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Europe is not out, but it certainly is down

What will Europe look like two or three years from now? The old dear, I fear, will look pretty much the same: fading alarmingly fast while deluding herself into thinking that another layer of rouge will keep her in the game.

The worst is not over for Europe. The 17-country euro zone is back in recession. Greece has yet to be fixed, and may still inflict massive damage across the continent. It is the equivalent of New Brunswick being in a position to take down Canada.

Throughout the euro zone, sovereign debt loads continue to rise relentlessly. A crisis that had little to do with debt four years ago is now about to live up to its "debt crisis" billing. Spain seems to be on the verge of a sovereign bailout and France has become so uncompetitive, and is deindustrializing so rapidly, that it is becoming part of the problem, not the solution. Britain is worshipping at the false god of austerity, and on the verge of a triple-dip recession as a result. On the continent, too, government cutbacks continue to crush growth, pushing jobless rates and youth desperation ever higher. There is little to suggest that anything will improve soon. The OECD predicts that the euro zone will remain in mild recession in 2013.

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By contrast, the United States is adding jobs and growing again, a classic V-shaped recovery since the dark days of 2008 and 2009, when the end of the financial world seemed nigh. The OECD predicts 2 per cent U.S. growth in 2013 and 2.8 per cent in 2014. If the American housing market has indeed bottomed out, a surge in confidence could make those growth projections look mean.

How is it that the United States—ground zero of the financial crisis—has come back so strongly compared to Europe? Some clichés are true, and the cliché about Americans moving boldly and with alacrity to fix big problems is one of them.

In the autumn of 2008, when the American financial system, from Lehman Brothers and AIG to Citigroup and Fannie Mae, was unravelling at warp speed, the otherwise clapped-out administration of president George W. Bush rolled out the Troubled Asset Relief Program, a tool of mass financial salvation. Originally authorized to spend $700-billion (U.S.), the equivalent of almost half of Canada's annual GDP, the program propped up the financial system at lightning speed by purchasing the banks' and insurers' toxic assets. It also boosted their capital directly by buying preferred shares.

Meanwhile, the U.S. Federal Reserve slashed interest rates and printed money through its quantitative easing program, announced in 2008 and repeated in 2010 and 2012. The Obama administration pumped fortunes into infrastructure development. Austerity has yet to enter Washington's lexicon.

At the same time, industrial America got its act together through massive restructurings. General Motors and Chrysler went through Chapter 11 bankruptcy, closed factories and blew armies of workers out the door. Chrysler has recovered so well that it is now propping up its controlling shareholder, Fiat of Italy, instead of the other way around. GM was able to return to the stock market and turned a $31-billion loss in 2008 into a $7.6-billion profit in 2011. The U.S. airline industry went through the same restructuring hell to remain aloft.

And Europe? Its reaction to the crisis was denial, followed by blame and dithering. At first, the Europeans viewed the crisis as a purely American banking problem: European banks were stronger and more tightly regulated. To their shock, they learned that many European banks were more highly leveraged than American ones, and fully capable of blowing themselves up and dragging entire countries down with them.

The Swiss and the British defused their bank bombs quickly, through nationalizations and recapitalizations. But many of the other troubled banks in Europe were left to fester. Only now are Spanish banks being rescued through a euro zone bailout fund that will be used to bolster their capital by as much as ¤100 billion.

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As European banks flounder to stay afloat, European companies are struggling to restructure without a homegrown version of Chapter 11. The carmakers, airlines and steelmakers find it almost impossible to close plants and lay off workers because of pro-labour rules, violent street protests and endless political meddling.

Meanwhile, Greece's slow-motion suicide continues as austerity works its dark magic. Yet euro zone governments and the European Central Bank refuse to do the obvious, which is to take losses on their holdings of Greek sovereign bonds.

With the European fix-it job moving so slowly, there is a growing sense that the continent cannot withstand another shock. American capitalism may be nasty and brutal, but it can adapt in a hurry. Tomorrow's Europe will look pretty much like today's Europe, or worse, because it cannot. It won't be a pretty picture.

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About the Author
European Columnist

Eric Reguly is the European columnist for The Globe and Mail and is based in Rome. Since 2007, when he moved to Europe, he has primarily covered economic and financial stories, ranging from the euro zone crisis and the bank bailouts to the rise and fall of Russia's oligarchs and the merger of Fiat and Chrysler. More

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