Monday, May 7, 2012
Things are getting interesting in Europe again. In a good way, mostly, I hope. Congratulations to François Hollande, Président de la République. Not so sure who I'd want to congratulate in Greece though. I sympathize with wanting to kick out the bums responsible for the mess they're in, but voting in actual, card-carrying, Hitler-saluting Nazis is unlikely to make things any better.
Since I got my head around this whole Euro crisis, I've felt that the German-led course of austerity and low inflation is a dead end. Austerity never has begat growth. Never will. Structural reforms, addressing corruption, investing in infrastructure—human and physical—do produce growth, but only in the long term. They won't get you out of an acute crisis unless they involve spending lots of money. It's painfully obvious that Greece and the rest of the Balkans at least are sorely in need of structural reforms, but I somehow don't think a huge crisis with a quarter of the labor force unemployed makes them any easier.
There are alternatives to austerity. The obvious one is breaking up the Eurozone and letting the resulting regional currencies float.
I would hate to see this happen, because I believe in the European project. It has turned what used to be the black heart of the world's bloodiest wars and evilest tyrannies into what is, for the most part, a pretty decent, safe, peaceful, and prosperous place to live. It has brought different people together in very concrete ways. I think something vaguely resembling the European Union's model of governance—a voluntary union of diverse polities muddling its way towards tearing down walls between each other—is civilization's best bet for survival, in fact. It's certainly light-years ahead of the jingoisms and fundamentalisms that gave us Hitler and Mussolini, Stalin and Reagan, Mao and Hafez al-Assad. I fear very much that these old demons now stirring in their sleep would be released should the European project fail, even if we don't have the demographics to fight proper wars anymore, at least not with anyone with the capability to fight back.
Another alternative is the one the erstwhile Vladimir Putin proposed when the crisis first broke: "It is no problem. You just print more money."
Only very few of the EU countries are truly broke. Greece is. It really cannot survive on its own within the Eurozone. It will either have to leave, or receive massive aid—not loans, aid—from the rest of the EU. The rest of us aren't doing nearly so badly. The "massively indebted" France has a debt/GDP ratio of about 90%, which is perhaps a bit higher than most of us would like, but far from unsustainable. The vicious circle of austerity is that it throttles the economy, putting people out of work, and therefore actually reduces the amount of money available for governments to do their thing, including service their debts. So it doesn't even do what it's supposed to do, while making everything else worse.
Conversely, if Spain was able to get its unemployment down from its current 20+ per cent to, say, 5%, its budgetary problems would be solved. France's 90% debt-GDP ratio would barely register. The simple Keynesian fact is that to get out of a crisis, you have to spend. It's only when you really can't spend, like Greece today, that you're genuinely screwed.
Massive spending in the countries that can afford it would address a second problem too. Namely, the structural imbalance that has Northern European countries running export surpluses with Southern European ones. This imbalance means that productivity is too low in South Europe relative to North Europe. Or, to state the same fact in a more provocative way, German workers aren't paid enough.
Until now, the demands have been for the Southern European countries to reform themselves through internal devaluation. This is slow and hugely painful, putting millions of people out of work and keeping the economy depressed for year after dreary year. We could accomplish the same result not by paying Southern European workers less, but by paying German workers more. That would result in a boom that would create demand all over Europe. Since wages in Southern Europe would not rise before full employment is reached, it would also resolve the imbalance. We could be back to full employment within a year if we decided to run 5% inflation instead of the measly 1.5% that we're doing now.
So, Mario. You had your shot. Enough austerity. Let's inflate our way out of this hole. Print some money. And make sure it goes to the masses rather than the 1% for a change.