Eurozone austerity won't spur growth needed for rebound
Protesters are seen during a demonstration against austerity cuts in Barcelona, Spain. The banner reads in Catalan: "Bankers return the money." (May 15, 2012) Credit: AP
With Europe sliding ever deeper into fiscal quicksand, G-8 leaders met over the weekend and issued a statement emphasizing growth.
It's a fine thing that leaders of some of the world's top economies, including those in Europe, are making the right noises at last. Yet Europe remains in profound trouble, and the G-8 offered nothing concrete for turning around an increasingly desperate situation.
It may be too late. Many European countries have seen their borrowing costs soar even as their economies are shrinking, and the European banking system is on life support. Misguided austerity policies are only making things worse. The euro -- the single currency that was supposed to knit the continent together in peace and prosperity -- has proved more of a straitjacket, keeping individual nations from adjusting for trade imbalances, divergent fiscal policies and differing productivity levels by the time-honored means of currency devaluation.
Having mismanaged this crisis for two years, Europe faces the real risk of a massive financial collapse complete with large-scale unemployment and social unrest. It's inconceivable the United States could avoid being harmed, which is why the Obama administration must do everything it can to get the Europeans to abandon blind budget-cutting in favor of stimulating growth.
Let's be clear on what's going on. Aside from Greece, whose recklessness and dishonesty have rightly been condemned by all, Europe's troubles are not the result of profligacy. The European Union has a lower level of government debt (as a proportion of gross domestic product) than the United States. Spain, one of the worst continental basket cases, is the victim not of government spending but a disastrous housing bubble inflated by cheap euros. So the problem is the single currency, now cemented in place, which may fracture harmfully if Europe sticks to the austerity that voters in Greece and France have already rejected.
The latest source of worry is the Greek election slated for June 17. But it's hard to believe the outcome matters much, since German taxpayers will have to pony up whether Greece's leaders accede to tough international bailout terms or refuse to go along. Germany can pay now by funding more bailouts, or later, if and when Greece collapses. Chances are, the former course will be cheaper. If Greece repudiates its debts, it will fall out of the eurozone. That could trigger bank runs in Spain, Italy and elsewhere, with terrible economic and social consequences sure to reverberate across the Atlantic as well as the Rhine.
A safer bet would be more aggressive action by the European Central Bank to stimulate growth. It would be risky for the ECB to print money, as the Federal Reserve has done. But if Greece abandons the euro -- or vice versa -- the ECB will have no choice but to guarantee deposits in the rest of the eurozone's banks to stave off panicked withdrawals -- and that's even riskier. It's also high time for bonds backed by the entire eurozone. These nations are already on the hook for one another in various ways; euro bonds would at least offer a chance to buy time for changing labor laws and other growth-inhibiting policies.
It's possible none of this will work, but vague statements about the need for growth are unlikely to generate it. And time is running out.
