Even before the financial sector and sovereign debt crisis began to destabilise Europe's banking system, European leaders were voicing fears that the Old World might be slipping towards global irrelevance. Low economic growth rates, demographic stagnation, military feebleness, dwindling natural resources and the rise of non-European powers threatened a bleak future of irreversible relative decline. In his maiden speech as the European Union's first full-time president, Herman Van Rompuy observed in December 2009: "What is at stake is the survival of what has been so painstakingly built up. We must at least double the poor growth rate of 1 per cent projected for our economies ... A strong economy is necessary not only so that we can play our part in the world, but above all to safeguard the achievements of our European way of life."

Arguably, the outlook now is even darker than Van Rompuy painted it two years ago. Thanks to the financial crisis, Europe stands on the brink of a "lost decade" similar to that which enveloped Japan in the 1990s and which in certain respects has not yet ended. Economic growth in most European countries ranges from weak to non-existent. Government finances are severely impaired, and it will take many years to put them right. Banks are danger-ously exposed to a potential break-up of the 17-nation euro area. Moreover, even if the monetary union were to survive the crisis intact, European governments would still face the problem identified by Van Rompuy: the unsustainably high cost of providing citizens with a panoply of generous public services. Short of a wholly improbable surge in economic growth between now and 2020, tens of millions of Europeans face a decade of stagnant or declining living standards, reduced state benefits and longer working lives - if they can find secure employment.

A "lost decade" in Europe would not be quite like its Japanese equivalent. The homogeneity of Japanese society contrasts with the national, ethnic and religious diversity of European states, a condition that increases the risk of social and cultural tensions. Equally important, Japanese unemployment at its peak never exceeded 5.5 per cent of the workforce - a level most Europeans would regard as enviably low. True, this figure obscures the disappearance from Japan's labour force of "peripheral workers", mainly married women, who, after they lose their jobs in a recession, are not classified as unemployed because they do not seek new jobs.

High unemployment would nonetheless be a defining characteristic of a European "lost decade". One need only look at Spain, where the IMF predicts that the jobless rate, currently above 20 per cent of the workforce, will not fall below 16 per cent until 2016. It is not just that the jobs created in Spain's property and construction bubble have gone for good. Over the next decade the more serious problem will be the grip of privileged insiders on Spain's better-paid, more permanent private sector jobs. Without reforms to open up this segment of the labour market, Spain - and other countries such as France, Greece and Italy - will churn out ever greater numbers of university graduates with ever diminishing prospects of secure employment.

The impact would vary from country to country.

In Ireland, from which 40,000 citizens (about 1 per cent of the total) emigrated in the year to April 2011, one might expect a continuing outflow of people, largely but not exclusively to the rest of the Anglophone world. Greece would probably witness political disorder, taxpayers' strikes, labour unrest and street protests, degenerating at times into violence between extremists and the police. Were Greece to exit the euro area, a more far-reaching breakdown of law and order might ensue, triggered by bank closures, the new currency's rapid depreciation against the euro, rampant inflation and the spread of black market activities.

In central and eastern Europe, where several former communist countries have struggled to build stable, law-based democracies and market economies, powerful organised crime clans might gain more influence over political parties and the state. Some of these clans, particularly those connected with the energy and raw materials sectors, would liaise with patrons in Russia, Ukraine and further abroad.

Across Europe populist and xenophobic political movements would seek to exploit the social anxieties of a "lost decade". They would encourage citizens to blame immigrants for job shortages, downward pressures on wages, rising crime and the sharpening competition to obtain state benefits. North African, Middle Eastern and Asian Muslims would be targets in Belgium, France, Germany and parts of Scandinavia. Resentment would intensify in Italy against irregular Chinese immigrants, and in the Czech Republic and Hungary against Roma "social outcasts". There would be more intense public resistance to the large-scale immigration required to compensate for Europe's low birth rates and to stop the labour force from shrinking. Immigration, legal and illegal, would continue, but for the most part it would comprise unskilled and semi-skilled workers rather than the trained engineers and computer technicians that the European economy needs.

Throughout the decade there would be increasingly severe funding pressures on public health, pension and education systems. Certain social groups would be vulnerable to poverty, criminal violence and infectious diseases: pensioners, low-wage workers, the homeless, and people with a migrant background. Pension fund losses, stemming from the crisis in financial markets, would cut future benefits for young workers, provoking a generation clash with their elders. Rising income inequality, as the rich got richer and the poor poorer, would disproportionately affect women and young people. Universities and state schools would deliver lower-quality education.

A "lost decade" would neither destroy the livelihoods of Europeans as a whole nor irreparably shatter the refined quality of so much of European life. But it would undermine Europe's image as the world's lifestyle power par excellence. For the first time in generations, a future beckons in which life for most Europeans will be worse than it was for their parents.

(Tony Barber is Europe Editor of The Financial Times.)

 

 

 

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