I feel as though I am sitting through a Charlie Kindleberger lecture about Europe in the early 1930s. Every country thinking that the global and continental level of aggregate demand was somebody else's business. Every country thinking that if only it could impress international investors with its creditworthiness that investment would flow to it and away from other countries. Nobody willing to act like a hegemon. And nobody upset at the absence of a hegemon willing to act responsibly.
Three more months of this and I will be calling on European sovereigns to incorporate themselves in Delaware as bank holding companies and join the Federal Reserve System...
Austerity has brought Europe to the brink again: Once again European efforts to contain crisis have fallen short…. The architects of current policy and their allies argue that there is insufficient determination to carry on with the existing strategy…. Much of what is being urged on and in Europe is likely to be not just ineffective but counterproductive….
The premise of European policymaking is that countries are overindebted…. The strategy is to provide financing while insisting on austerity…. Unfortunately, Europe has misdiagnosed its problems in important respects and set the wrong strategic course. Outside of Greece, which represents only 2 percent of the eurozone, profligacy is not the root cause of problems. Spain and Ireland stood out for their low ratios of debt to gross domestic product five years ago…. Italy had a high debt ratio but a very favorable deficit position. Europe’s problem countries are in trouble because the financial crisis under way since 2008 has damaged their financial systems and led to a collapse in growth. High deficits are much more a symptom than a cause….
The right focus for Europe is on growth; in this dimension, increased austerity is a step in the wrong direction….
[Fiscal contraction reduces incomes, limiting the capacity to repay debts. It achieves only limited reductions in deficits once the adverse effects of economic contraction on tax revenue and benefit payments are accounted for. And it casts a shadow over future growth prospects by reducing capital investment and raising unemployment, which inevitably takes a toll on the capacity and willingness of the unemployed to work. These considerations are magnified at the continental level. Slowdowns in one country reduce the demand for the exports of other countries….
Skeptics will rightly wonder how a prescription for more spending by countries that already have trouble borrowing can be correct…. Normally, an individual helps his creditors by borrowing less; but a person who stops borrowing to finance commuting to his job does his creditors no favor. A country’s income is determined by spending, so a country that pursues austerity to the point where its economy is driven into a downward spiral does its creditors no favor…. Only if growth is restored can the euro endure and European financial problems be resolved. If there was ever a situation that called for a collective response, this is it…