Austerity is no cure for euro's deep malaise

Then the bubbles burst.

The construction jobs vanished, and unemployment in the south soared; it’s now well above 20 per cent in both Spain and Greece. At the same time, revenues plunged; for the most part, big budget deficits are a result, not a cause, of the crisis. Nonetheless, investors took flight, driving up borrowing costs. In an attempt to soothe the financial markets, the afflicted countries imposed harsh austerity measures that deepened their slumps. And the euro as a whole is looking dangerously shaky.

What could turn this dangerous situation around? The answer is fairly clear: policymakers would have to (a) do something to bring southern Europe’s borrowing costs down, and (b) give Europe’s debtors the same kind of opportunity to export their way out of trouble that Germany received during the good years – that is, create a boom in Germany that mirrors the boom in southern Europe between 1999 and 2007. (And yes, that would mean a temporary rise in German inflation.) The trouble is Europe’s policymakers seem reluctant to do (a), and completely unwilling to do (b). In his remarks, Draghi – who I suspect understands all of this – basically floated the idea of having the central bank buy lots of southern European bonds to bring those borrowing costs down. But over the next two days German officials appeared to throw cold water on that idea. In principle, Draghi could just overrule German objections, but would he really be willing to do that?

And bond purchases are the easy part. The euro can’t be saved unless Germany is also willing to accept substantially higher inflation over the next few years – and so far I have seen no sign that German officials are even willing to discuss this issue. Instead, they’re still insisting, despite failure after failure – remember when Ireland was supposedly on the road to rapid recovery? – that everything will be fine if debtors stick to austerity programmes.

So could the euro be saved? Yes, probably. Should it be saved? Yes, even though its creation now looks like a huge mistake. For failure of the euro wouldn’t just cause economic disruption; it would be a giant blow to the wider European project, which has brought peace and democracy to a continent with a tragic history.

But will it actually be saved? Despite Draghi’s show of determination, that is, as I said, very much in doubt.