As real austerity begins to kick in, the political situation will become simply untenable.
Yes, fiscal stabilization in Europe is desired at all costs, but the reality of what is entailed to do this – absent adopting other Keynsian solutions in the mix - will without doubt destroy what is left of the EU’s political legitimacy.
I am not an economist and I don’t play one on the tee vee. I freely admit I am supremely unqualified to write or speak intelligently on Europe’s fiscal mess. And yet, perhaps purely by serendipitous coincidence, others have noted Keynes is fatally absent in today’s policy-making circles. Henry Farrell and John Quiggin, the latter the author of the great Zombie Economics, have written in the current edition of Foreign Affairs:
“. . . institutionalizing austerity will badly damage European economies in the short term – and the long-term consequences will be even worse. European politicians worry about the economic consequences if their attempts at fiscal stabilization fail. They should be far more worried about the political consequences.”After Greece was caught cooking the books and Ireland was caught out as ridiculously profligate, when bondholders ran for the exits, the EU managed to contain the immediate crisis by creating the European Financial Stability Facility. This has the power to issue bonds and raise money to help eurozone states. The Facility stepped in with the International Monetary Fund provide short-term relief.
Beyond the short-term, however, it’s not a pretty picture. Portugal is likely to receive 50-100 billion euros over the next few months. If Spain also requires a bailout, the Facility will fall short. Default is not an option in Europe: the only absolute truth is that so long as a eurozone exists, there will be no Argentinas – at least as long as Germany has anything to say about it. As a result, Germany sees no alternative except making ruthless cuts in government spending. This seems fruitless: bondholders are likely to remain unconvinced in part because they know such cuts will not be politically sustainable.
As the authors point out, the EU is in mortal danger of “compounding its ongoing economic crisis with a political crisis of its own making”.
The only way out is Keynes:
“The short-term solution is clear – even if the European Central Bank, which is still fighting the war against the inflation of the 1980s and 1990s, refuses to recognize it. The solution is a one-off combination of market purchases of bonds and other financial assets, temporarily higher inflation, and fiscal support with the issuance of a common European bond. Quantitative easing, and higher inflation would help ease the pain of adjustment, and a European bond would allow the weaker eurozone states to raise money on international markets. All of this would shore up the euro long enough to allow for further-reaching reforms down the road.”Everyone would have to make compromises:
“The major euro bondholders would have to bear some of costs – as they should, since they lent excessively during the first years of this century – through either explicit haircuts (in effect a discount of their bonds’ value) or inflation. Germany might not enjoy experiencing temporarily higher inflation, but if this were a one-time cost, it could probably live with the results – as long as it was also reassured that the long-term gain would be stability in the eurozone.”Sadly, even if I thought policy-makers appreciated the peril of continuing down our current road to ruin, I’ve yet to see a European politician emerge with the courage and leadership qualities necessary to forge the required consensus.
Which makes my disappointment in Obama – who possesses such qualities – all the more painful.
