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Social Unrest and Economic Stress: Europe's Angst

Quite what happens in Cyprus from now on is unpredictable. But the Cyprus crisis has reminded perhaps complacent thinking, certainly in financial markets of wider Euro Area implications.

When was the last time you heard a central banker talking the stuff of Hobbes, Locke and Rousseau? I don't remember either, but Benoit Coeure, Executive Board Member of the European Central Bank told an audience at Harvard recently that ' At the heart of the crisis, there is the challenge of redefining the social contract to safeguard the sustainability of Europe's social economy model'. I think that's what golfers call 'a hole in one'.

The problem, of course, is that the redefinition of the social contract, championed by European leaders isn't one that sits comfortably with European citizens. According to the Financial Times/Harris poll at the end of 2012, more than half of respondents said they didn't trust European institutions, and between 50-75% of German, French, Spanish, Italian and UK respondents didn't trust their own governments to handle the economic crisis in Europe. The breakdown in trust has manifested itself in the electoral defeat of 13 out of 19 European governments since the crisis began in Greece in 2010, in the rise of nationalist, anti-EU, and separatist political movements across Europe, and in recurrent bouts of social unrest.

Social unrest is a systemic phenomenon. It is unpredictable, ambiguous, and prone to ripple effects throughout society with uncertain consequences. According to recent empirical research going back a century, its frequency and severity correlates closely with large and sustained reductions in public spending. True to form, the bragging rights for social unrest lie with Southern European countries, even if a much more quiescent public in the UK, for example, has not taken to the streets against austerity, per se, in the same way.

While anti-austerity and other protests related to unemployment or social exclusion are aimed directly at government policies, they also embed an accumulation of discontent predating the crisis that spans other fractures in the social model, including stagnant or declining real wages, rising income inequality, high levels of youth unemployment and of the long-term unemployed, and the preponderance of low income jobs, even where there has been employment growth, for example, in the UK and the US.

But until the Cypriot people came out into the streets quite recently, the last big anti-austerity protests had comprised a European day of action last November that turned violent in Spain, Italy and Portugal, and demonstrations in Athens and Lisbon, in February and March, respectively. In spite of the fall of most European governments since 2010, and rising support for anti-establishment political parties, you might nevertheless wonder why have the streets of Europe been relatively quiet? Does it mean that the European social fabric is more robust than many suspect, or is the calm deceptive?

Perhaps it's all about demographics, with the baby boomers having expended all their protest energy. The proportion of people aged 15-59, the group most likely to express non-voting anger has been leveling off for a while, and is now set for a relentless decline. Countries with the highest rates of youth unemployment - Greece and Spain (around 50%), and Portugal and Italy (around 30%) - are also those where the proportion of 25-34 year olds still living with their parents is the highest (between 30-50%). If mum and dad are providing financial and social support, young people are better able to take on informal jobs, and less prone to riot. If you're scratching your head over these suggestions, so am I. They might comprise mitigating factors but they are not persuasive.

Or perhaps social unrest in Europe is just the predictable noise that erupts at times of social and structural change, and that most citizens are resigned to the pain of fixing Europe in general, and keeping the Euro-system together specifically. But this isn't the mood in Europe, and in recent days, Cyprus has demonstrated again that people will express their anger overtly when consumed by injustice, gross unfairness, and loss of trust.

Quite what happens in Cyprus from now on is unpredictable. But the Cyprus crisis has reminded perhaps complacent thinking, certainly in financial markets of wider Euro Area implications. Spanish and Italian depositors, for example, may wonder if they might be next up for a deposit tax, or more accurately, confiscation. The vicious circle that locks together weak bank and weak sovereign balance sheets in a powerful vortex has not been broken. German citizens and their northern European neighbours may simply be unwilling to hand over enough of their sovereignty and financial resources to European institutions. And Europe remains an austerity zone without a growth escape hatch.

Even if political glue sustains the integrity of the Euro project for now, it will remain fundamentally unstable. It will be characterised by economic stagnation or depression, persistent high unemployment and under-employment, ever-retreating targets for debt sustainability, a succession of bail outs and bail ins, latent financial instability, and sovereign default. This is hardly the ideal scenario in which to expect European social unrest and political instability to fade away.

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