One of the things that should concern Germans is the banking system. It has been the obsession of the European financial elite, at the cost of massive unemployment, and there is the belief, validated by stress tests, that the financial system is sound. For me, there has been an ongoing mystery about Europe: How could it have such high unemployment rates and not suffer a consumer debt crisis? The climbing rate of unemployment should be hitting banks with defaulted mortgages and unpaid credit card debt. Given the fragility of the European financial system in the past, it seems reasonable that there would be heavy pressure caused by consumer debt.
The known nonperforming debt situation is sufficiently concerning. Four countries have nonperforming loan rates surpassing 20 percent. Six have rates between 10 and 20 percent, including Italy's, which stands at 15.1 percent. The overall EU rate is 7.3 percent. Obviously, the situation in Italy is the most dangerous, but there is the question of whether these numbers capture the entire problem. Spain, with 24 percent unemployment, is reporting only an 8.2 percent nonperforming loan rate. Portugal, with lower unemployment rates, has an 11 percent nonperforming loan rate. France (with more than 10 percent unemployment) is reporting only a 4.3 percent nonperforming loan rate. The devil is in the details, and there may be an explanation for these anomalies. But the definition for a nonperforming loan has been flexible in Europe and other places before, and the simple question remains: How can such long-term high unemployment rates not produce significant problems in consumer debt?
It is simply unclear how Europe untangles this Gordian knot. Considering the length of Europe's economic malaise, a strong argument would be required to say this is a passing phase. Given Europe's unemployment, Germany's need to export to the rest of Europe, and persistent weak growth rates now spreading to Germany, it is simply not obvious what force will reverse this process. Inertia is pointing to a continuation of the current pattern. It is hard to see anything that will help Europe recover its vibrancy.
A Political Question
The question that follows is political. If the economic premise of the European Union -- prosperity -- is cast into doubt, then what holds Europe together? This is particularly relevant as the fault line between Russia and the European Peninsula comes alive and as Europe is measuredly asserting itself in Ukraine. Poland's and Romania's interest in Ukraine is clear. Spain's interest is less obvious. The idea of pursuing common goals to preserve EU prosperity doesn't work when the bloc is economically crippled and when signs of divergence are already evident. These include British threats to withdraw from the European Union and the loss of common interests that united the countries when prosperous.
One of the most important signs of divergence is the emergence of anti-establishment and Euroskeptical parties, which did remarkably well in recent European Parliament elections. This political shift has been dismissed by many as merely the result of a protest vote rather than a harbinger of the future. In my view, protest votes of this breadth and magnitude are significant in and of themselves. They remind us that the most dangerous source of social unrest is not the young and unemployed but rather middle-aged men and women who have suffered unemployment and lost their investments. They live in a world of shattered hopes, convinced that others engineered their misfortune. The young throw rocks and then go home. The middle-aged and middle class, having lost their dreams with no hope of recovery, are at the heart of fascism and are the real threat posed by the new European reality.
Russia is important, and so is radical Islam. But the fate of Europe is a vital force that will shape the world. Russian power grows as Europe fragments. Europe has its own internal confrontation with Islam. With long-term sclerosis of the economy and persistent unemployment, how do the Europeans deal with the immigrants among them? How does the Continent accept open borders? The implications are profound, and it is time to consider that a Europe without growth, with high unemployment and with no way out might be the reality for a much longer time than anyone expected.
