Europe in 2013: A Year of Decision – Stratfor

By George Friedman Founder  and Chief Executive Officer Stratfor

The end of the year always prompts questions about what the most important  issue of the next year may be. It’s a simplistic question, since every year sees  many things happen and for each of us a different one might be important. But it  is still worth considering what single issue could cause the world to change  course. In my view, the most important place to watch in 2013 is Europe.

Taken as a single geographic entity, Europe has the largest economy in the  world. Should it choose to do so, it could become a military  rival to the United States. Europe is one of the pillars of the global  system, and what happens to Europe is going to define how the world works. I  would argue that in 2013 we will begin to get clarity on the future of  Europe.

The question is whether the European Union will stabilize itself, stop  its fragmentation and begin preparing for more integration and expansion.  Alternatively, the tensions could intensify within the European Union, the  institutions could further lose legitimacy and its component  states could increase the pace with which they pursue their own policies,  both domestic and foreign.

The Embattled European Project

It has been more than four years since the crisis of 2008 and about two years  since the problems spawned by 2008 generated a sovereign debt crisis and a  banking crisis in Europe. Since that time, the crisis has turned from a  financial to an economic crisis, with Europe moving into recession and  unemployment across the Continent rising above 10 percent. More important, it  has been a period in which the decision-making apparatus created at the founding  of the European Union has been unable to create policy solutions that were both  widely acceptable and able to be implemented. EU countries have faced each other  less as members of a single political entity than as individual  nation-states pursuing their own national interests in what has become  something of a zero-sum game, where the success of one has to come at the  expense of another.

This can be seen in two ways. The first dimension has centered on which  countries should bear the financial burden of stabilizing the eurozone. The  financially healthier countries wanted the weaker countries to bear the burden  through austerity. The weaker countries wanted the stronger countries to bear  the burden through continued lending despite the rising risk that the loans  will not be fully repaid. The result has been constant attempts to  compromise that have never quite worked out. The second dimension has been  class. Should the burden be borne by the middle and lower classes by reducing  government expenditures that benefit them? Or by the elites through increased  taxation and regulation?

When you speak with Europeans who support the idea that Europe is in the  process of solving its problems, the question becomes: What problem are they  solving? Is it the problem of the banks? The problem of unemployment? Or the  problem of countries’ inability to find common solutions? More to the point,  European officials have been working on this problem for years now, and they are  among the best and brightest in the world. Their inability to craft a solution  is not rooted in a lack of good ideas or the need to think about the problem  more. It is rooted in the fact that there is no political agreement on who will  pay the price geographically and socially. The national tensions and the class  tensions have prevented the crafting of a solution that can be both agreed upon  and honored.

If the Europeans do not generate that sort of solution in 2013, it is time to  seriously doubt whether a solution is possible and therefore to think about the  future of Europe without the European Union or with a very weakened one. If,  however, Europe does emerge with a plan that has general support and momentum  behind it, then we might say that Europe is beginning to emerge from its crisis,  and that, in turn, would be the single most important thing that happens in  2013.

At this point, a reasonable person will argue that I am ignoring the United  States, which has different but equally significant economic problems and is  also unable to generate consensus on how to solve them, as we have seen during  the recent “fiscal cliff” affair, which will have many more iterations. But as  valid as the comparison is on the financial level, it is not valid on the  political level. The  United States does not face the dissolution of the republic if it follows  contradictory policies. The United States is more than two centuries old and has  weathered far worse problems, including the Civil War and the Great Depression.  The European Union is only about 20 years old in its current form, and this is  its first significant crisis. The consequences of mismanaging the U.S. financial  system are significant to say the least. But unlike Europe, the consequences are  not an immediate existential threat.

The Other Costs of the Crisis

It is the political dimension that has become the most important, not the  financial. It may well be that the European Union is in the process of dealing  with its banking problems and might avoid other sovereign debt issues, but the  price it has paid is both a recession and, much more serious, unemployment at a  higher rate than in the United States overall, and enormously higher in some  countries.

