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Europe's crisis of confidence

The birth of modern Europe

Europe: the birthplace of western civilization, with a centuries-long history of democracy, commerce and culture. A region with a lot to be proud of among its 28 nations and 503 million-strong population.

In spite being convulsed with dramatic upheavals – from wars and conflicts to resolution and reunification – the region has remained prosperous and peaceful, as can be seen in the values enshrined in the modern "construction" of an European Union. It has come a long way.



Despite the progress Europe has made in overcoming its recent period of crisis, many in Europe feel the continent is an "old" power in a new world lacking confidence, direction and unity.

Countries like Greece and Italy, that were once the homes of great empires and nation states have in the modern age been laid low by financial crisis, recession and a whole "lost" generation of young people – 40 percent in Italy and almost 52 percent in Greece – who are unemployed.

Meanwhile those that could create the jobs elsewhere – such as the millions of small and medium-sized businesses that are the backbone of European economies – often struggle to access credit or are caught up in red tape and regulation.

Banking sector crises and collapses and several international bailouts later, and Europe is on the road to recovery. Its self-belief – and that of its citizens, businesses and investors – is slowly recovering but the scars from the crisis, such as unemployment and high public debt, remain.

Everyone from investors and intellectuals to politicians and entrepreneurs agree that what Europe needs most is investment, jobs, innovation and better mechanisms to deal with future crisis. It needs confidence, a belief in itself that it can retain its position in the new world order. It needs "swagger."


Just what is 'swagger'?

Swagger (ˈswaɡə): How one presents him or herself to the world. Swagger is shown from how the person handles a situation.

Source: The Urban Dictionary

Europe certainly has plenty on its plate – from the current migrant crisis to negotiating its fraught relationship with Russia – at the moment which has given it an opportunity to show the world how it handles a situation.

But a bit of swagger, self-confidence and a clear vision of its past achievements – and future aims – could pull it through, according to the continent's most high-profile business, economic and political leaders.


Bloomberg | Getty Images

What Europe has to offer the world

With a combined economic might of some 13.9 trillion euros ($15.5 trillion) in 2014, the European Union is one of the most powerful economic powers in the world, dwarfing China's $10.3 trillion in the same year but not quite reaching the U.S' $17.4 trillion.

"Europe is a synonym of quality, whether the Europeans understand this or not. And quality is not only wonderful Italian pasta, Scandinavian design or a stroll through the magical streets of Lisbon, quality also is education, competitiveness and the emergence of leading edge global companies." -Stephen Morais, Executive Director, Caixa Capital

Europe is the home of global brands, from carmakers such as French manufacturer Citroen to Italy's Fiat and Germany's scandal-hit Volkswagen to giants of the luxury and retail market. Global companies founded in Europe like food giant Nestle, based in Switzerland, or pharmaceutical firms like Novartis or Astra-Zeneca, an Anglo-Swedish group, show that Europe can think big and beyond its frontiers too.

In the tech space, Europe might not be as well-known as Silicon Valley but it is a quiet innovator in the field and its products essential components for U.S. products.

Take ARM Holdings, for example, the British semiconductor and software design company based in the university city of Cambridge manufactures components for Apple.

"Europe’s luxury market is in a world of its own. Even the Chinese, who've tried to replicate the success of European industry, have had no success engraving a luxury brand into consumers’ minds that compares with Europe’s best in class – Chanel, Prada, Burberry, Cartier, Hermes, Gucci, Dior and Louis Vuitton." -Karen Tso, CNBC Anchor

Although the chief executives of some of Europe's largest companies are keen to point out that Europe has a lot going for it, much of Europe's "success story" comes from small and medium-sized enterprises (SMEs).

Widely seen as the "backbone" of Europe's economy, small-scale, modest businesses represent 90 percent of all business in the European Union and for individual member states, SMEs are vital for economic growth.


"Across the EU in 2013, some 21.6 million SMEs in the non-financial business sector employed 88.8 million people and generated 3,666 trillion euros in value added…This illustrates how critical SMEs are and reflects the value of the present report." -European Commission

While some have suffered during the downturn worse than others, such as the construction and manufacturing sectors, others have fared better. Small enterprises offering "business services", "retail and wholesale trade" and "other sectors" (which include all other non-financial business sectors) have all posted positive value added growth from 2008 to 2013, the Commission said.


João Romão founder of GetSocial

Being European is not a disadvantage

João Romão is a young entrepreneur based in Lisbon, Portugal. After quitting his consultancy job, he founded digital start-up GetSocial – a software-as-a-service company that provides website owners with "a social media app store" – in 2013.

For him, locating his business in Europe – and in his native Portugal – was as natural a decision as looking to expand it beyond his own country. He told CNBC about his experiences of doing business in Europe.

