New York Times Editorial, January 31, 2012
European Union leaders failed on Monday to move forward on their most urgent task: increasing the bailout fund to protect Europe’s ailing economies from defaulting on their bonds.
Instead, leaders of 25 of 27 European countries agreed to sign a new fiscal compact that will legally restrict them from fighting recessions with robust fiscal stimulus. Most economists outside the euro zone consider this approach a dangerous one. Those countries account for more than 20 percent of the world’s economy. Condemning them to longer and deeper recessions will drag down economies elsewhere that depend on trade, from the United States to China.
Without a bigger bailout fund, investors will likely keep betting against weakened economies like Italy and Spain, pushing up their interest costs and, consequently, adding to their deficits. Nevertheless, Europe’s leaders deferred action on more money until March. Market speculators may not agree to wait.
The world has gotten used to failed European summit meetings. What is particularly disheartening about this one is that some European leaders seem to believe they succeeded. “Considering the time frame, this was a real masterpiece,” Chancellor Angela Merkel of Germany said of the new fiscal pact. It was only in December that she made clear to other European leaders that adopting a fiscal pact to balance their budgets and reduce debt was an essential precondition for Germany to continuing to pay its fair share of European debt-relief costs.
The fiscal pact imposes substantial fines on any signatory nation whose deficit averages more than 0.5 percent of gross domestic product over a full economic cycle, a condition the United States would have had great trouble meeting over the past three decades. The summiteers also made ritual nods in the direction of more jobs and higher growth, without providing any new money to achieve this.
As the European Union’s biggest economy, and biggest contributor to the bailout fund, Germany continues to determine the approach in managing the Continent’s economic crisis. Others, particularly those needing help paying their bills, have little choice but to go along, whether or not they really believe that German-dictated austerity will help their ailing economies. Many leaders — Prime Minister Mario Monti of Italy, for example — have made clear that they do not.
A leader wiser than Mrs. Merkel would build a stronger European Union by helping her neighbors grow their way out of debt, not squeeze them to the breaking point. A wise leader would also remind German voters that the prosperity of their own export-dependent economy requires sustained demand in neighboring countries.
Poor German leadership in this crisis has exacted an increasing economic and social price from Greece, Ireland, Portugal, Spain, Italy, Belgium and France. The longer Germany insists on putting fiscal austerity ahead of growth, the more likely it becomes that Germany, too, will suffer economic pain.
For many of the last seven decades, I have watched as those advocating "austerity" in the middle of a crisis have held the dominant position. Austerity, or restraint, or holding back....these are code words for both fear and control. There is no way "austerity" by itself can be used as a surrogate for "responsibility"...not now, and not tomorrow, not in North America and not in Europe.
And let's not put all of the responsibility for this regrettable decision on Ms Merkel; there had to be other European leaders who believed that, if they joined in supporting this decision, they would receive less "flack" back home from their electorate. Some have even called this the Merkozy decision, punning on the Merkel Sarkozy leadership.
Crisis is like a medical red flag from the family doctor, "If you don't stop smoking, you will die within two years!"
It make get one's attention; it may even bring about a little shock and thereby a little change of habit. However, it does not bode well for a smoking cessation regime that has much likelihood of success.
In North America too, the calls for "austerity" in the middle of this economic stress/crisis/lowpoint....grow primarily from the neo-cons whose capacity to demonstrate leadership is much less than they are given credit for doing.
Primarily, their fears are playing to the fears of the citizenry. Both are singing from the same song sheet, hoping that not everyone will jump off the dock at their invitation, urging and manipulation. Fears always send one into a "retreat" position, whether it is the fear of budget shortfalls, business or personal bankruptcy, or government's runaway spending. And whatever the public expression of fear, we can be confident that the louder the public fear, the more likely the political leaders will give expression to that fear, fearing themselves that they will not sustain public support, either now or at election time.
Most responsible economists, including the New York Times Editorial Board, believe that a balanced approach of both spending restraint and investment in growth will be more likely to provide a way out of the crisis, without pitting the 99% against the 1%....and some measure of social order, never easy to calculate its "dollar value" is essential, as is a steady flow of government revenues, enhanced only by increasing the number of people working and paying taxes.
That is the position of Paul Krugman, Jeffrey Sachs, (The Price of Civilization), and it is also the position of President Obama. Clearly, the Harpers and Niall Ferguson's and the Republican party sing from a different song sheet, the same one, apparently, being used by Merkozy and friends in Europe.
Many of the talking heads postulate that a weakened Europe will redound on President Obama's election prospects. If European leaders want another dose of George W. Bush's Republican conservative politics and policies, they may have taken one step to make that result more likely. On the other hand, if they come to their senses, seeing the constrictions that are holding their trachial tubes from breathing fully, as well the restrictions they are placing on their compatriot EU members, they might just revise their position and decision.
We are hoping and watching.