May 23, 2011
The Nation, June 6, 2011 Edition
The eurozone crisis is in some ways less complicated in its foundations than most people are making it. The fundamental problem is that Greece, Spain, Ireland, and Portugal are stuck in recession or near-recession and are not allowed to adopt the policies that are necessary to get out of it. In 2009, most countries in the world adopted some combination of expansionary policies to get out of recession: for example, a fiscal stimulus or expansionary monetary policy (witness the more than $2 trillion that the U.S. Federal reserve has created since our recession began). In some cases countries also got a boost from a depreciating currency, which increased their exports and reduced their imports.
The peripheral European countries are stuck in a currency union where their monetary policy is dictated by the European Central Bank (ECB), which is far to the right of the U.S. Federal Reserve and has little interest in helping them. Since they have adopted the Euro, they also do not control their exchange rate, and their fiscal policy is going in the wrong direction, under pressure from the European authorities (the European Commission, ECB, and the International Monetary Fund – IMF).
No wonder then, that Spain has more than 20 percent unemployment, the Greeks have nearly 15 percent unemployment and are sinking further into debt, and Ireland has lost about 17 percent of its income per person since the crisis began. Portugal just signed an agreement with the IMF that is projected to give them two more years of recession.
This does not make any economic sense, except from the point of view of creditors that want to make sure that these countries are punished for their “excesses” – although for the most part, it was not over-borrowing but the collapse of bubble growth and the world financial crisis and recession that brought them to this situation. Unfortunately, the view of the creditors is that which prevails among the European authorities.
IMF Managing Director Dominique Strauss-Kahn, currently jailed on sexual assault charges, understood the futility of some of these policies, particularly in Greece; but he was unable to change them very much, since IMF management is subordinate to the European authorities (and U.S. Treasury). His imminent departure is therefore unlikely to change much, although it may speed up the process of Greece’s inevitable move toward a debt restructuring.
Argentina defaulted on its foreign public debt at the end of 2001 after more than three-and-a-half years of trying the IMF route to recovery and sinking further into recession. The currency was cut loose from the dollar, and although the free-fall of the economy accelerated for one more quarter, it then recovered and grew 63 percent over the next six years. Within three years Argentina had reached its pre-crisis level of output; by contrast, Greece is not expected to reach its pre-recession level of GDP for at least eight years, and it will probably be longer.
When will it end? So long as these governments are committed to policies that shrink their economies, their only hope is that the global economy will pick up steam and pull them out with demand for their exports. This does not look likely in foreseeable future – the rest of Europe is not growing that rapidly and the U.S. economy is still weak.
The governments of Greece, Portugal, and Ireland need to tell the European authorities that they will not accept any “bailout” agreements that do not allow their economies to grow. That has to be the bottom line: help, not punishment. Spain has not yet entered into a loan agreement but its situation is similar. All of these governments have a lot of unused bargaining power, since the European authorities are very much afraid of a default and/or exit from the Euro by any one of them. And the European authorities have the money to help each and every one of these economies recover with expansionary macroeconomic policies. They just need to be told that “there is no alternative.”