English

Europe’s Impossible Dream

Jul 20 2015

Paul Krugman – The New York Times

There’s a bit of a lull in the news from Europe, but the underlying situation is as terrible as ever. Greece is experiencing a slump worse than the Great Depression, and nothing happening now offers hope of recovery. Spain has been hailed as a success story, because its economy is finally growing — but it still has 22 percent unemployment. And there is an arc of stagnation across the continent’s top: Finland is experiencing a depression comparable to that in southern Europe, and Denmark and the Netherlands are also doing very badly.

How did things go so wrong? The answer is that this is what happens when self-indulgent politicians ignore arithmetic and the lessons of history. And no, I’m not talking about leftists in Greece or elsewhere; I’m talking about ultra-respectable men in Berlin, Paris, and Brussels, who have spent a quarter-century trying to run Europe on the basis of fantasy economics.

To someone who didn’t know much economics, or chose to ignore awkward questions, establishing a unified European currency sounded like a great idea. It would make doing business across national borders easier, while serving as a powerful symbol of unity. Who could have foreseen the huge problems the euro would eventually cause?

Actually, lots of people. In January 2010 two European economists published an article titled “It Can’t Happen, It’s a Bad Idea, It Won’t Last,” mocking American economists who had warned that the euro would cause big problems. As it turned out, the article was an accidental classic: at the very moment it was being written, all those dire warnings were in the process of being vindicated. And the article’s intended hall of shame — the long list of economists it cites for wrongheaded pessimism — has instead become a sort of honor roll, a who’s who of those who got it more or less right.

The only big mistake of the euroskeptics was underestimating just how much damage the single currency would do.

The point is that it wasn’t at all hard to see, right from the beginning, that currency union without political union was a very dubious project. So why did Europe go ahead with it?

Mainly, I’d say, because the idea of the euro sounded so good. That is, it sounded forward-looking, European-minded, exactly the kind of thing that appeals to the kind of people who give speeches at Davos. Such people didn’t want nerdy economists telling them that their glamorous vision was a bad idea.

Indeed, within Europe’s elite it quickly became very hard to raise objections to the currency project. I remember the atmosphere of the early 1990s very well: anyone who questioned the desirability of the euro was effectively shut out of the discussion. Furthermore, if you were an American expressing doubts you were invariably accused of ulterior motives — of being hostile to Europe, or wanting to preserve the dollar’s “exorbitant privilege.”

And the euro came. For a decade after its introduction a huge financial bubble masked its underlying problems. But now, as I said, all of the skeptics’ fears have been vindicated.

Furthermore, the story doesn’t end there. When the predicted and predictable strains on the euro began, Europe’s policy response was to impose draconian austerity on debtor nations — and to deny the simple logic and historical evidence indicating that such policies would inflict terrible economic damage while failing to achieve the promised debt reduction.

It’s astonishing even now how blithely top European officials dismissed warnings that slashing government spending and raising taxes would cause deep recessions, how they insisted that all would be well because fiscal discipline would inspire confidence. (It didn’t.) The truth is that trying to deal with large debts through austerity alone — in particular, while simultaneously pursuing a hard-money policy — has never worked. It didn’t work for Britain after World War I, despite immense sacrifices; why would anyone expect it to work for Greece?

What should Europe do now? There are no good answers — but the reason there are no good answers is because the euro has turned into a Roach Motel, a trap that’s hard to escape. If Greece still had its own currency, the case for devaluing that currency, improving Greek competitiveness and ending deflation, would be overwhelming.

The fact that Greece no longer has a currency, that it would have to create one from scratch, vastly raises the stakes. My guess is that euro exit will still prove necessary. And in any case it will be essential to write down much of Greece’s debt.

But we’re not having a clear discussion of these options, because European discourse is still dominated by ideas the continent’s elite would like to be true, but aren’t. And Europe is paying a terrible price for this monstrous self-indulgence.JULY 20, 2015

Annex:

Greece: Donald Tusk warns of extremist political contagion

Peter Spiegel – Financial Times

Brussels – The bitter stand-off over Greece has given new energy to radical political groups on the left and right, creating a pre-revolutionary atmosphere that Europe has not seen since 1968, the EU leader who brokered Monday’s bailout deal has warned.

Donald Tusk interview
The annotated transcript

Donald Tusk, the former Polish prime minister who now heads the European Council, said he feared “political contagion” from the Greek crisis far more than its financial fallout, arguing that common cause between far-right and far-left groups has been a precursor to some of Europe’s darkest moments of the last century.

“I am really afraid of this ideological or political contagion, not financial contagion, of this Greek crisis,” said Mr Tusk.
“It was always the same game before the biggest tragedies in our European history, this tactical alliance between radicals from all sides. Today, for sure, we can observe the same political phenomenon.”

Mr Tusk, who chairs all EU summits, played a central role in forcing Alexis Tsipras, the Greek prime minister, and Angela Merkel, his German counterpart, to agree terms on Monday that will allow talks to restart on a new €86bn bailout as soon as this weekend.

The new bailout deal, which involves sweeping austerity measures including a requirement to put an estimated €50bn of Greek public assets into a privatisation fund supervised by EU authorities, has led to accusations in Athens that Ms Merkel forced on Greece the kind of punitive conditions Germany was saddled with at the end of the first world war.

Mr Tusk disputed such criticisms, saying he was “100 per cent sure that Germany is not the winner in the context of political power”, particularly since “Germany has to sacrifice much more than other countries” in terms of financial aid it will soon have to send to Athens.

“I can’t accept this argument, that someone was punished, especially Tsipras or Greece. The whole process was about assistance to Greece,” Mr Tusk said.

“When we discuss facts, deeds and numbers, this is the only number on the table: €80bn for Greek assistance, and quite soft conditions. Not only [soft] financial conditions, but political conditions — in fact, without collateral. Come on: what is the reason to claim it’s something humiliating for Greece, or this is punishment for Tsipras?”

Mr Tusk said he had been unsettled by the bitter recriminations that have characterised the contentious six-month Greek negotiations, particularly the anti-EU and anti-German sentiment that he believes has become part of mainstream political discourse.

He said he was taken aback by a speech Mr Tsipras gave to the European Parliament last week where his criticism of Germany — including an argument that whereas Germany was provided “solidarity” and debt relief after the second world war, Greece had been denied similar treatment — was loudly cheered by a large number of MEPs.

“It was the first time I saw radicals with such emotion, in this context anti-German emotion. It was almost half of the European Parliament. This is why I think nobody, but in particular Germany, are political winners in this process.”

Mr Tusk said he was concerned about the far left, which he believes is advocating “this radical leftist illusion that you can build some alternative” to the current EU economic model. He argued those far-left leaders were pushing to cast aside traditional European values like “frugality” and liberal, market-based principles that have served the EU in good stead.

He insisted these beliefs did not influence his negotiations with Mr Tsipras, whose Syriza party has been the most successful far-left party in Europe in decades. Mr Tusk said he took a pragmatic, non-ideological approach to the Greek leader.

Still, he said the febrile rhetoric from far-left leaders, coupled with high youth unemployment in several countries, could be an explosive combination.

“For me, the atmosphere is a little similar to the time after 1968 in Europe,” he said.

“I can feel, maybe not a revolutionary mood, but something like widespread impatience. When impatience becomes not an individual but a social experience of feeling, this is the introduction for revolutions.”July 16, 2015

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