EU Post-Crisis Resilience and Fragility: Collateral Damage or Global Recovery

By Irene Finel-Honigman

There is a perception of steady economic recovery across the post-sovereign debt crisis within the European Union (EU) and the Eurozone. Data and market-driven indicators, however, belie weaknesses and danger points revealed in the EU parliamentary elections on 25th May, 2014. Below, Irene Finel-Honigman examines both the recovery and the underlying damage and risks that are also present.

Recovery: Perception and Reality

Former Federal Reserve Governor Kevin Warsh, along with Stanley Druckenmiller of Duquesne Capital, wrote in the Wall Street Journal: “At its policy meeting earlier this week, the Fed made clear that it’s scarred, if no longer scared, by the crisis”1 This summarises the state of the post-crisis European Union.

After four years of fearing the collapse or disintegration of the EU, eurozone and euro, the markets are no longer scared – but the crisis has left long-lasting economic, political and cultural scars.

German Chancellor Angela Merkel’s re-election to a third term in September 2013 marked the start of a surge in corporate confidence, valuation and investment in the EU. Although growth is still barely at 1%, the markets finally regained confidence in the stability and resilience of the eurozone and the euro. This diagnosis was validated from January to April 2014, when the three weakest states returned to the bond market: Ireland (exiting from its €85 billion bailout in December 2013) issued ten-year bonds in January 2014; Greece, for the first time since 2010, returned to the markets, raising €3 billion in five-year bonds in April 2014; and Portugal exited the bailout with a successful auction of €750 million in April 2014. In the past year, major EU banks, having benefited from the European Central Bank’s massive recapitalisation programs in 2011 and 2012, have stabilised. As sixteen national European banks (including from the United Kingdom (UK) and Switzerland) are among the thirty largest global banks (SIFIS: Systematically Important Financial Institutions), the soundness of these “too-big-to-fail” (TBTF) institutions is key to global economic recovery.

Until June 2014, prior to the massive fines imposed on the French BNP bank for United States (US)-based sanction violations, the EU banking sector appeared poised to meet the capital requirement, soundness and risk management criteria for the new stringent stress tests that will be administered by the European Central Bank (ECB) in October 2014.

In 2015 the new EU Banking Union and Basel III will come into effect. Under the Banking Union, the ECB would have expansive supervisory and monitoring authority over the top 130 EU banks. For the first time, there will be an EU-wide standardised deposit insurance scheme put into place, and there will be bank resolution mechanisms to meet the challenges of “TBTF” banking crises.

In the United States and Europe there has been a radical overhaul of banking regulation, aiming to set up firewalls between traditional banking and trading, speculative activity: the US Dodd Frank Act (the “Volker rule”); the UK Vickers Act; the European Banking Authority Guidelines on Internal Governance; and the UK Corporate Governance Code. In July 2014, a new EU-Directive, “Alternative Investment Fund Managers Directive”, will be implemented to reduce systemic risks and discourage wide-scale hedge fund penetration. Following a barrage of scandals regarding insider trading, money laundering, and LIBOR and Forex rate manipulation, reforms are also trying to establish a sounder and more ethics-driven financial culture.

According to the economic data that shows the existence of improved credit ratings, the slow drop in unemployment, an IMF-led easing of conditions and timetables for eurozone countries to reduce their debt, and according to the well-intentioned reforms about to be implemented, the recovery is moving forward.

Fragility and Collateral Damage

Yet the case remains that for civil societies across Europe, for weaker eurozone and former Baltic and Balkan non-Euro countries, for small and medium-sized businesses, and for the long-term (over four years) unemployed and recently graduated unemployed youth, these positive indicators are meaningless and misunderstood. The collateral damage is a generation of disgruntled students and graduates, a disillusioned work force, and a lack of direction or inspiration from what they perceive to be weak, confused leaders. Foreign hedge fund investments offer no direct benefit to local companies and industries bereft of capital. In reality, there are two parallel economic trajectories: one corporate, market, investment, urban and statistical; the other, endemic unemployment, weak lending, anaemic recovery for SMEs, and embittered political constituencies. Unlike previous crises in which market resurgence can precede ‘real’ growth and recovery by six to nine months (such as in 1987, 1992, and 2001), the gap appears to be much deeper, longer and difficult to breach.

