Growing at a stellar 3.1 percent in 2006, European Union countries soared past America in job creation. Unemployment across the 27-member bloc has plummeted to 6.9 percent, a level last seen a generation ago. The numbers have given Europe a new confidence about its place in a globalizing world. Now, as subprime-related troubles reverberate throughout Europe, the moment seems to be over before it’s begun. The British government had to intervene to stop a bank run last week. Housing markets in the United Kingdom, Spain and Ireland are headed downward, and more of Germany’s poorly monitored Landesbanken may need government bailouts thanks to their hoarding of risky U.S. assets.
The crisis comes at a moment when Europe’s economy has already had to deal with a whole barrage of shocks: a surging euro (which makes European goods more expensive for foreigners), sharp hikes in food and energy prices, the European Central Bank’s doubling of its benchmark interest rate and the biggest tax hike in German history. Together, these shocks have dragged eurozone economies back down; the Bank of America estimates 2 percent growth in the second half of 2007.
Still, the downturn may be only skin deep; European fundamentals still look healthy. In France, much-needed labor reform is finally underway, and a major tax cut kicks in next year. Interest-rate hikes seem to have run their course. German exports, foundering since September 2006, have been held back only because factories are at peak capacity, says Jürgen Matthes of Cologne’s Institute of the German Economy. New facilities are now coming on line. That’s important: Germany’s exports contribute 40 percent to the GDP of the continent’s largest economy, and have been one of the drivers of Europe’s resurgence.
Of course, the politicians could mess it up. Even as he liberalizes labor markets, French President Nicolas Sarkozy has railed against “financial speculators.” German Chancellor Angela Merkel has vowed to “regulate globalization,” while her coalition is mulling new limits on hedge funds. If the subprime crisis deepens, support may rise for populist policies that could have a destructive effect on the world economy. “France and Germany should be on anyone’s watch list right now,” says Nicolas Veron, an economist at Brussels think tank Bruegel. “In both countries you can sense a backlash against global capitalism.” More than anything, it’s the political backlash that threatens Europe’s new competitive strength.
