bne -

When the legendary bearish Economist wrote on one of its covers in March, "Can it be...the recovery?", it was tempting to feel that the good times are back again. However, it would be foolish to think Europe's sovereign debt crisis has gone away.

Being the Economist, it inevitably went on to say that while European government actions appear to have averted both a financial collapse and a nasty credit crunch, the continent "remains a long way from recovery." For permanent relief, it argues, the Eurozone "needs to build institutions that allow joint liability for government debts balanced with fiscal discipline."

The relative calm stems from Greece committing the largest sovereign default in history being greeted by investors with a metaphorical shrug of the shoulders - not the market meltdown that many had predicted. Greece's promise on further reforms released its second international bailout, a payment of €7.5bn.

The problem is that few believe the official Brussels' line that Greece is an isolated case, and attention is now focusing on Portugal, which has been employing the same kind of financial jiggery-pokery that Greece used to make its finances look better than they really were. Charlie Fell, a financial market analyst, says the country's reported budget deficit would not have come in almost two percentage points below the desired level, but for a last-minute transfer of banking-sector pension funds to the government social security system. "This transfer accounted for almost 60% of the fiscal adjustment in 2011. Removing this once-off item implies that the underlying improvement was 1.3% of GDP, way less than the 'fudged' reported number," he says.

The high level of debt (both public and private) and a chronic growth problem won't simply be turned round by a bit of goodwill and a few "magic wand" structural reforms, says economist Edward Hugh, meaning Portugal is headed for a second bailout before September next year, to follow the €78bn one in May 2011.

Plus ça change, as they say in Paris - and it's this that causes people in the newer part of the EU to shake their heads in dismay, fearing that a lack of fundamental change in attitude amongst the EU elite will destine the bloc to years of stagnation and, perhaps, worse.

A sad singer

Miroslav Singer, head of the Czech National Bank, is that rarest of beasts: he's a jovial central banker. But he saves most of his ire (perhaps indignation is a better word for such an affable man) for a cultural attitude among Europe's elite that created this crisis and then allowed it to perpetuate and deteriorate. He calls it Europe's "mythical approach to reality"; more colloquially, it would be the triumph of hope over experience.

Singer, in an interview with bne , says that the euro embodies the problem of many European institutions, which have come to regard reality as something that can be changed by good intentions alone and at will - basically, the European elites say to themselves: "we want it, we decided this, so this will change reality."

Then, when reality has that nasty habit of intruding on European fantasies, the initial reaction is one of denial, which is what is currently happening. Allied with this is a good dose of hypocrisy, where European institutions sing the praises of austerity and budget cutting, but wouldn't for a moment think that it should be applied to their own departments. Witness the extraordinary scene in June 2011 of the European Commission laying out glossy brochures about its swanky new €240m home at a meeting of EU leaders to discuss measures to resolve the debt crisis in Greece. This infuriated British Prime Minister David Cameron: "You do wonder whether these institutions actually get what every country, what every member of the public is having to go through as we cut budgets and try to make our finances add up," he was reported as saying.

For Singer, the real danger is that this active suppression of accepting things need to change fundamentally is allowed to continue for so long the European dream will be consigned to the dustbin of history, along with the world's other extinct empires. "History has shown us that decaying empires can decay for quite a while in very good style. Venezia was decaying for hundreds of years, but was still a hotspot for rich gentlemen," he says. "Talking to many people in Europe you get the feeling that they still think we are a beacon of civilisation for the rest of the world. Talking with my Asian or Latin American colleagues I can clearly say that we are not a beacon for others. The Byzantine Empire probably thought it was a beacon to follow until its last days. "

Singer is quick to stress that the EU doesn't have to meet the same end as the Byzantine Empire. But its leaders need to drop this mythical approach to reality and start facing up to the fundamental changes that are needed to create sustainable growth rather than the lopsided trade growth that the euro generated until the huge imbalances caused the whole edifice to collapse. This will require that these imbalances are mitigated or reversed, and this will create a different pattern of European trade. Most of this adjustment will have to take place in the consumer part of the economy, rather than a huge reindustrialisation of the continent, which won't be pleasant for those forced to bear the brunt of this.

"I'm not sure whether Europe is ready to understand this, it seems not to be getting through. But it will sooner or later have to do it," he says. "This is a deep crisis, but we tend to underestimate how the world has to change after this crisis."