We can divide the European Union into three categories by measuring it  against the U.S. unemployment rate, which stands at about 7.7 percent. There are  five EU countries significantly below that rate (Austria, Luxembourg,  Germany, Netherlands and Malta). There are seven countries with unemployment  around the U.S. rate (Romania, Czech Republic, Belgium, Denmark, Finland, the  United Kingdom and Sweden). The remaining 15 countries  are above U.S. unemployment levels; 11 have unemployment rates between  10 and 17 percent, including France at 10.7 percent, Italy at 11.1 percent,  Ireland at 14.7 percent and Portugal at 16.3 percent. Two others are  staggeringly higher — Greece at 25.4 percent and Spain at 26.2 percent. These  levels are close to the unemployment rate in the United States at the height of  the Great Depression.

For advanced industrialized countries — some of the most  powerful in Europe, for that matter — these are stunning numbers. It is  important to consider what these numbers mean socially. Bear in mind that the  unemployment rate goes up for younger workers. In Italy, Portugal, Spain  and Greece, more than a third of the workforce under 25 is reportedly  unemployed. It will take a generation to bring the rate down to an  acceptable level in Spain and Greece. Even for countries that remain at about 10  percent for an extended period of time, the length of time will be substantial,  and Europe is still in a recession.

Consider someone unemployed in his 20s, perhaps with a university degree. The  numbers mean that there is an excellent chance that he will never have the  opportunity to pursue his chosen career and quite possibly will never get a job  at the social level he anticipated. In Spain and Greece, the young — and the  old as well — are facing personal catastrophe. In the others, the percentage  facing personal catastrophe is lower, but still very real. Also remember  that unemployment does not affect just one person. It affects the immediate  family, parents and possibly other relatives. The effect is not only financial  but also psychological. It creates a pall, a sense of failure and dread.

It also creates unrooted young people full of energy and anger. Unemployment  is a root of anti-state movements on the left and the right. The extended and  hopelessly unemployed have little to lose and think they have something to gain  by destabilizing the state. It is hard to quantify what level of unemployment  breeds that sort of unrest, but there is no doubt that Spain and Greece are in  that zone and that others might be.

It is interesting that while Greece has already developed a radical right  movement of some size, Spain’s political system, while experiencing stress  between the center and its autonomous regions, remains  relatively stable. I would argue that that stability is based on a belief  that there will be some solution to the unemployment situation. Its full  enormity has not yet sunk in, nor the fact that this kind of unemployment  problem is not fixed quickly. It is deeply structural. The U.S.  unemployment rate during the Great Depression was mitigated to a limited degree  by the New Deal but required the restructuring of World War II to really  address.

This is why 2013 is a critical year for Europe. It has gone far to solve the  banking crisis and put off a sovereign debt crisis. In order to do so, it has  caused a serious weakening of the economy and created massive unemployment in  some countries. The unequal distribution of the cost, both nationally and  socially, is the threat facing the European Union. It isn’t merely a question of  nations pulling in different directions, but of political movements emerging,  particularly from the most economically affected sectors of society, that will  be both nationalist and distrustful of its own elites. What else can happen in  those countries that are undergoing social catastrophes? Even if the  disaster is mitigated to some degree by the shadow economy and  emigration reducing unemployment, the numbers range from the painful to the  miserable in 14 of Europe’s economies.

Europe’s Crossroads

The European Union has been so focused on the financial crisis that it is not  clear to me that the unemployment reality has reached Europe’s officials and  bureaucrats, partly because of a growing split in the worldview of the European  elites and those whose experience of Europe has turned bitter. Partly, it has  been caused by the fact of geography. The countries with low unemployment tend  to be in Northern Europe, which is the heart of the European Union, while those  with catastrophically high unemployment are on the periphery. It is easy to  ignore things far away.

But 2013 is the year in which the definition of the European problem must  move beyond the financial crisis to the social consequences of that crisis.  Progress, if not a solution, must become visible. It is difficult to see how  continued stagnation and unemployment at these levels can last another year  without starting to generate significant political opposition that will create  governments, or force existing governments, to tear at the fabric of Europe.

That fabric is not old enough, worn enough or tough enough to face the  challenges. People are not being asked to die on a battlefield for the European  Union but to live lives of misery and disappointment. In many ways that is  harder than being brave. And since the core promise of the European Union was  prosperity, the failure to deliver that prosperity — and the delivery of  poverty instead, unevenly distributed — is not sustainable. If Europe is in  crisis, the world’s largest economy is in crisis, political as well as  financial. And that matters to the world perhaps more than anything else.