THE SICK MAN IS EUROPE / ROUBINI GLOBAL ECONOMICS WEDNESDAY NOTE ( HIGHLY RECOMMENDED READING )

THE SICK MAN IS EUROPE

Greetings from RGE!

Something other than leaves will fall in Europe this autumn. American attention, no doubt, will focus on Barack Obama’s date with an angry electorate this November. Yet across the pond, governments of the right, left and center in Europe appear ready to crumble, their positions eroded by a wave of austerity and high unemployment and government debt, plus a smattering of nasty corruption scandals.

Consider the situations in Europe’s five most important countries (examined in more depth in RGE’s newly released Q3 2010 Geostrategy Note):

• In Germany, one of the costs of bailing out the Greeks earlier this year appears to be the career of Chancellor Angela Merkel. It’s too early to write her off, but voters sharply rebuked her Christian Democrat-led coalition in local elections in July, depriving her government of control of the upper house of parliament. Since the election, Merkel’s own poll numbers have slipped, and trouble has emerged inside her coalition. (See this Critical Issue for a play by play.)

• In Britain, the election that ended 12 years of Labour rule in April brought to power not the Tories but rather a Tory-Liberal Democrat coalition, an uncomfortable and somewhat unprecedented situation for the British. The deals each side cut have a one-year shelf life—basically, until the referendum on electoral reforms that the Lib Dems insisted on can be held next May. After that, watch how quickly the coalition unravels.

• In Italy last week, Prime Minister Silvio Berlusconi lost his parliamentary majority due to the defection of a 30-strong faction from his People of Freedom party over a junior minister accused of corruption. Berlusconi, who has been in power since 2008 (after leading in 1994-95 and 2001-06), probably will face a vote of confidence in September. As of right now, new elections in Italy seem more likely than not.

• In France, meanwhile, another mercurial continental leader, President Nicolas Sarkozy, finds himself embroiled in a campaign finance scandal that could threaten his job. Sarkozy came into office declaring that a new era of probity had dawned. But French police have opened investigations into whether Sarkozy solicited large political donations from 87-year-old Liliane Bettencourt, the wealthiest woman in France and heiress to the L'Oréal cosmetics fortune. In this Critical Issue, we address the potential implications for the implementation of Sarkozy's highly unpopular austerity package.

• In Spain, the European country staring most intently into the economic abyss, Prime Minister Jose Luis Rodriguez Zapatero’s coalition is dependent on two nationalist parties that know they have him in a spot. Ahead of the Catalan regional elections in October and November, both the Catalan Party and the Basque Nationalist Party want concessions on regional autonomy that the rank-and-file of Zapatero’s Socialist Party oppose. The Catalan nationalists also want to see more and deeper reforms of labor laws and social programs and could be tempted by a coalition with Zapatero’s rival, People’s Party leader Mariano Rajoy, who now trumps Zapatero in opinion polls.

These five economies represent nearly three-fourths of the GDP of the EU. Put another way, combined they generate as much economic activity every year as the United States did in 2004. Crushing national debts aside, this degree of political instability in economies this large has to make you wonder about the future of “The West.” Something to think about on the beach next week.