The End Of Europe

(5 of 5)

As difficult and politically improbable as it sounds, experts like Rogoff, as well as many politicians and economists in Europe, believe it will happen, and possibly quite soon. But that would be only the beginning of the hard work. Fixing the crisis of the old order will require serious reforms of everything from Europe's sclerotic labor markets to its still vulnerable financial sector. (American banks, despite their troubles, are much better run and capitalized than European ones.) Most important, it will require painful and deeply unpopular austerity measures that could lead to more violence among populations already struggling to cope with the downturn.

Rioting of the kind we've seen in London and Athens is just one side effect of the new age of austerity. Populist politics is another. Just as the economic downturn in the U.S. helped fuel the Tea Party, Europe's debt crisis is fueling a resurgence of polarizing, right-wing politics embodied by figures like Marine Le Pen in France. Xenophobia and anti-immigrant sentiment are rife, a fact most dramatically illustrated by the mass shootings at a Norwegian youth camp in July. Even in mainstream politics, there's a sense that unity is impossible. Within the past few months, Sarkozy, Merkel and British Prime Minister David Cameron have all spoken about the end of the European dream of multiculturalism.

The turmoil is a portent for the U.S. We are ultimately facing the same problem as old Europe: how to grow amid a continuing downturn when the public sector can't or won't spend more to jump-start the economy. It's clear that we've still got a lot of work to do before that problem is solved.

In the meantime, both Europe and the U.S. will continue to struggle with the crisis of the old order. Populations will have to come to terms with no longer being able to afford the public services they want. Investors will have to cope with a world in which AAA assets aren't what they used to be. Businesses will deal with stagnating demand, and workers will face flat wages and high unemployment. All this will take place at a time that is in many ways the opposite of the optimistic two decades that preceded the financial crisis. Think the 1970s, without inflation (though there are those who think a whiff of inflation to wipe out debt might not be a bad idea). It's the end of an era in which the West and Western ideas of how to create prosperity succeeded. The crisis in Europe and the challenges yet to come on either side of the Atlantic take us into a whole new era. The rules and risks of it are only just becoming clear.