Nouriel Roubini's Global EconoMonitor

RGE’s Wednesday Note: The Sick Man Is Europe

Something other than leaves will fall in Europe this autumn. American attention, no doubt, will focus on Barack Obama’s date with an angry electorate this November. Yet across the pond, governments of the right, left and center in Europe appear ready to crumble, their positions eroded by a wave of austerity, high unemployment and government debt, plus a smattering of nasty corruption scandals.

Consider the situation in Europe’s five most important countries, drawn from RGE’s newly released Q3 2010 Geostrategy Note:

  • In Germany, one of the costs of bailing out the Greeks earlier this year appears to be the career of Chancellor Angela Merkel. It’s too early to write her off, but voters sharply rebuked her Christian Democrat-led coalition in local elections in July, depriving her government of control of the upper house of parliament. Since the election, Merkel’s own poll numbers have slipped, and trouble has emerged inside her coalition.
  • In Britain, the election that ended 12 years of Labour rule in April brought not the Tories but rather a Tory-Liberal Democratic coalition to power, an uncomfortable and somewhat unprecedented situation for the British. The deal each man cut with the other has a one-year shelf life – basically, until the referendum on electoral reforms that the Lib Dems insisted on can be held next May. After that, watch how quickly the coalition unravels.
  • In Italy last week [eds: Aug. 5], Prime Minister Silvio Berlusconi, in power since 2008 (and who led Italy  1994-95, 2001-06), lost his parliamentary majority due to the defection of a 30-strong faction from his People of Freedom party over a junior minister accused of corruption.  Berlusconi likely will face a vote of confidence in September, and as of right now, new elections in Italy seem more likely than not.
  • In France, meanwhile, another mercurial continental leader, President Nicholas Sarkozy, finds himself embroiled in a campaign finance scandal that could threaten his job. Sarkozy came into office declaring that a new era of probity had dawned.  But French police have opened investigations into whether Sarkozy solicited large political donations from 87-year-old Liliane Bettencourt, the wealthiest woman in France and heiress to the L’Oréal cosmetics fortune.
  • In Spain, the European economy staring most intently into the economic abyss, Prime Minister Jose Luis Rodriguez Zapatero’s coalition is dependent on two nationalist parties that know they have him in a spot. Ahead of the Catalan regional elections in October and November, both the Catalan Party and the Basque Nationalist Party want concessions on regional autonomy opposed by the rank-and-file of Zapatero’s Socialist Party. The Catalan nationalists also want to see more and deeper reforms of labor and social programs and could be tempted by a coalition with Zapatero’s rival, People’s Party leader Mariano Rajoy, who now leads Zapatero in opinion polls.

These five economies represent nearly three-fourths of the GDP of the European Union. Put another way, combined they produce as much economic activity every year as the United States did in 2004. Their crushing national debts aside, having this degree of political instability in an economic pillar that large has to make you wonder about the future of “The West.” Something to think about on the beach next week.

Michael Moran is vice president, executive editor and the senior geostrategy analyst at Roubini Global Economics.

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