In an ever-present media environment, the public at large is far more aware of the allegations of insider trading, financial scandals, corruption and fraud. Banks have reduced lending and credit remains tight, while bankers continue to receive exorbitant salaries and CEOs remain unpunished, there is a widespread perception that banks are only servicing their shareholders rather than their communities. US investment has surged in the EU but, driven by hedge funds, it has further eroded, rather than increased, confidence.

In order for eurozone countries to return to the bond market and be able to honour their obligations, they had to meet the draconian “austerity” criteria imposed by the ECB, EU Commission and IMF (“Troika”). Pressure came not only from Brussels, but, more painfully, from Berlin, in order to reduce the debt-to-GDP ratio, to cut public sector expenditures, to force fiscal discipline and to begin harmonising budgetary standards. For the peripheral Mediterranean countries, German-imposed austerity seemed to only benefit the productive German economy at the expense of ravaged economies.

Reports that unemployment was beginning to drop belied the extent and duration of the crisis. According to the indicators released by Eurostat news on the 2nd May, 2014: unemployment rates slightly decreased across Europe with Euro-area unemployment at 11.8% (stable since December 2013, and down from 12% in 2012). But since 2010, the lowest rates were limited to Germany (5.1%), Austria and Luxembourg. Since 2012, the highest unemployment rates remain in Greece (26.7%) and Spain (25%). Portugal (falling from 17% in 2013, to 15% in 2014) and Ireland (falling from 13.7% in 2013, to 11.8% in 2014) showed slight but steady decrease. France’s unemployment rate stagnates, remaining at around 11%. For the youth (eighteen to twenty-five) demographic, however, unemployment remains at the extremely high level of 56% in Greece, 53% in Spain, and 49% in Croatia, a country that has just joined the EU.

Economic competitiveness across the EU (not including the UK) remains hampered by weak labour mobility, rigid labour laws, archaic bureaucracy and inefficient tax laws that depress entrepreneurship and start-up businesses. After nearly five years of reductions, the EU budget passed in February 2013 finally addressed the urgent need to fully reinstate and increase funding for the Erasmus cross-border educational programs. The new Horizon 2020 program approved by the European parliament in November 2013 will increase scholarships, provide personal loans for Masters degrees and fund job training mobility. Herman von Rumpuy, President of the EU Council, declared, “We simply cannot afford to sacrifice future oriented investments in education, research or innovation”.2 Long before 2020, can this generation of unemployed graduates be reintegrated and salvaged?

25th May 2014: Political Trauma

Although it was predicted for months that “extremist” factions would gain seats in the EU parliamentary elections, European officials and the media were in shock in the May 2014 elections, when voters elected one third of candidates to the EU parliament from extremist and/or marginalised anti-EU factions.

Directly correlated to the four years of crisis, austerity measures and leadership deficit, these candidates all have anti-EU, anti-euro, anti-globalisation, and anti-immigration platforms in common. Their ideologies are very diverse, ranging from rabid anti-Semitism in Hungary’s Jobber Party, to Geert Wilders’ Netherland Party for Freedom pro-gay rights, and an anti-Muslim stance from the British UK Independence Party (UKIP) led by Nigel Farage, focusing on British interests in leaving the EU without social or racist overtones. The crisis has broken down traditional party lines at the risk of reawakening the monsters of European history: fascism, anti-Semitism, xenophobia, and communism.

Until the election, they had been judged as marginalised groups appealing to small disenfranchised extremists, but the strength of the far-right vote eventually proved that their appeal was far more mainstream, leaking into the middle and educated urban voting bloc. In France and the UK, for the first time since elections to the European parliament began in1979, the main parties were defeated: UKIP won 32%, and France’s Front Nationale, under Marine le Pen, won 27%.3 Le Pen defeated the centre-right UMP (Union for Popular Movement) and devastated the weakened Socialist party in power, going beyond her core constituency in the South West, across a swathe of Northern industrial France, including former left and union strongholds. Even in Germany, the most stalwart supporter and anchor of the euro and eurozone, a small “Alternative for Germany” party won 7% of the vote, granting them seven seats in the German delegation.