"Depending on the country (where your business is), building towards internationalization from day one is key and, sometimes, quite easy. I'll give you the Portuguese example," he told CNBC.

"Portugal has been living through austerity measures since 2010, when the first cuts and progression stalls started in the public sector. After our bailout in April 6th, 2011 came a shortage of internal consumption and companies had to export, or die. In early-mid 2014, we sought new ways to bring more money into the realm, and going abroad, finding new routes, new land, was the answer.

"There are some difficulties expanding within Europe of course. Each country has its own set of laws, fiscal policy and even purchase culture. But if you look at the best examples out there, you'll find most of them started off by opening one office in one location. They learned their drill, improved it and replicated it to other geographies in and out of Europe.

"I don't think we could ever consider being European as a disadvantage of any kind towards other economies and countries. On the contrary, having an enormous part of the world where free movement of goods, services, capital and customers is assured should only be assumed as an extraordinary benefit to create and expand one's business."

Ben Stansall | AFP | Getty Images

What’s holding Europe back?

If Europe has so much going for it and young businesses are thriving, where is the swagger?

Despite the successes and opportunities evident across its individual industries, the overall macro-economic outlook looks shaky and uncertain.

Europe's economy, as a whole, is improving slowly but surely but the emphasis remains undoubtedly on the "slowly."

The latest flash estimates for gross domestic product (GDP) in the second quarter of 2015 show that the economy expanded 0.3 percent in the 19-country euro zone, and by 0.4 percent in the 28-member European Union, from the previous quarter.

On an annual basis, the EU grew 1.6 percent compared with the second quarter in 2014.

In comparison, China grew an annual 7 percent in the same period and the U.S. grew at an annual rate of 3.6 percent.

Growth in the European Union, and euro zone, also remains a picture of divergence too. While the region's largest economies – Germany, France and Italy limp on with low growth figures – the wider region has some surprising and unexpected "emerging" growth stories with Czech Republic, Hungary, Latvia, Romania and Poland all growing faster than Europe's "old," larger and more indebted economies.


As the map shows, Europe is in danger from becoming a "two-speed" continent. The risks lie in the vast differences in macro-economic fundamentals in countries such as Germany and Greece, which could not be further apart in terms of rates of growth, debt or unemployment.

It also faces other deep-rooted problems related to decision-making, as seen in the slow and awkward response to the migrant crisis, as well as questions over the transparency and legitimacy of EU institutions.


Anthony Charles | Cultura RM Exclusive | Getty Images

Why ‘Made in Italy’ lost its swagger

If there is one country that exemplifies all that's good and wrong in Europe, it's Italy.

Now the third largest economy in the euro zone and the second-most indebted nation after Greece, the days of Roman rule are consigned to the history books and Italy is a shadow of its former self and -- rather like Europe – lost its swagger.

Like the rest of Europe, Italy has endemic problems: A north-south divide and economic divergence, corruption and bureaucracy as well as troubles with migration, anti-establishment politics and a political system that is sluggish at best, and chaotic at worst.


Pacific Press | Getty Images

'Made in Italy'

Yet just like its neighbors, Italy has a lot going for it and the "Made in Italy" brand is synonymous with quality, style and substance.

From global fashion labels to coffee machines, pasta, shoes and cars, Italian goods are exported around the world, conferring a certain panache on consumers. Small and medium-sized businesses too make up the backbone of the Italian economy, and there are an estimated five million small firms, that are often family-run, accounting for 80 percent of Italy's gross domestic product (GDP).

Yet many of those businesses have struggled during the last few years to access credit during a period in which the country has experienced a triple-dip recession –which it only emerged in the first quarter of 2015.

"There are several key factors holding Italy back. First is weak domestic demand, the high rate of unemployment and weak household income growth…The second is Italy’s poor international competitiveness and the third is the banking sector, burdened with a high rate of non-performing loans." -Jack Allen, European Economist, Capital Economics

Italy still has a problem with a divergence between its prosperous, industry-heavy north and impoverished, informal economy of the south too.

Called the "Mezzogiorno" question, regional disparities in Italy have long-plagued the government. According to Bank of Italy research, the financial crisis between 2007 and 2013 hit the south much harder than the north. In 2013, for instance, southern Italy's GDP was down 13.5 percent from 2007 levels whereas in the north and center, although still hard hit, output declined 7.1 percent.


Franco Origlia | Getty Images

Fractured politics

What has made Italy's economic recovery so slow is a fractured political scene that's so busy trying to reform itself, the economy appears to have been put on the backburner.

Indeed, over the period of time when Italy was in recession, the country's political scene has been nothing short of a mess, having gone from the scandal-hit tenure of billionaire businessman Silvio Berlusconi, to a technocratic government and two general elections in the space of a year.

