Those Revolting Europeans

The French are revolting. The Greeks, too. And it’s about time. Both countries held elections Sunday that were in effect referendums on the current European economic strategy, and in both countries voters turned two thumbs down. It’s far from clear how soon the votes will lead to changes in actual policy, but time is clearly running out for the strategy of recovery through austerity and that’s a good thing. Needless to say, that’s not what you heard from the usual suspects in the run-up to the elections. It was actually kind of funny to see the apostles of orthodoxy trying to portray the cautious, mild-mannered François Hollande as a figure of menace. He is “rather dangerous,” declared The Economist, which observed that he “genuinely believes in the need to create a fairer society.” Quelle horreur! (source: Paul Krugman – NYTimes – 07/05/2012)

What is true is that Hollande’s victory means the end of “Merkozy,” the Franco-German axis that has enforced the austerity regime of the past two years. This would be a “dangerous” development if that strategy were working, or even had a reasonable chance of working. But it isn’t and doesn’t; it’s time to move on. Europe’s voters, it turns out, are wiser than the Continent’s best and brightest. What’s wrong with the prescription of spending cuts as the remedy for Europe’s ills? One answer is that the confidence fairy doesn’t exist, that is, claims that slashing government spending would somehow encourage consumers and businesses to spend more have been overwhelmingly refuted by the experience of the past 2 years. So spending cuts in a depressed economy just make the depression deeper. Moreover, there seems to be little if any gain in return for pain. Consider the case of Ireland, which has been a good soldier in this crisis, imposing ever-harsher austerity in an attempt to win back the favor of the bond markets. According to the prevailing orthodoxy, this should work. In fact, the will to believe is so strong, members of Europe’s policy elite keep proclaiming Irish austerity has indeed worked, that the Irish economy has begun to recover. But it hasn’t. And although you’d never know it from much of the press coverage, Irish borrowing costs remain much higher than those of Spain or Italy, let alone Germany. So what are the alternatives? One answer, an answer that makes more sense than almost anyone in Europe is willing to admit, would be to break up the euro, Europe’s common currency. Europe wouldn’t be in this fix if Greece still had its drachma, Spain its peseta, Ireland its punt, and so on, because Greece and Spain would have what they now lack: a quick way to restore cost-competitiveness and boost exports, namely devaluation. As a counterpoint to Ireland’s sad story, consider the case of Iceland, which was ground zero for the financial crisis but was able to respond by devaluing its currency, krona (also had the courage to let its banks fail and default on their debts). Iceland is experiencing the recovery Ireland was supposed to have, but hasn’t.

Yet breaking up the euro would be highly disruptive, and would also represent a huge defeat for the “European project,” the long-run effort to promote peace and democracy through closer integration. Is there another way? Yes, there is, and Germans have shown how that way can work. Unfortunately, they don’t understand the lessons of their own experience. Talk to German opinion leaders about the euro crisis, and they like to point out that their own economy was in the doldrums in the early years of the last decade but managed to recover. What they don’t like to acknowledge is that this recovery was driven by the emergence of a huge German trade surplus vis-à-vis other European countries, in particular, vis-à-vis nations now in crisis which were booming, experiencing above-normal inflation, thanks to low interest rates. Europe’s crisis countries might be able to emulate Germany’s success if they faced a comparably favorable environment, that is, if this time it was the rest of Europe, especially Germany, that was experiencing a bit of an inflationary boom. So Germany’s experience isn’t, as Germans imagine, an argument for unilateral austerity in Southern Europe; it’s argument for much more expansionary policies elsewhere, and in particular for the European Central Bank to drop its obsession with inflation and focus on growth. The Germans, needless to say, don’t like this conclusion, nor does the leadership of the central bank. They will cling to their fantasies of prosperity through pain, and will insist that continuing with their failed strategy is the only responsible thing to do. But it seems that they will no longer have unquestioning support from the Élysée Palace. And that, believe it or not, means that both the euro and the European project now have a better chance of surviving than they did a few days ago. 


Acerca de ignaciocovelo
Consultor Internacional

6 Responses to Those Revolting Europeans

  1. Professor Uziel Nogueira says: Economists are very much like Army generals. Some belong to a group of theoreticians that end up teaching at West Point. Others belong to a cadre of appalling officers but brilliant field commanders. One group teaches, the other win wars. Prof PK belongs to the former and teaches at Princeton. His Neo-Keynesian approach to solve the euro zone crisis is a non-starter with any serious policy makers. According to him, the first best solution is a break up of the euro, the common currency. Prof PK loves to talk about the benefits but skip the huge costs. As his argument goes, the highly indebted countries –Greece, Portugal, Spain and Italy- would regain export competitiveness with their own currency. The only drawback is WHAT kind of COMPETITIVE products can be exported to the rest of the world. Olive oils and wine would not do the trick to create a trade surplus big enough to pay up the public debt. The second best solution –warmly received in Berlin — is for Germany to “experience a BIT OF AN INFLATIONARY boom. ” In this case, the country would become an engine of growth for the euro zone, absorbing the exports of its neighbors. The problem is the same as mentioned above. Besides, there is a limit of how much wine and olive oil can be consumed by the German population. After many articles of Prof PK at the NYT, we’re back on square one. His solutions do not fit neatly in his academic trade model, origin of his well deserved Nobel Prize.

