrung by inflation and low growth yet faced with the appalling prospect of saving up all their money simply to pay off the exorbitant interest rates on their staggering national debt.

That’s what happened to Argentina and Brazil in the late 1990s and, say many critics, Brussels is mad or blind if it genuinely believes that Europe is immune from such ills.

‘Latin America right now is in a far better sovereign state than many European countries,’ says Mark Schaltuper, head of Europe analysis at consultancy Business Monitor International (BMI). ‘You can even say that a few years down the line, Europe could be in the position that Latin America was in ten years ago.’

Ideologically, the impact of a fading or receding Ireland or Greece is enormous. It puts into jeopardy the entire European project. Brussels, cloaked in self-certainty, has long assumed that Europe’s wealth will grow steadily, even inexorably, helping to pull together disparate states and even out fluctuations in the region’s economic cycles.

This, now, may not happen. Indeed, it is highly likely that European convergence may grind to a halt and even be reversed. In five years’ time, the likes of Portugal and Greece are likely to be significantly poorer than they are today. So too Ireland, which last year boasted Europe’s highest average hourly wage rate (at £16.35), and the region’s third highest per-capita income (£31,500).

As wealth ebbs, animosity toward Lisbon, Athens and Dublin will rise. But it will also lead to much soul-searching in Brussels. After all, if Europe isn’t in the business of raising living standards, ensuring a broadly wealthy future for the Union’s 500m people, what is its raison d’être?

Notes BMI’s Schaltuper: ‘If we talk about Europe as a whole, the process of convergence has reached the ‘ hangover’ phase. You could argue for the foreseeable future that wealth convergence will stop, with parts of the region continuing to get much poorer.’

Besides, at some point, the money will just run out. There is only so far Berlin in particular will be pushed. German workers, following a decade of wage stagnation, are affronted at having to bail out their high-spending, free-living southern European neighbours.

Europe’s fading economies now need to ask themselves some pretty tough questions – specifically, what they want to be. As both Ireland and Iceland found in recent years, becoming a financial centre is tricky. Even London and New York find it hard sometimes.

So why not stick to what your country-does best? The Emerald Isle is both stunningly beautiful and a great place to run a computer support centre. Portugal could become the solar energy hub of Europe.

Some have suggested, rather cheekily, that Greece could pay off its debts by selling off its islands. But why should it not become a full-time retirement cum tourism destination: the Florida of Europe.

Yet this is the best case scenario. More likely, Europe’s more troubled nations will continue to regress, retreating permanently into ‘receding country’ status and perhaps beyond.

‘Anyone who has seen the events in Greece, with people throwing Molotov cocktails at the police – that is pretty much the response of a failing state,’ says Schaltuper.

Adds Chatham House’s Rossi: ‘Next year will be a watershed year. If these receding countries can get through it, we’ll be well on the way to having a long-term solution on our hands. And if not, well, then we’re all sunk.’

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