The past week has seen a flurry of alarming developments and analyses on the euro zone crisis, which, as I’ve written before, has significant implications for TOL’s coverage area. When the European Central Bank announced a bold plan in late 2011 to effectively offer an open line of credit to European banks, fears of a looming “Eurogeddon” eased. But that European leaders continue to insist on more tax hikes and government spending cuts – what economists call fiscal austerity – for depressed economies like Spain has markets worried again. Last Tuesday, Spanish borrowing costs on the bond markets reached a four-month high on concerns the country will need a bailout.
“… far from abating, the euro crisis has recently taken a turn for the worse,” billionaire financier and philanthropist George Soros wrote in the Financial Times last week. If European leaders, especially in Germany, don’t change course on austerity, the euro will collapse and take the European Union (EU) down with it. Soros added an exclamation point Saturday, at a conference in Berlin hosted by the Institute for New Economic Thinking. Unless something changes, he said:
… the European Union may end in acrimonious recrimination with worse conflicts between European states than before the European Union. That’s about as dismal a prospect as you could have, and I genuinely believe that is where we are heading.
Other experts say the EU is on a disastrous course. In Europe’s Economic Suicide, published this morning, economist and New York Times columnist Paul Krugman calls Germany’s insistence on more austerity “just insane.”
Europe has had several years of experience with harsh austerity programs, and the results are exactly what students of history told you would happen: such programs push depressed economies deeper into depression.
In Spain, unemployment is 24 percent. That’s Great Depression levels, Krugman notes. It and other struggling euro zone economies will only fall further under current policies, and recession will spread to core economies like Germany and France.
The stakes for TOL’s coverage area are just as high as in so-called Old Europe. Many of our countries use the euro, and all are interdependent with the euro zone, whether through investment, trade or remittances. Here’s an example of what I’m talking about: The Czech Republic has a robust, export-driven economy, but when western Europe suffered recession in 2008, demand for Czech goods cratered, and GDP fell 4.7 percent in 2009.
What to do? Soros suggests allowing euro zone members to refinance their debt at the same interest rate but emphasizes that leaders must first recognize the recklessness of existing policies. The hope then, I guess, is that German leaders will wake up to what every economist seems to be saying: extreme austerity is leading Europe off a cliff. Even those who advocate for austerity say the EU is taking a one-sided, destructive approach.
“The trouble is that the euro zone has an austerity strategy but no growth strategy,” writes New York University’s Nouriel Roubini. “And, without that, all it has is a recession strategy …”
Photo from flickr