Europe's race between its economics and politics
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Six years after the Great Economic Recession, Europe's political economy is at a critical juncture. At last, there are signs that Europe finally might be on its way to a meaningful economic recovery. However, there are also indications that Europe's politics are fragmenting at an accelerating rate as a result of thwarted economic expectations. Whether Europe can now decisively avoid a downward political and economic spiral will depend very much on whether its economic recovery has sufficient force to reverse the political deterioration of the past few years.

Europe's economic performance since 2008 has been highly disappointing. This has been in large part due to the timidity of the European Central Bank (ECB) at a time that most euro member countries were forced to pursue budget austerity within a euro straitjacket. In contrast to the U.S., where an activist Federal Reserve contributed importantly to an expansion in the U.S. economy to 8 percent above its pre-Lehman Brothers crisis peak, the European economy is still 2 percent below its peak. As a result, while U.S. unemployment has declined to around 5.25 percent, Europe remains stuck at over 11 percent, with youth unemployment stuck at almost 24 percent.

Luckily for the European economy, a number of strong tailwinds are now blowing in its favor. Over the past six months, international oil prices have approximately halved, which is like manna from heaven for the beleaguered European consumer. At the same time, the ECB has now finally embraced full-bodied quantitative easing by committing itself to buy 60 billion euros a month in European bonds. This has already seen European long-term interest rates decline to their lowest levels on record. More important yet, it has also contributed to a 20 percent decline in the euro with respect to the U.S. dollar that is almost certain to provide a big boost to European exports.

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Europe's favorable tailwinds make it plausible that European economic growth will pick up to 1.5 percent in 2015 as the ECB is now officially projecting. However, before allowing ourselves to get carried away by this encouraging news, it is well to recall that even were the European economy to grow at that rate, it would still not have regained its pre-Lehman peak by end-215. Also sobering is the thought that by end-2015, overall European unemployment would still be in the region of 11 percent, while the rate in countries like Greece and Spain would be more of the order of 25 percent.

Greece's troubling political situation should be a wake-up call to European policymakers about the political fallout from years of economic underperformance. In the wake of a six-year economic recession, which saw Greece's gross domestic product (GDP) decline by almost 25 percent, the Greek electorate has turned to a radical-left Syriza government that is openly hostile to budget austerity and structural economic reform. This has put Greece on a collision course with its European paymasters that could all too likely see Greece forced out of the euro before the year is out.

Sadly, the political deterioration spawned by years of European economic underperformance is not confined to Greece. Indeed, across Europe, the political center appears to has crumbled. In its place, radical parties on both the left and the right side of the political spectrum that are opposed to Europe have the wind in their sails. In Spain, the far-left Podemos party is now more popular than either of the two establishment parties, while in France, Marine le Pen's National Front Party has become a real contender for the French presidency in 2017. Meanwhile, in Italy, all four main opposition parties are now committed to taking Italy out of the euro if they come to government.

If containing the fallout from a possible Greek euro exit underlines the urgent need for policies aimed at reinvigorating the European economy, so too does Europe's crowded electoral calendar. Over the next 12 months, highly contested elections are to be held in the United Kingdom, Portugal, Spain and Ireland. One would think that the electoral prospects for establishment parties committed to Europe would be enhanced by a more favorable European economic backdrop.

Europe's longer-run economic and social prosperity would seem to hinge crucially on whether its economic rebound outpaces its deteriorating politics. In that race, there can be no letting up on policies aimed at restoring European economic prosperity. For that reason, one has to hope that European policymakers move quickly support the ECB's quantitative easing efforts with meaningful structural economic reform and with an easing in budget austerity.

Lachman is a resident fellow at the American Enterprise Institute (AEI). He was formerly a deputy director in the International Monetary Fund's Policy Development and Review Department and the chief emerging market economic strategist at Salomon Smith Barney. He will moderate the event "Does Greece pose a threat to the euro?" to be held at AEI on April 17. For more details, click here.