Europe’s ‘lost decade’: What it means for Mideast

Something remarkable has just happened in Europe. Leaving aside the headline 10% decline in major European stock indices in recent months, there has been a distinct change in the mood amongst the bankers whose job is to deal with the European debt crisis, a series of events that began in 2008 and as yet show no sign of ending.

In years gone by, if you had sat in a cafe outside a bank’s headquarters in one of Europe’s financial centers — say London, Paris, or Geneva — every evening you would have seen a load of weary bankers leave their smart offices, smell the fresh air, and make their way home. It was another day. Stress was normal, as anyone who has ever worked on a high profile deal will agree, but it was always fleeting and accompanied by the sense that any problem could be solved.

It was with this instinctive confidence that bankers approached the euro zone turmoil, a financial catastrophe now entering its fifth year. It was a problem to be analyzed, understood, and neutralized by a series of clever policy initiatives. Whether you were employed by Goldman Sachs or Germany’s Bundesbank, you were paid to come up with ideas that worked.

But since the beginning of June, a growing sense of unease has gripped the financial community. This is partly caused by the never-ending uncertainty: Greece’s fate is still unknown, much less that of Spain, a much more significant player in the euro zone. Observing events in Spain over the last few weeks felt like riding an emotional roller coaster. A real fear of state bankruptcy was swiftly followed by euphoria when an initiative was announced. This momentary joy was accompanied by a rally in global share prices, from New York to Tokyo. Then the reality hit that the problem had not been solved. Share prices around the world promptly fell again, sharply.

The key change in the mood in Europe is the basic realization that the problem is not going to be solved any time soon. Exotic financial engineering will not help; whiz kids with Ph.D.s in mathematics are powerless. This is a gloomy conclusion, and also begs the question — what is going to happen to the economies of the European Union over the next few years? This is highly relevant to the world economy. In 2011, if all the countries of the EU were counted as one bloc, they were worth $ 18 trillion a year.

Last week, I spoke to one of Europe’s most successful financiers who had an answer to the ‘what happens next’ question. He said that Europe was entering a ‘lost decade,’ something similar to what happened to Japan in the 1990s, when a ruinous bubble popped and led to decline and stagnation. European governments and consumers are so burdened by debt that the only serious way out of this crisis is to spend years paying it off. It is an unglamorous solution, to be sure, but the only real way out.

Europe’s trading partners throughout the world are not immune from what is going on. Given the geographical proximity and historical connections, it is no surprise to learn from the WTO that the Middle East trades more with the EU than it does with North America. So what does the debt crisis mean for the Middle East?

There is, of course, no such thing as ‘Europe’ just as there is no such thing as the ‘Middle East.’ Spain may be in a perilous situation but in comparison, the UK, Germany, and some other northern European states are not. A number of Spanish banks have just been downgraded by rating agencies, whereas investors are hoovering up British government bonds.

Early, the Gulf region is a major exporter of crude oil. European demand for Gulf energy products has weakened and could weaken further. Does this mean Gulf states should be looking for new markets elsewhere? Some grey-haired financiers in Europe are certainly thinking along those lines. Most notably, Lord Jacob Rothschild, who hails from one of Europe’s most prestigious banking dynasties, recently entered into a strategic relationship with the Rockefeller’s of the United States. One reason behind this move across the Atlantic was Rothschild’s confidence in the American economy — there is an implication here that he lacks confidence in the European economy.

But that is not to say Middle Eastern states should follow suit, far from it, primarily because there is an obvious conclusion to be drawn from weakened European stock markets: Cheap asset prices can be more attractive to buyers. If certain Middle Eastern countries, most likely from the Gulf region, are able to take a long-term view, Europe offers significant value right now. After all, Europe will exit the crisis a leaner and more efficient place to do business. It should not go unnoticed that Qatar has made large investments in European businesses as diverse as Porsche and Barclays Bank.

The current situation in Europe teaches a broader lesson. Basically, certain European countries overspent in the 2000s, a binge that will haunt the region as a whole for years to come. As a direct result of this fiscal liberalism, instead of thinking up creative ways of tackling poverty, improving education, or reducing crime, Europe’s political leaders spend endless hours locked in meetings together trying to find a way out of the crisis. Because GCC member states followed different economic principles, they are not suffering from such woes.

The euro zone crisis could then be a policy opportunity for parts of the Middle East. To take Saudi Arabia as the example, if, as the IMF believes, the Saudi economy grows by 6% in 2012 — one of the fastest growth rates in the world, while Europe continues to stagnate — then Saudi Arabia is clearly doing something right. Should Europe be adopting similar principles? The Saudi economy obviously benefits from significant oil exports, but sound macro-management, increasing diversification, and a strong banking system are all also bearing fruit.

Those bankers stepping out onto the street every evening in Europe having spent the day struggling with these long-term problems might just want to look to their next door neighbors in the Middle East for some answers.