THE BLOG
12/15/2011 10:02 am ET Updated Dec 06, 2017

Eurozone Woes - Is The Union Falling Apart?

Budgets, deficits, and austerity. Those three words seem to be all we hear out of Europe these days. The new proposed treaty amendments focus nearly exclusively on centralizing spending oversight and balancing budgets. It seems that German chancellor Angela Merkel (who, by the way, bears a striking resemblance to the Tennessee women's basketball head coach) has gotten her way at the Euro summit meeting, with French President Nicolas Sarkozy gleefully clutching at her fingers. But the real truth lurks ominously -- that Europe may be falling apart.


Bad economics

Austerity is bad for growth. Well, that might be an overstatement -- but at the least there must be stimulus measures to compensate for growth-restricting debt reduction measures. There is a reason why the World Bank has scaled back its austerity policies in its developing country lending programs -- its own studies show that externally-imposed austerity measures actually increase the poverty rate.

Professor William Easterly, with whom I had the chance to work as an undergraduate at New York University, has devoted his career (along with other Nobel-winning economists) to showing that so-called "structural adjustment" loans from the IMF and World Bank -- loans that require concomitant spending cuts and privatization -- serve to increase poverty. This is especially true in countries with pre-existing large disparities in wealth (which exist in nearly every wealthy country in the world, including the USA).

What have draconian austerity accomplished in Greece? Well, unemployment is at a record high of 18.4%, disproportionately affecting the younger generation. And for Ireland, praised by Merkel as an "outstanding example" of fiscal responsibility? Retail sales have fallen in the past year by 3.8 percent -- even on essentials like textbooks and shoes. The New York Times quotes one Irish nurse as saying "a lot of people are just trying to get by week to week."

The Economist has warned that use of the Euro is dangerously similar to the pre-Depression currency tying to the gold standard, preventing countries from devaluing their currencies to reduce trade deficits (something all major world economies including the USA and China do every day). Would it be so bad for Greece's economic growth if the country left the monetary union and returned to the drachma?

A little-known fact about President Franklin Roosevelt is that, after small gains in the economy from 1932 to 1935, he shifted his economic policy towards balancing the budget. That same Economist article warns that this led to a recession within the depression:

In 1937 and 1938, the recession within a depression brought a drop in real GDP of 11% and an additional four percentage points of unemployment, which peaked at 13% or 19%, depending on how you count it.

Bad politics

Economics and politics are inextricably linked, and there is precedent for otherwise democratic nations to turn to fascism when economic hardship appears insurmountable. Countries throughout Europe have been taking sharp turns to the right for years now -- France, the Netherlands, Sweden, Austria, and now Hungary. In Italy, a far-right gunman shot two Senegalese merchants dead in the streets of Florence two days ago -- in broad daylight.

Hungary, a nation with a fascist past, is scarily reminiscent of European's regression from democracy. According to Paul Krugman of the New York Times, the governing center right party Fidesz is currently attempting to pass a bundle of laws that would stifle judicial independence, create gerrymandered districts designed to make it almost impossible for other parties to form a government, pack courts with party loyalists, crack down on independent media, and effectively criminalize the leading leftist party.

Weakening alliances

On top of this, even the most stable and powerful players within the European Union seem to be drifting away from each other. Despite what looks like an unbreakable cooperation pact, a rift may be forming between France and Germany. A New York Times survey on the issue cites domestic politics, cultural differences, and varying views on the Euro for the split. Britain's recent behavior has, of course, not made Europe any happier with it.

Within France, meanwhile, members of the Partie Socialiste (PS), of which DSK was once the leading candidate to challenge Sarkozy for the Presidency in 2012, have criticized Merkel for "abusing her dominant position and using hegemonic procedures" during the Euro-crisis talks. The French Foreign Minister Alain Juppé in turn reproached the PS for threatening to raise the "old demons of Germanophobia."

Can we pump the brakes?

Like a Puegeot weaving through the roundabout at the Arc de Triomphe, the Eurozone talks seem to be moving quickly and recklessly with a course charted by the biggest and most powerful actors. But can we pump the brakes and re-evaluate what seems to be a set of failing policies?

The original goals of the European Union of were peace, stability, security, economic solidarity and the promotion of humanitarian values. In the all-out effort to retain Moody's AAA status, it is integral to keep those goals ahead of us, not in the rearview mirror. Let's not get out of the car just yet.