The rollercoaster ride of Italian politics has prevented long-overdue reforms to both the economy, electoral system and constitution (ironically, designed to speed up the legislative process) from taking place quickly, although a number of significant pieces of legislation, such as the Jobs Act, have been passed into law.


AFP | Stringer | Getty Images

Anti-Establishment politics

Amid a convoluted and often chaotic political scene, Italy, has seen the rise of anti-establishment parties which have attracted voters weary of the old politics.

One of the more vocal opponents in Italy's political scene has been Beppe Grillo, the shaggy-haired comic that heads the anti-establishment 5-Star Movement. The rise of anti-Europe parties has been mirrored across the continent, such as the U.K. Independence Party (UKIP) and Alternative for Germany (AfD).


Pacific Press | Getty Images

Migration

Accompanying the rise in anti-European sentiment has been another issue that affects Italy acutely: Immigration.

Recent scenes of thousands of migrants trying to get into Europe from the Middle East and beyond, has brought international attention to Europe's increasing struggle to deal with migration. As many as 500,000 migrants have arrived so far this year, according to Europe's border agency, Frontex.

Italy, and particularly its poorer southern regions, have been struggling with an influx of migrants for years, however, and has repeatedly called on its European neighbors for help in the increasingly arduous task of patrolling the Mediterranean and processing the numbers of migrants entering Italy.

The migration "problem" in Italy feeds into many other endemic issues in Italy – as well as highlighting the problem of organized crime, the country's north-south divide.

In Naples, for example, migrants (often illegal) can be seen selling fake goods such as handbags – an industry controlled mainly by the Neapolitan organized criminals, the Camorra.

In fact, criminal gangs such as the Mafia in Sicily, Camorra in Campania and the 'Ndrangheta in Calabria have seen the influx of migrants – and the systems being put in place to receive, process and fund them – as a new source of illicit profits, according to a report in the Financial Times in July.


David Madison | Getty Images

Ageing and employment

From the point of view of the many desperate migrants arriving in Italy, those that do settle in Italy face a struggle to find legal work and avoid the clutches of organized crime groups that offer a wage.

On a wider societal level too, migrants also struggle to be accepted by a country that has less of a modern history of immigration compared to northern European countries like the U.K. or Germany, a country which sees migrants as a way to solving a demographic time-bomb in Europe: an ageing population.

Germany views migrants as a way to solve a future dearth of young and able workers but many in Europe who oppose immigration are keen to point out that, as a prosperous country, Germany has the means to support more migrants.

In Italy, however, despite facing the same problem of a declining population -- in 2014, only 509,000 live births were recorded, the lowest number since the unification of Italy in 1861, according to the country's statistics agency, ISTAT – the broader economic backdrop is the source of reluctance.

Any attempts to help migrants into Italy's labor market could play out badly domestically given Italy's weak employment situation. The country had an unemployment rate of 11.9 percent in August and reflecting a trend across southern Europe, youth unemployment remains an acute problem, with 40.7 percent of young people under 25 out of work, according to Eurostat.


Frederick Florin | Getty Images

A cause for concern or hope?

Italy highlights many of the wider problems facing Europe but it also highlights the region's attempts to solve them. From the European Commission's 300 billion euro ($340.8 billion) job creation plan to its attempts to cooperate on the migrant crisis, the region shows that it is making attempts, albeit often clumsy, bureaucratic and sluggish ones, to work together to resolve its problems.

"Swagger may be an overstatement of the facts, but the EU is starting to strut a little." -Geoff Cutmore, CNBC Anchor

Those that have been watching Europe's economy for a long time, such as CNBC anchor Geoff Cutmore, say it is certainly not all doom and gloom.

"Swagger may be an overstatement of the facts, but the EU is starting to strut a little. Over the last 12 months the jobless rate has fallen in 22 European countries. The raw GDP data also points to an improvement. Second quarter GDP increased in all 28 EU states except France where it stayed flat. And the consumer was a bright spot: household final consumption expenditure had a positive contribution to GDP growth in the euro area and the EU28.

"Whisper it quietly, but Europe's long-ignored emerging markets are also getting their mojo back. The Czech Republic, Croatia, Slovakia and the Baltic states are set for 2-3 percent growth this year. It has been a long road to recovery, but this is one part of the world that has been a net beneficiary of falling oil and commodity prices."

While Cutmore said it was too early to crack open the champagne yet, it would be premature to write-off Europe just yet.

"Europe has an enduring ability to recover just as its obituary is being sent to the typesetters."


Credits

Reporting: Holly Ellyatt
Editor: Phill Tutt
Design & Code: Bryn Bache
Images: Getty Images


Correction: Italy is the euro zone's third-largest economy and fourth in the European Union.