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Europe’s Economic Suicide

By Paul KrugmanOn Saturday The Times reported on anapparently growing phenomenon in Europe: “suicide by economic crisis,” people taking their own lives in despair over unemploymentand business failure. It was a heartbreaking story. But I’m sure I wasn’t theonly reader, especially among economists, wondering if the larger story isn’tso much about individuals as about the apparent determination of Europeanleaders to commit economic suicide for the Continent as a whole.

Just a few months ago I was feeling some hope aboutEurope. You may recall that late last fall Europe appeared to be on the vergeof financial meltdown; but the European Central Bank, Europe’s counterpart tothe Fed, came to the Continent’s rescue. It offered Europe’s banks open-endedcredit lines as long as they put up the bonds of European governments ascollateral; this directly supported the banks and indirectly supported thegovernments, and put an end to the panic.The question then waswhether this brave and effective action would be the start of a broaderrethink, whether European leaders would use the breathing space the bank hadcreated to reconsider the policies that brought matters to a head in the firstplace.But they didn’t.Instead, they doubled down on their failed policies and ideas. And it’s gettingharder and harder to believe that anything will get them to change course.Consider the state ofaffairs in Spain,which is now the epicenter of the crisis. Never mind talk of recession; Spainis in full-on depression, with the overall unemployment rate at 23.6 percent,comparable to America at the depths of the Great Depression, and the youthunemployment rate over 50 percent. This can’t go on — and the realization thatit can’t go on is what is sending Spanish borrowing costs ever higher.In a way, it doesn’treally matter how Spain got to this point — but for what it’s worth, theSpanish story bears no resemblance to the morality tales so popular amongEuropean officials, especially in Germany.Spain wasn’t fiscally profligate — on the eve of the crisis it had low debt and a budget surplus.Unfortunately, it also had an enormous housing bubble, a bubble made possiblein large part by huge loans from German banks to their Spanish counterparts.When the bubble burst, the Spanish economy was left high and dry; Spain’sfiscal problems are a consequence of its depression, not its cause.Nonetheless, theprescription coming from Berlin and Frankfurt is, you guessed it, even morefiscal austerity.This is, not to mincewords, just insane. Europe has had several years of experience with harshausterity programs, and the results are exactly what students of history toldyou would happen: such programs push depressed economies even deeper intodepression. And because investors look at the state of a nation’s economy whenassessing its ability to repay debt, austerity programs haven’t even worked asa way to reduce borrowing costs.What is thealternative? Well, in the 1930s — an era that modern Europe is starting toreplicate in ever more faithful detail — the essential condition for recoverywas exit from the gold standard. The equivalent move now would be exit from the euro,and restoration of national currencies. You may say that this is inconceivable,and it would indeed be a hugely disruptive event both economically andpolitically. But continuing on the present course, imposing ever-harsherausterity on countries that are already suffering Depression-era unemployment,is what’s truly inconceivable.So if Europeanleaders really wanted to save the euro they would be looking for an alternativecourse. And the shape of such an alternative is actually fairly clear. TheContinent needs more expansionary monetary policies, in the form of awillingness — anannounced willingness — on the part of theEuropean Central Bank to accept somewhat higher inflation; it needs moreexpansionary fiscal policies, in the form of budgets in Germany that offsetausterity in Spain and other troubled nations around the Continent’s periphery,rather than reinforcing it. Even with such policies, the peripheral nationswould face years of hard times. But at least there would be some hope ofrecovery.What we’re actuallyseeing, however, is complete inflexibility. In March, European leaders signed afiscal pact that in effect locks in fiscal austerity as the response to any andall problems. Meanwhile, key officials at the central bank are making a pointof emphasizing the bank’s willingness to raise rates at the slightest hint ofhigher inflation.So it’s hard to avoida sense of despair. Rather than admit that they’ve been wrong, European leadersseem determined to drive their economy — and their society — off a cliff. Andthe whole world will pay the price.πηγη:THE NEW YORK TIMES liberals10