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Jeffrey Simpson (Brigitte Bouvier For The Globe and Mail)

Jeffrey Simpson

(Brigitte Bouvier For The Globe and Mail)

JEFFREY SIMPSON

Europe is divided, and it's not alone Add to ...

Britain has tipped back into recession: two consecutive quarters of negative growth. France, which votes for its president in Sunday’s runoff, is on the brink of the same fate.

Greece is a basket case, likely to leave the euro zone before year’s end. Spain, Portugal and Italy have huge deficits and slow growth. Southeastern Europe – Bulgaria, Romania and Hungary – is in bad economic shape.

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Europe is splitting into two zones: a northern, economically stable area centred on Germany, and a southern one of high unemployment, dismal growth and poor productivity. (Ireland’s economy puts it in the southern zone, its political culture in the northern one.)

The Germans want the southerners to pull up their socks and make their economies more competitive; the southerners want Germany to agree to ease the continent’s pain by emphasizing growth over fiscal rigour.

France, under Nicolas Sarkozy, has more or less sided with Germany. But if, as the polls suggest, Socialist François Hollande becomes president on Sunday, he’ll side with the southerners: He’s proposed big new spending for France (already highly indebted and burdened with endemic deficits), new spending to stimulate growth for Europe, fresh taxes on the rich.

Mr. Hollande has promised that, if elected, he’ll speed to Berlin. There, he’ll be received with all the politeness due the newly elected president of Germany’s closest partner – and an economics lesson. Germans already feel their country has done too much for the southern region. If Paris wants to take a “southern” approach to Europe’s problems, then let it be on France’s head.

At this first meeting, courteous words will cover the fundamental disagreement between Germany and France’s new Socialist government – a disagreement that already divides Europe and will get deeper with Mr. Hollande’s election.

Europe’s being squeezed to the pips, with unemployment sky high in Britain and 10.9 per cent in the 17 countries of the euro zone. A year ago, unemployment was 9.9 per cent in the euro zone. The rise illustrates that fierce austerity in key nations has resulted in more joblessness and corresponding political disillusion over the state of the economy in many countries. Mr. Hollande’s election will further spook jittery financial markets that already doubt France’s capacity to meet the euro zone’s deficit-reduction targets.

It’s with Europe that Canada is close to finishing negotiations for a free-trade and investment treaty. When launched, the possibilities of the treaty seemed more promising than they do now with Europe mired in such an economic morass. Moreover, Europe is so preoccupied with itself these days that its ability to play a constructive international role is being compromised.

Europe lacks a common defence or foreign policy. For the moment, it has a stabilization pact to clean up the internal fiscal mess, but that pact will be under constant pressure from the north-south divisions about to be worsened if Mr. Hollande is elected.

Europe, of course, is not alone in being divided. So is Canada’s largest trading partner, the United States, where politics has all but paralyzed any decisions on the economy, the country’s staggering deficits and burgeoning debt. The polarization of U.S. political culture seems to grow every day, witness to which is the possibility that a moderate conservative senator, Richard Lugar of Indiana, might be unseated in the Republican primary by a Tea Party type backed by Sarah Palin.

As for Asia, the holy grail of growth, a school of thought suggests that China is storing up trouble for a banking and real-estate crisis. Japan is still struggling. India (another supposed economic juggernaut in the making) is plagued by endemic corruption, poor infrastructure, a regional Maoist insurrection and a government that takes forever to make decisions.

With all this uncertainty, the world economy remains fraught with peril. No wonder the Bank of Canada is projecting very modest growth of 2.2 per cent to 2.5 per cent for the next three years – not enough to reduce unemployment or to lead any government to believe that, by growth alone, it can escape budgetary deficits.

 
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