Those Revolting Europeans

[Dave Anderson]

Paul Krugman! Pretty much the only voice of sanity on economics in the
mainstream media!

Dave

http://www.nytimes.com/2012/05/07/opinion/krugman-those-revolting-europeans.html?_r=1&smid=fb-share

OP-ED COLUMNIST
Those Revolting Europeans
By PAUL KRUGMAN
Published: May 6, 2012


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!

What is true is that Mr. 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 two 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 the 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 that members of
Europe’s policy elite keep proclaiming that 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, the krona (and also had the
courage to let its banks fail and default on their debts). Sure
enough, 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 the 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 the nations now in crisis — which were booming,
and 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 the Germans imagine, an argument for
unilateral austerity in Southern Europe; it’s an 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.

A version of this op-ed appeared in print on May 7, 2012, on page A23
of the New York edition with the headline: Those Revolting Europeans.