What Happens in Europe Doesn’t Stay There

Many of us wish to know what will happen next in Europe; and for good reasons. It is the biggest economic zone in the world, and the one with the most interconnected banks. And, unlike the famous Las Vegas ad, what happens in Europe will not stay there.

Look for lots of news in the next few weeks: from policy announcements by countries and regional to political summits; and from election results to general strikes.

Here is a simple framework to separate true signals from distracting noise. It relies on four drivers that need to converge to place the region on a stronger footing (and this without going into the much more complicated case of Greece).

Economics: Europe (and particularly large peripheral economies such as Italy and Spain) needs to strike that delicate balance between budgetary austerity and growth-enhancing structural reforms. For that, technocrats need to be more open with politicians on the severity of the underlying circumstances, including trade-offs to overcome debt overhangs and maintain acceptable employment.

Financial: Peripheral economies need more abundant and less costly financing to support their policy implementation. This will only materialize if the firewalls recently announced by the ECB are made operational and remain credible.

Political: Stabilizing troubled peripheral economies is necessary but not sufficient. Politicians also need to deliver on the “four-legged stool” – namely, supplementing monetary union with greater fiscal, banking and political convergence. For that, citizens in individual countries need to buy into a regional vision that is both feasible and desirable.

Social: Some countries must move quickly to counter the rising risk of destabilizing social unrest – and one that is fueled excessively by a desire to dismantle a past and insufficiently by a vision for the future.

Sustained progress on all these is key for Europe to overcome its damaging crisis, and for the rest of the world to avoid further collateral damage.