Anti-EU sentiment has been derived from the sense that populations have been forced to either sacrifice for others (a popular sentiment among the Northern countries), or were forced to accept a loss of sovereignty, dignity and basic living standards in order to benefit Brussels or Berlin (an idea prevalent across the Southern periphery).

As in previous incarnations, extremist groups appeal to emotion and nostalgia (of an often mythical history, with voters in Hungary and Austria going to the polls in traditional national costume), and a quest for scapegoats. Anti-EU factions offered clear messages while centrist politicians offered incomprehensible economic data. It was never clearly explained that a currency crisis was averted, inflation remained low (too low, even, for the ECB), and bank deposits were guaranteed. These measures of stability could not offset the deep bitterness of lost wages, jobs and security.

In the last month, the situation in Ukraine (which also voted on the 25th May) and general increased global volatility has overshadowed the impact of these elections.

Perhaps politicians should finally try to convey that the EU and also NATO, with its regional commitments and interdependency, offers security and protection. Despite the crisis, former CEE/FSU countries Estonia, Slovenia and Latvia joined the eurozone, and Croatia, despite economic hardship, joined the EU.

Identity Crisis

In 2007, an optimistic new generation of cross-border students and workers thought of themselves as Europeans, enjoying the benefits of their local culture but under the EU umbrella. The umbrella is in tatters, and national identity has given way to nationalism. Fear of immigration and loss of jobs had already been relevant in the boom years, contributing to the defeat of the Lisbon Treaty in 2005. The promise of fully harmonised EU labour, immigration, financial, and budgetary standards has been a perpetual work in progress. Jacques Attali’s concern for “Europe(s)” (1994), a multitude of cultures and histories seeking common goals and values, is still ongoing.4

Europe is therefore on the brink of recovery, but economic recovery has to combine solid political and popular support.

The EU Commission, the ECB, the Federal Reserve and the IMF are too often seen as all-powerful global forces that impose conditions, rules and oversight on hapless nations, but in reality are faced with unpopular leaders and panicked markets. They were the only “lenders of last resort”, able to calm and re-stabilise economies in danger.

The affluent have embraced globalisation as “high-tech”, with corporations, commodity, bond, stock and currency markets interconnected “in the cloud”, but bitterness, inequality, and atavistic hatreds are local and real on the ground.

The European Union was originally conceived as a peaceful, equalising, socially and politically cohesive counterpoint to the horrors of war and economic collapse. The fundamental values are still in place but the message no longer has the same resonance. In a BBC interview (BBC News, 27th May 2014) IMF Managing Director Christine Lagarde, addressing the issue of inequality, spoke for “greater social consciousness – one that will seep into the financial world and forever change the way it does business[…] to take values as seriously as valuations and culture as seriously as capital”.

Economic recovery is only part of the challenge; hopefully the rest will follow.


About the Author

Irene Finel-Honigman is the adjunct Professor of International Affairs and International Economic and Finance Policy at SIPA, Colombia University. She has previously taught at John Hopkins University, and was senior advisor on finance policy at the United States Department of Commerce during the Clinton administration. Her published works include A Cultural History of Finance (Routledge, Taylor and Francis, 2010), and European Monetary Union Banking Issues: Historical and Contemporary Perspectives (JAI Press, 2005).


1 Warsh, K. and Druckenmiller, S. (May 2014) “The Asset Rich, Income Poor Economy” Wall Street Journal.

2. Herman von Rumpuy. Speech given at Columbia University World Leaders Forum, September 23, 2013. The quote also appears in Sara Cutter, “Erasmus Program Survives EU Budget Cuts”, The PIENEWS, February 25, 2013

3. European Parliament Results of the May 2014 European Elections.

4. Jacques Attali, Europe(s), Paris: Fayard, 1994

The views expressed in this article are those of the authors and do not necessarily reflect the views or policies of The World Financial Review.