Euro sculpture at the European Central Bank in Frankfurt, Germany.

Michael Probst, Associated Press - Ap

In Europe, economic suicide

  • Article by: PAUL KRUGMAN
  • New York Times
  • April 16, 2012 - 9:09 PM

On Saturday, the New York Times reported on an apparently growing phenomenon in Europe: suicides "by economic crisis" -- people taking their own lives in despair over unemployment and business failure.

It was a heartbreaking story. But I'm sure I wasn't the only reader, especially among economists, wondering if the larger story isn't the apparent determination of European leaders to commit economic suicide for the continent as a whole.

Just a few months ago I was feeling some hope about Europe. You may recall that late last fall Europe appeared on the verge of financial meltdown, but the European Central Bank, Europe's counterpart to the Fed, came to the rescue.

It offered Europe's banks open-ended credit lines as long as they put up the bonds of European governments as collateral; this directly supported the banks and indirectly supported the governments, and ended the panic.

The question then was whether this brave action would start a broader rethink -- whether European leaders would use the breathing space the bank had created to reconsider the policies that brought matters to a head.

But they didn't. They doubled down on their failed policies. And it's getting harder to believe that anything will get them to change course.

Consider the state of affairs in Spain, now the epicenter of the crisis. Spain is in full depression, with the overall unemployment rate at 23.6 percent, and the youth unemployment rate at more than 50 percent.

This can't go on -- and the realization that it can't go on is what is sending Spanish borrowing costs ever higher.

It doesn't really matter how Spain got to this point -- but for what it's worth, the story bears no resemblance to the morality tales so popular among European 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, made possible in 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's fiscal problems are a consequence of its depression, not its cause.

Nonetheless, the prescription coming from Berlin and Frankfurt is, you guessed it, even more fiscal austerity.

This is, not to mince words, just insane. Europe has had several years of experience with harsh austerity programs, and the results are exactly what students of history predicted: The depressed economies were pushed even deeper into depression.

And because investors look at a nation's economy when assessing its ability to repay debt, austerity hasn't even worked to reduce borrowing costs.

What is the alternative? Well, in the 1930s -- an era that modern Europe is starting to replicate in ever more faithful detail -- the essential condition for recovery was an exit from the gold standard.

The equivalent move now would be an 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 and politically.

But continuing on the present course, imposing ever-harsher austerity on countries that are already suffering Depression-era unemployment, is what's truly inconceivable.

So if European leaders really wanted to save the euro they would be looking for an alternative course. Its shape is fairly clear.

The continent needs more-expansionary monetary policies, in the form of a announced willingness on the part of the European Central Bank to accept somewhat higher inflation.

It also needs more-expansionary fiscal policies, in the form of budgets in Germany that offset austerity in Spain and other troubled nations around the continent's periphery, rather than reinforcing it.

Even with such policies, the peripheral nations would face years of hard times. But at least there would be some hope of recovery.

What we're actually seeing, however, is complete inflexibility. In March, European leaders signed a fiscal pact that locks in austerity. Meanwhile, key officials at the central bank are emphasizing the bank's willingness to raise rates at any hint of higher inflation.

So it's hard to avoid a sense of despair. Rather than admit that they've been wrong, European leaders seem determined to drive their economy -- and their society -- off a cliff. And the whole world will pay the price.


Paul Krugman's column is distributed by the New York Times News Service.

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