Still no sign of a policy shift to save Europe's currency

ECONOMICS: OVER THE past few months I’ve read a number of optimistic assessments of the prospects for Europe.

Oddly, however, none of these assessments argue that Europe’s German-dictated formula of redemption through suffering has any chance of working. Instead, the case for optimism is that failure – in particular, a break-up of the euro – would be a disaster for everyone, including the Germans, and that in the end this prospect will induce European leaders to do whatever it takes to save the situation.

I hope this argument is right. But every time I read an article along these lines, I find myself thinking about Norman Angell.

Who? Back in 1910, Angell published a famous book titled The Great Illusion arguing that war had become obsolete. Trade and industry, he pointed out, not the exploitation of subject peoples, were the keys to national wealth, so there was nothing to be gained from the vast costs of military conquest.

Moreover, he argued that mankind was beginning to appreciate this reality, that the “passions of patriotism” were rapidly declining. He didn’t actually say that there would be no more major wars, but he did give that impression.

We all know what came next.

The point is that the prospect of disaster, no matter how obvious, is no guarantee that nations will do what it takes to avoid that disaster. And this is especially true when pride and prejudice make leaders unwilling to see what should be obvious.

Which brings me back to Europe’s still extremely dire economic situation.

It comes as something of a shock, even for those of us who have been following the story all along, to realise that more than two years have passed since European leaders committed themselves to their current economic strategy – a strategy based on the notion that fiscal austerity and “internal devaluation” (basically, wage cuts) would solve the problems of debtor nations.

In all that time the strategy has produced no success stories; the best the defenders of orthodoxy can do is point to a couple of small Baltic nations that have seen partial recoveries from Depression-level slumps, but are still far poorer than they were before the crisis. Meanwhile, the euro’s crisis has metastasised, spreading from Greece to the far larger economies of Spain and Italy, and Europe as a whole is clearly sliding back into recession. Yet the policy prescriptions coming out of Berlin and Frankfurt have hardly changed at all. But wait, you say – didn’t last week’s summit meeting produce some movement? Yes, it did. Germany gave a little ground, agreeing both to easier lending conditions for Italy and Spain (but not bond purchases by the European Central Bank) and to a rescue plan for private banks that might actually make some sense (although it’s hard to tell, given the lack of detail). But these concessions remain tiny compared with the scale of the problems.