  2. It’s being called the “battle of the beards” — Paul Krugman vs. Ben Bernanke. Both are eminent (and bearded) economists: Bernanke, chairman of the Federal Reserve Board; Krugman, a Nobel Prize winner and a prominent New York Times columnist. Krugman accuses Bernanke of being too timid in fighting high unemployment and slow economic growth. Bernanke calls Krugman’s policy proposals “reckless.” What’s going on? Beyond the rhetoric, there’s a serious debate about the Federal Reserve. A decade ago, the Fed was widely seen as all-knowing and powerful. It could cushion business cycles, defuse financial crises and ensure prosperity. No more. Almost everyone thinks unemployment (8.1 percent in April) is declining too slowly. By year-end 2013, it will still be somewhere between 7 and 8.1 percent, according to top Fed officials’ latest estimates. The Fed hasn’t been passive. Since late 2008, it has kept overnight interest rates just above zero. During the 2008-09 financial crisis, its emergency loans to banks and money market funds averted a broader collapse. The Fed also bought more than $2.5 trillion of Treasury bonds and mortgage-related securities in an effort to lower long-term interest rates (studies suggest a decline of 0.7 percentage points or more) and boost stock prices, as investors seek higher returns. But these heroic exertions haven’t yet ignited a robust recovery. What we need now — and what the Fed could supply, says Krugman — is a bit more inflation. This would spur growth and job creation, he argues. The Fed now strives to keep inflation around 2 percent annually, a low level that it views as reassuring the public. Krugman wants the Fed to raise its target range to 3 to 4 percent for five years. “You’d make borrowing more attractive. Sitting on cash would be less attractive,” he says. The logic is straightforward. If prices rise 4 percent instead of 2, consumers and businesses have an incentive to buy now and avoid higher prices later. If interest rates don’t increase (or increase less than inflation), then “real” rates — adjusted for inflation — fall; again, that makes borrowing more appealing. Higher inflation would also erode the “real” value of debt. With a lighter debt burden, households and businesses would feel freer to spend. Another channel would be a cheaper dollar on foreign exchange markets, making U.S. exports less expensive and imports more expensive. (Krugman minimizes this channel, because he thinks Europe and Japan should also pursue higher inflation.) Besides Krugman, some other economists advocate higher inflation. But not Bernanke (…..)

  3. Don Reid: It is fruitless to tell people what they do not want to hear. The difference between liberals (French or otherwise) and children is that if you tell a child they must go to bed, they cry. Liberals say, “I will not!”; blame the need for sleep on someone else; tell you how unfair it is that adults get to stay up longer; and pretend they can just keep playing forever. (I posted this on Yahoo/Finance). I am not ‘in favor’ of the breakup of the Euro. I just don’t see how it will work without surrendering sovereignty which I consider an impossibility. Can anyone ever imagine the Germans letting the Italians and Greeks vote on German policies? The lack of enforcable restrictions is how the EU got where they are today. The difference between the EU and the US is that the US has an irresponsible federal government and the EU has too many irresponsible member countries. Each has created the same problem in different ways. The solution is the same: acceptance that you must live within your means even if that means you can’t live as you like or as well as others live. Even worse, you must live below your means to defray the debt you have created over a 60 year period. If you do this, perhaps in another 60 years, things will get better – perhaps. Is it surprising that this is a hard sell? Everyone understands the situation, but want someone else to make the sacrifices to correct it. Krugman is a gnat.

  4. Tulio: Uziel, a coisa está ficando cada vez mais preta, se isso é possível. Será que haverá uma solução de continuidade?

  5. (Autoria) Comentario del Prof. Uziel Nogueira: Minha leitura da zona euro continua a mesma desde o inicio da crise. Eventualmente, os países altamente endividados -Grécia, principalmente- irão concluir que o custo de manter a moeda comum e maior que os benefícios. O custo de abandonar o euro sera alto. O debacle Argentina de 2001 – em comparação- foi um verdadeiro pic nic. As reformas estruturais –que todavia não foram iniciadas– tem um serio problema de percepção politica: ninguém pode garantir quando irão terminar. O numero de países usando o euro eventualmente sera reduzido dos atuais 17. A liderança alemã na zona euro sairá fortalecida a medida que países ‘weak link’ abandonem a moeda comum.

    Conclusão: Termino o experimento de construção de um estado de welfare para todos os países membros da União Europeia. A lição da periferia europeia e a mesma da experiencia mexicana de integração com EUA. Integrar com pais rico não significa o fim da pobreza. Portugal e uma prova do pensamento do ex embaixador Azambuja: subdesenvolvimento não se improvisa. São necessários 500 anos de experiencia.

  6. Tulio: Sabias palavras do filho da D. Dirce.


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