European leaders seem determined to ruin their economy
ON SATURDAY the New York Times reported on an apparently growing phenomenon in Europe: suicides “by economic crisis”, people taking their own lives in despair over unemployment and business failure. It was a heartbreaking story. But I’m sure I wasn’t the only reader, especially among economists, wondering if the larger story isn’t so much about individuals as about the apparent determination of European leaders to commit economic suicide for the continent as a whole.
Just a few months ago I was feeling some hope about Europe. You may recall that, late last autumn, Europe appeared to be on the verge of financial meltdown but the European Central Bank, Europe’s counterpart to the Fed, came to the continent’s rescue. It offered Europe’s banks openended credit lines as long as they put up the bonds of European governments as collateral; this directly supported the banks and indirectly supported the governments, and put an end to the panic.
The question then was whether this brave and effective action would be the start of a broader rethink, whether European leaders would use the breathing space the bank had created to reconsider the policies that brought matters to a head in the first place.
But they didn’t. Instead they doubled down on their failed policies and ideas. And it’s getting harder and harder to believe that anything will get them to change course.
Consider the state of affairs in Spain, which is now the epicentre of the crisis.
Never mind talk of recession; Spain is in full-on depression, with the overall unemployment rate at 23.6 per cent, comparable to America at the depths of the Great Depression, and the youth unemployment rate at more than 50 per cent.
This can’t go on – and the realisation that it can’t go on is what is sending Spanish borrowing costs ever higher.
In a way it doesn’t really matter how Spain got to this point – but, for what it’s worth, the Spanish story bears no resemblance to the morality tales so popular among European officials, especially in Germany. Spain wasn’t fiscally profligate – on the eve of the crisis it had low debt and a budget surplus.
Unfortunately it also had an enormous housing bubble, a bubble made possible in large part by huge loans from German banks to their Spanish counterparts.
When the bubble burst, the Spanish economy was left high and dry; Spain’s fiscal problems are a consequence of its depression, not its cause. Nonetheless, the prescription coming from Berlin and Frankfurt is, you guessed it, even more fiscal austerity.
This is, not to mince words, just insane. Europe has had several years of harsh austerity programmes, and the results are exactly what students of history told you would happen: such programmes push depressed economies deeper into depression.
And because investors look at the state of a nation’s economy when assessing its ability to repay debt, austerity programmes haven’t even worked as a way to reduce borrowing costs.
What is the alternative? Well, in the 1930s – an era that modern Europe is starting to replicate in ever more faithful detail – the essential condition for recovery was an exit from the gold standard. The equivalent move now would be an exit from the euro and restoration of national currencies.
You may say that this is inconceivable, and it would indeed be a hugely disruptive event both economically and politically. But continuing on the present course, imposing ever-harsher austerity on countries that are already suffering depression-era unemployment, is what’s truly inconceivable.
So if European leaders wanted to save the euro they would be looking for an alternative course. And the shape of such an alternative is fairly clear. Europe needs more expansionary monetary policies, in the form of a willingness – an announced willingness – on the part of the ECB to accept somewhat higher inflation; it needs more expansionary fiscal policies, in the form of budgets in Germany that offset austerity in Spain and other troubled nations around the continent’s periphery, rather than reinforcing it.
Even with such policies the peripheral nations would face years of hard times. But at least there would be some hope of recovery.
What we’re actually seeing, however, is complete inflexibility. In March, European leaders signed a fiscal pact that, in effect, locks in fiscal austerity as the response to any and all problems. Meanwhile, key officials at the central bank are making a point of emphasising the bank’s willingness to raise rates at the slightest hint of higher inflation.
So it’s hard to avoid a sense of despair. Rather than admit that they’ve been wrong, European leaders seem determined to drive their economy – and their society – off a cliff.
And the whole world will pay the price. – (New York Times service)