UBS' George Magnus Asks "Why Are The European Streets Relatively Quiet?"

Tyler Durden's picture

The wave of social unrest that rumbled across Europe between 2008 and 2011 has become less intense. This has come as a cause for relief in financial markets, as it has helped to underpin the marginalization of ‘tail risk’ already addressed by the ECB and the Greek debt restructuring. And yet the latest crisis over the Cyprus bail-out/bail-in not only shoots an arrow into the heart of the principles of an acceptable banking union arrangement, if it could ever be agreed, but also signifies the deep malaise in the complex and fragile trust relationships between European citizens and their governments and institutions. Some people argue that protest, nationalist and separatist movements are just ‘noise’, that the business of ‘fixing Europe’ is proceeding regardless, and that citizens are resigned to the pain of keeping the Euro system together. UBS' George Magnus is not convinced, even if public anger is less acute now than in the past, it is far from dormant, and its expression is mostly unpredictable. So is the current lull in social unrest a signal that the social fabric of Europe is more robust than we thought, or (as we suggested 14 months ago) is the calm deceptive?

Another systemic problem

Social unrest is a systemic phenomenon, which, according to an OECD report, meets two principal criteria. It is highly uncertain, complex and ambiguous; and it is highly likely to generate ripple effects into other sectors of the economy and society, possibly leading to the toppling of governments, or even political systems. Although European social unrest since the crisis in Greece began has claimed a small number of fatalities and considerable damage to property, it has been notable more for the public expression of lack of trust in the institutions of government, including in Brussels. If a rising number of people give up on the willingness and ability of their institutions to address grievances, then the lull is most likely deceptive.

We have been here before. The economic and political context of the 1930s was, of course, different. Then there was much historical and unresolved geo-political baggage, and a rupture of the political centre as two radically different ideological veins erupted from the backlash against free trade and the gold standard. One championed radical social reform, the other what may be euphemistically called ‘nation-building’ 5 . And there was no EU. But the problem today, as then, is the same, namely the inadequacy of mainstream, political channels to address rising public concern about the loss of economic security, social stability and, yes, cultural identity6. How else to explain both the rise of Spain’s indignados, and other similar national protest movements in Europe, and the increase in nationalist, populist and separatist sentiment, and representation in national parliaments from Greece, France, and Spain to Finland and the Netherlands, and now Italy?

Via George Magnus, UBS:



Still an austerity zone


Even though the financial crisis in Europe has faded, for the time being at least, the economic stress nurturing protest movements hasn’t. The best that can be said is that the incidence of austerity may not be as significant as it was in 2010-11




Backlash link to austerity


Let’s assume nothing changes, and that while European elites debate how – or if – they can build strong European banking, fiscal and economic institutions, with the required transfer mechanisms between creditors and debtors, the economic lot of European citizens, an unhappy one for five years now, shows no improvement. This seems a decent assumption.




The principal economic lesson is that an austerity regime with recurring reductions in public outlays won’t work a) when the private sector is trying to delever and shrink liabilities at the same time b) when it is a generic phenomenon and c) when its principal impact is to depress the level of money GDP and sustain the economy in a liquidity trap. But thanks to some interesting empirical work, another lesson concerns the corrosive and dangerous effects of large and sustained austerity in creating a social backlash that results in greater uncertainty, and therefore inertia, when it comes to corporate hiring and capital spending. As a result, output and public sector tax revenues suffer, reinforcing the negative dynamic between debt and the economy.




when expenditure cuts, specifically, rise to more than 2% of GDP, and particularly when they rise towards or over 5% of GDP, the number and the severity of incidents of unrest rise sharply.




Self-evidently, there have been heightened levels of social unrest and shocks to the political system in Greece, Spain, Portugal and Italy, but not in the UK or Ireland, or in the US, for that matter, though neither the US nor the UK, for example, have been immune to social unrest, sometimes requiring the force of the state to suppress it.12. But the main difference between many incidents of social unrest and the ones that damage the social fabric and the economic environment is the impact (sometimes more perceived than real, perhaps) of highly restrictive budgetary measures. Some governments may be better able to implement and absorb them, and sustain the trust or belief in citizens in perseverance. Mostly, this comes down to the robustness of local institutions, and the performance of leaders, as well as culture and history.


