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Peter S. Goodman

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Euro Crisis Inspires Fresh Worries Of Threats To Global Economy

Posted: 04/18/2012 3:13 pm

Europe's economy is like a patient stuck in a hospital run by quack doctors who see sickness as a form of moral failing, and leeches as the preferable cure. The only hope now is that Europe either manages a miraculous recovery or develops a case of something so inarguably lethal that real doctors come running with effective medicine.

Will Europe and its beleaguered currency, the euro, get out of this crisis in one piece? That question is commanding renewed attention as financial markets demand higher rates of interest on loans to the debt-saturated nations at the center of concern, Spain and Italy, thus elevating the prospect that their governments might eventually default. Maybe the euro will endure, and maybe it won't. In any event, Europe seems irretrievably bound for years of retrenchment, diminished living standards and social strife.

"We're going into a long period of stagnation in Europe, with terrible problems that will emerge as a result," declared the former Austrian chancellor Alfred Gusenbauer, speaking Tuesday at Brown University during a conference on the future of the euro, a proceeding that felt much like an autopsy on a body that never should have been born.

"The crisis found us unprepared," said former Italian Prime Minister Romano Prodi. "How to get out of this? It will be extremely difficult."

Continued anxiety about the fate of the euro is bad news not just for Europe, but for the globe as a whole -- and not least for the United States, whose tenuous recovery from the Great Recession is feeling increasingly vulnerable. Europe constitutes the world's largest marketplace. When its people and companies are hunkered down, unable to spend and invest, the consequences ripple everywhere, including to the American factory floor, where a slowing of production is amplifying broader economic worries.

But here's the most frustrating part of Europe's unrelenting crisis and the drag it is imposing on multiple shores: It is both self-inflicted and fixable.

The mantra at Tuesday's conference, held by the Watson Institute for International Studies, was that Europe's problems are not financial in nature, but essentially political. If the members of the eurozone could simply agree to arm their impotent central bank with the authority to sell bonds backed by the full faith and credit of member countries, the crisis would ease. The central bank could backstop the weakest countries in the eurozone and soothe financial markets now fretting over potential sovereign default scenarios. Borrowing costs would come back down, making it easier for the most indebted eurozone member nations to pay their bills.

This, unfortunately, is much like saying that America's economic problems can be easily fixed (which happens to be correct), so long as you ignore the political reality. If Americans could merely agree to lift our tax rates back to the level of the Reagan years, invest the resulting revenues in productive pursuits like education and infrastructure, and then squeeze some savings out of a health care system designed primarily to succor oligopolistic insurance companies, our debt problems would disappear. All true -- and all as politically achievable as forcing Americans to embrace a strict vegan diet.

In Europe's case, the impediments to a proper economic solution stem from the peculiar structure of the eurozone, a currency union without an accompanying political union. Seventeen individual states all share the same money, but still chart their own budgetary courses. In the first decade of the euro, which began trading in 1999, financial markets acted as if the shared currency rendered equivalent the risks of lending to Germany and Greece. The currency masked the fundamental differences that distinguished the fiscal soundness of individual member states, giving less-disciplined governments access to too much credit.

"It was an accident waiting to happen," said Prodi.

Now that the accident is here, with Mediterranean states confronting untenable debts, a lack of political concurrence is preventing the obvious solution: a real central bank that can print euros by issuing bonds backed by all members.

Germany refuses to entertain this idea, disgusted by the prospect of putting its credit on the line for the sake of aiding weaker eurozone member states. This stance is built on a peculiarly German terror of possible inflation -- an outcome that would be wonderful compared to the current alternatives -- and a moralistic desire to punish the profligate. In the conversation that rules Berlin, hard-working, thrifty Germans cannot be expected to finance endless revelry for free-spending Spaniards, Greeks, Portuguese and Italians.

This central notion is responsible for the austerity that Germany has imposed on member states as a condition of the myriad eurozone bailouts that have so far prevented collapse. But this is where we get back to the leeches: Austerity also ensures that Europe cannot grow robustly, enhancing the debt burdens of weaker states.

"Europe is prescribing a medicine that makes the disease worse," Gusenbauer said.

This is now so apparent that even the International Monetary Fund -- traditionally a stalwart advocate of austerity in the face of budget crises, from Indonesia to Argentina -- now warns that Europe has gone too far.

Moreover, austerity imposed as moral curative misses the origins of the crisis. Most of the debtor governments ensnared in the euro mess were not living beyond their means before the crisis. They are now facing impossible debt burdens because they bailed out private banks that lent recklessly. The German refusal to allow euro bonds and the prevailing wave of fiscal austerity is sticking ordinary Europeans with the costs of addressing the sins of wayward banks.

Greece has come to encapsulate the whole euro story in the conventional narrative, but this is bogus. Greece is the only case in which profligacy explains the mess. The Greeks wasted their money on unbridled government spending, corruption and tax avoidance. The rest of the eurozone landed in peril only after the red ink of private banks washed up on public balance sheets. Indeed, Ireland had much smaller debts than Germany as a percentage of its overall economy before the government rescued the banking system. So did Spain.

In the United States, a similarly phony morality play is at work as elites wander around sagely discussing the need for the populace to commence living within its means. American leaders cite fiscal distress as they dismantle many of the institutions that serve regular people, from community colleges to the social safety net. But we did not get into hock by bingeing on classrooms and food stamps. We got here via extravagant tax cuts for the wealthiest people and disastrous wars in Iraq and Afghanistan. Now, in the logic of the moment, the people who rely upon unemployment checks are going to have to pay to square the books.

In the United States, austerity is nothing more than the product of political dysfunction, an inability among people in Washington to acknowledge simple arithmetic: We need to raise taxes to pay for basic government services.

In Europe, austerity may be the sacrifice required to enable Germans to make peace with transferring some of their prodigious wealth to less-affluent neighbors.

If this is the price established by the political marketplace, it may be better than the status quo -- a long slide toward sovereign default big enough to bring down the euro and usher in another global financial crisis. Yet it is also madness, as if the patient neglected by the hospital is best served by chopping off a finger or two to ensure that the doctors finally see his case as requiring emergency intervention.

 
 
 

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