Cross-posted from New Deal 2.0.
There is a general idea around that the euro is bound to fail because you can't get 17 countries to agree on a single fiscally-oriented rescue policy. Christine Lagarde, the new IMF director and the most refreshing economic voice in Europe, has said so. Countless commentators have said so. It is now widely accepted that the end of the euro is inevitable because of this.
There is little doubt that even to expand the EU bailout fund is a laborious and unwieldy process. But other measures can be taken, including pressure on the European Central Bank to expand credit and buy the debt of the nations on the brink as well as extra-mural efforts to borrow against the rescue fund.
In fact, to save the European Monetary Union requires only one nation's assent, not 17. Yes, Finland and the Netherlands are resisting helping Greece and others. But in truth, Europe will do whatever Germany wants it to do. Germany has the trade surplus, the assets, and the confidence; Finland and the Netherlands, though financially strong, will not likely buck the Germans if the Germans mean it.
The Germans seem convinced they have made their economy stronger than all others due to their manufacturing, innovation, and self-discipline. Preaching with a kind of moral authority, they want others, namely Greece, to take their medicine. In a huff, prestigious Germans are leaving international institutions because the miscreants of the rest of Europe are trying to get away with their profligacy.
Germany did not succeed economically alone, however. It did so in good part because a single currency, the euro, underpriced its exports to most of the other EMU nations. Let it be said loud and clear that without substantial demand from others, the export models of the world, like Germany's and China's today and Japan's before them, would not work. The U.S. has long enabled the growth of Japan and China because of its high level of consumption, based self-destructively on rising consumer debt. The same is partly true for Germany as well, but most of their trade is with the EU. And China, recognizing this, has gone to some lengths to pump up its domestic market.
Now, Germany is a remarkable economy nonetheless, as was the Japan of Toyota and Sony and as China is today. It is a champion of manufacturing focus, from which America could learn a lot. But while the world cannot believe what the Tea Party is doing to America, it had better pay attention to what a certain kind of German economist (not all by any means) is doing to the world. These educated and seemingly somber men argue that fiscal probity is almost everything, that the ECB better not buy sovereign debt of other nations, and that Germany had better not put more money into a rescue fund to help Greece restructure and ward off similar failures in Italy and perhaps Spain (whose government was not profligate). They apparently will not back a Eurobond, which is badly needed -- a bond guaranteed by all members of the EU. They are so far opposing expansion of the rescue fund. And they will not insist their private sector share some losses.
There is little empirical evidence to back Germany's intransigence, despite the erudition of some of the nation's chief intransigents. Walter Bagehot, an early editor of The Economist, the American historian Charles Kindlberger, and the far-seeing economist Hyman Minsky are agreed that there is no easy way out in a fiscal crisis. But there is a general rule: act early and act big. If not, odds are the crisis will deepen, spread, and become harder to manage.
Germany is incapable of learning this lesson. They are in the "don't throw good money after bad" school of thought. It is a gut feeling, not a theory based on thought, history, or statistical evidence. And it usually goes hand in hand with austerity economics.
Many forgive Germany their current narrowness and seeming self-concern because of the punishing early history with runaway inflation. I would urge them to remember a different lesson. After World War II, when the Germans were down and out, due clearly to their own doing, many Americans did not want to support them. But the American government wisely launched the Marshall Plan and opened its border to European imports. Those were gestures -- not perfect but generous by current European standards -- that led to 25 years of prosperity.
Germans should recall that part of their history and not demand that a people like Greece's abide cruel austerity, even if it had to do with irresponsible government policies, to satisfy a policy based on a gut feeling rather than serious thinking.
Tim Geithner is now preaching such a lesson to Europe: act big and act fast. He is proud of TARP and the expansive Federal Reserve policy that more than reinforced it. He is proud of the Obama stimulus of early 2009. To an extent -- but only to an extent -- he should be. Compared to what the Europeans are doing today, he should be.
Of course, America still has a long way to go. TARP did not force private bondholders to share losses. It did not force banks to reorganize. It did not force them to restructure household debt the way Geithner would like Europe to restructure Greece. In sum, it did not force banks to lend. America needs stimulus and it needs mortgage debt restructuring. Nevertheless, America did much better than Europe is now doing in its hour of crisis, despite political bumps in the preceding 100 years. Establishing the Federal Reserve was no easy matter, requiring the 1907 financial crisis to give it momentum -- the one that J.P. Morgan basically managed privately. Its ability to create fiat money was challenged in the Supreme Court in the 1970s.
The point is this: Europe has it in its grasp to solve the problem. Plow money into a restructured Greek economy and then try to get these economies to grow. This means foreswearing austerity -- look how poorly Greece, Portugal, and England are now doing with their austerity budgets (though Geithner praised England's).
What's needed instead is serious stimulus in Germany and elsewhere to generate growth. But we are fighting economic ignorance in the guise of educated, articulate, ever-so-serious men in nice suits. This happened before in the 1930s. These are really tough guys with strong gut feelings that the weak or disadvantaged just better get a grip. And maybe there is a bit of prejudice towards those in their southern rim -- or if not prejudice, a rather remarkable lack of compassion. To them, we can only say: Remember America in its finer moments after World War II... please.