The most fundamental manifestation of this damage is, of course, unemployment. But this is only the most visible sign of the upheaval in Europe’s famed social model, and overlooks other important social and economic fault lines, including stagnant or declining real wages, rising income inequality, levels of youth unemployment of between 25% and 50%, and the rise in the numbers of long-term unemployed.


These phenomena didn’t begin with the financial and Euro crises, of course, but they have certainly been exacerbated by it and by the response of governments, and citizens are certainly making the connection, regardless.

So why are the streets relatively quiet?

The short answer is we don’t know. None of the reasons we can think of add up to much, but judge for yourself. It could have something to do with Europe’s rapid ageing demographic transition. The proportion of young adults, aged 15-24 has already been falling from peak levels seen in the mid 1980s, and is on track to decline further in the next 20 years. The proportion of 15-59 year olds, or what we might imagine as the part of the population most likely to express non-voting anger, is peaking now, but a significant decline is predicted. Perhaps the baby boomers have expended their protest energy!


Rapid growth in, and a rising proportion of, the numbers of young people, say aged 15-29, certainly feed the potential for social protest and upheaval. But they also need a catalyst, which could be the emergence of high inflation.

Empirically, there is an unequivocal association, but this is best applied, in contemporary times at least, to the experience of emerging and developing countries, for example, as in the Arab Spring. Although the European upheavals in the 1960s and 1970s were set against a backdrop of rising inflation, those in the 1930s and today are the product of depression and awkward questions of self-determination, not inflation.

Perhaps the relative calm in Europe has something to do with European family structures. The Bank Credit Analyst recently published a chart, emphasizing the role of the family as a shock absorber. The authors suggest that the countries with the highest youth unemployment rates are also those with the highest proportion of young adults living with their parents, who fulfill the role of effecting transfers and economic and social support.

We are not sure about this one either, although having an extended family structure on which to rely is clearly a mitigating factor against poverty and social exclusion. But the two variables may simply be spuriously correlated since both represent symptoms of a depressed economy. In any event, those countries with the highest youth unemployment and numbers living at home have already claimed the bragging rights for anti-austerity protest, while six of the other eight countries have been characterized by fallen or weakened governments, and the rise of nationalist and anti-immigrant political parties and policies.

A conclusion to this discussion is not possible.


In a benign outcome, the potential for social disorder will be defused by a new approach to economic burden-sharing, a re-sequencing of the pursuit of austerity and growth objectives, and steady progress towards the establishment of credible and trusted European banking, economic and political institutions, including financial transfer mechanisms. Motherhood, to be sure, and this has at least two vital caveats, namely the willingness of Germany and other northern European countries to accept significant sovereignty compromises, and the implications for the EU project, if this level of integration proves a bridge too far for UK voters in the promised 2017 referendum.

Social and political upheavals would doubtless haunt the worst-case outcome, where muddling through leads nevertheless to a fragmentation of the Eurozone, or, in extremis, a collapse, in spite of OMTs and the like. The possible consequences, including for the social fabric of Europe, have been well aired in the last couple of years.

The middle way, so to speak, is a muddling through that never scales the successful outcome hurdles, but carries on regardless. Political bonds, maybe fear, sustain the Euro system, but European leaders are unable to reach an agreed and acceptable framework for durable economic recovery and full integration. This outcome describes the status quo, and is the base case for most people. But it is also about stagnant, low growth, persistent high unemployment, retreating targets for debt sustainability, more bail-outs and bail-ins, latent financial instability, and likely sovereign default. The current Eurozone news could not be more apt, and doesn’t seem like the ideal scenario in which to expect European social unrest and political turbulence to fade away.