The world used to be divided into the ‘developed’ and the ‘developing’. During the past decade the concept of the developing world has been successfully challenged: the countries that used to be so described have now been disaggregated. Countries such as China and India have diverged quite fundamentally from those like Chad and Afghanistan. Viewed from the perspective of the latter group of countries, that was, indeed, a core message of my book The Bottom Billion. The likes of China and India have duly been reconceptualised as ‘emerging markets’.
In this column I will argue that the same process of disaggregation unfortunately may now need to be applied to the category of ‘developed country’. Quite possibly, we are in the early stages of a second great divergence between those developed countries that can continue to prosper in competition with the emerging market economies, and those that are set to decline. For symmetry of language, I will refer to them as the submerging economies.
The most obvious candidates for the new category of submerging economies are the Southern European countries: Italy, Spain, Portugal and Greece. They have now been in absolute decline for five consecutive years, for the past three of which the rate of decline has been accelerating. It is becoming increasingly hard to pass this off as a temporary macroeconomic crisis: the official forecasts of recovery have been systematically wrong. The decline of Southern Europe is profoundly worrying both because of its causes and its consequences. Its causes are worrying because it is evident that there is no political impetus to address them. Its consequences are worrying because, contrary to the complacent notions of self-correcting disequilibria, decline breeds hysteresis.
Southern Europe is declining because it joined the Euro. Membership triggered a credit-cum-property boom while anchoring product prices, but did not change the myriad of attitudes, narratives and institutions which between them determine the path of a country’s labour costs. As a result, Southern Europe accumulated debt and unemployment. Financial markets dislike high debt and voters dislike high unemployment: both have already spoken out, but financial markets are more effective at forcing remedial action than are voters. The debt is being shuffled around, but is basically a problem for the creditors: we are witness to the delicate dance of the disguised default. Meanwhile, the unemployment is being left unaddressed. The political chatter is that Southern Europe’s unemployment will usher in fascism, but this is surely a melodramatic fantasy. People have learnt enough from history not to return to fascism. Rather, the likely outcome is that in correctly assigning blame to the established political parties voters will fragment, delivering a decade of political incoherence.
There is a collective delusion among Europe’s political class which prevents effective action against unemployment. Those in Southern Europe persist in seeing the Euro as the symbol of membership in modernity. Recently I asked one of the region’s former finance ministers whether she privately regretted that her country had joined the Euro. While stressing that the unemployment was a disaster, she said that, on the contrary, the Euro had been very good for her country. Her counterparts in Northern Europe persist in seeing the Euro as the guarantor of peace. Their spectre of a choice between the Euro and war is even more preposterous than the proposition that the Euro has been good for Southern Europe.
There will never be another war between France and Germany. This self-evident fact has nothing to do with either the Euro or even the European Union. It is underpinned by a profound change in European sensibilities: no European crowd is ever again going to cheer for war. The Euro is a consequence of this change in sensibilities, not its cause. For the unemployment rate in Southern Europe to be brought down swiftly to levels comparable to that of Britain, the region will, like Britain, most likely need some form of currency realignment. The present strategy of relying upon recession to force structural change in the labour market, if it works at all, will take a decade. That Europe’s politicians can manage a default shuffle but not a realignment shuffle, tells us less about the intrinsic difficulties than about the psychology of denial and the differential influence of financial markets and the unemployed.
The tragedy of unemployment is hysteresis. The youth of Southern Europe will, over their adult lives, face unprecedented competition from workers in emerging markets. They will need to be more skilled than their parents. Yet labour economists have shown that the long-term unemployed suffer such a loss of skills that they are permanently less productive. If the current youth unemployment rates of Southern Europe take a decade to correct the legacy of deskilling will condemn the region to continued divergence. The ‘submerging economies’ will no longer be a playful phrase; they will be a disturbing reality.