Ultimately both Europe and the euro will recover despite the dire predictions presently making the rounds

The crisis of the eurozone has rocked markets and again brought into question the stability of the financial system and the strength of the recovery. On its surface, this new crisis would appear to be bad news for investors.
Certainly it is not good news, at least in the short term. Still if you extend the time horizons out a bit further, a different story emerges.

After the devastation of the Second World War, Europe grew at a spectacular rate. In France this period is known as the Les Trente Glorieuses ("The Glorious Thirty"). With the special interest groups swept away by the war, growth benefited all segments of society and the countries as a whole. The growth was given further impetus by the creation of the European Union.

The EU and the euro were supposed to do one thing, encourage economic growth by unifying the market. Market unification of course is a legal problem. If all of the laws, regulations and tax codes could be aligned then seamless trading across national borders would be possible along with growth.

For a time it was very successful. It should be remembered that some of the countries presently so maligned as PIIGS were once lauded for their economic growth. After Ireland and Spain entered the EU their growth rates increased dramatically. Ireland was the Celtic Tiger and Spain had the highest growth rate in the EU after years of stagnation.

But good government policies do not go unpunished. As European economies grew so did the subsidies and regulations. Governments felt that more regulations could solve economic issues and make life better for their citizens. There was no problem that the beneficent hand of government could not solve.

For example in France, in the name of protecting citizens, the French government "sets the dates that shops can hold sales; forbids hypermarkets from selling below cost; limits the number of Paris taxis; and prevents pharmacists from owning more than one pharmacy". The French government employs 8% of the population, almost twice that of the US.

These bureaucracies become self sustaining. Their goal is to protect themselves rather than the rest of the country. A French 'fonctionnaire' retires at 60 at 75% of his or her final six months' salary. The size and cost of the French bureaucracy is certainly impressive but it is not unique. Most of Europe is saddled with massive bureaucracies and of course the costs.
In France 85% of pensions come from the state. This compares with an OECD average of 61% and contrasts with the US where only 36% of pensions are state liabilities. Even worse in both Greece and France the average age of retirement is only 60 compared with 65 in the US and 70 in Japan.

It is not only government employment that clogs the economic system. Most countries in Europe have a two-tiered labour market. There are union workers who have guaranteed jobs, retirements, and healthcare. Then there are the rest, usually the young who suffer from high rates of structural unemployment. As the result of the US recession, America presently has an unemployment rate of 9.9%. This contrasts with Europe where the rate is 10%. But in 2007 the US unemployment rate was 4.4% while Europe's was 7.3%.

The euro crisis then is a symptom of a much deeper disease that has been plaguing Europe long before the present crisis. The use of government and law to solve any problem or to control all segments of the economy has many costs. Not the least of which is that law, any law, any regulation has vast unknown and unintended consequences.

Why then is the present crisis something to celebrate? Laws don't get passed on their own. Certain groups within a political system stand to benefit from a particular legal regime. For example in France there are 35 different groups representing farmers, sailors, teachers and even notaries. Each has an economic stake in the present system and is willing to fight tooth and nail to preserve its rights under that system regardless of any detrimental effect on the general economy. These groups are also not unique to Europe. They exist in varying degrees in all countries. In the US the American Association of Retired People (AARP) is particularly ferocious despite the infirmity of many of its members.

Crises, though, are exceptionally useful. What was considered politically impossible a few weeks ago may actually be feasible today. Real reform invariably removes advantages of a privileged group, which is always difficult and painful. As such, it is invariably put off until there are no other alternatives. Still, over time, once accomplished, the results can be beneficial. The austerity packages making their way through various European parliaments are not only necessary to satisfy the short-term requirements of bond vigilantes; they also will eventually be exceptionally helpful in stimulating economic growth. Not tomorrow certainly. The medicine will be painful as government spending retreats, but what doesn't kill economies can make them stronger. So ultimately both Europe and the euro will recover despite the dire predictions presently making the rounds.
 
(The writer is president of Emerging Market Strategies and can be contacted at [email protected] or [email protected]).