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http://www.nytimes.com/2012/07/02/opinion/krugman-europes-great-illusion.html?ref=opinion
MADRID
Over the past few months I’ve read a number of optimistic assessments of
the prospects for Europe. Oddly, however, none of these assessments
argue that Europe’s German-dictated formula of redemption through
suffering has any chance of working. Instead, the case for optimism is
that failure — in particular, a breakup of the euro — would be a
disaster for everyone, including the Germans, and that in the end this
prospect will induce European leaders to do whatever it takes to save
the situation.
I hope this argument is right. But every time I read an article along
these lines, I find myself thinking about Norman Angell.
Who? Back in 1910 Angell published a famous book titled “The Great
Illusion,” arguing that war had become obsolete. Trade and industry, he
pointed out, not the exploitation of subject peoples, were the keys to
national wealth, so there was nothing to be gained from the vast costs
of military conquest.
Moreover, he argued that mankind was beginning to appreciate this
reality, that the “passions of patriotism” were rapidly declining. He
didn’t actually say that there would be no more major wars, but he did
give that impression.
We all know what came next.
The point is that the prospect of disaster, no matter how obvious, is no
guarantee that nations will do what it takes to avoid that disaster.
And this is especially true when pride and prejudice make leaders
unwilling to see what should be obvious.
Which brings me back to Europe’s still extremely dire economic situation.
It comes as something of a shock, even for those of us who have been
following the story all along, to realize that more than two years have
passed since European leaders committed themselves to their current
economic strategy — a strategy based on the notion that fiscal austerity
and “internal devaluation” (basically, wage cuts) would solve the
problems of debtor nations. In all that time the strategy has produced
no success stories; the best the defenders of orthodoxy can do is point
to a couple of small Baltic nations that have seen partial recoveries
from Depression-level slumps, but are still far poorer than they were
before the crisis.
Meanwhile the euro’s crisis has metastasized, spreading from Greece to
the far larger economies of Spain and Italy, and Europe as a whole is
clearly sliding back into recession. Yet the policy prescriptions coming
out of Berlin and Frankfurt have hardly changed at all.
But wait, you say — didn’t last week’s summit meeting produce some
movement? Yes, it did. Germany gave a little ground, agreeing both to
easier lending conditions for Italy and Spain (but not bond purchases by
the European Central Bank) and to a rescue plan for private banks that
might actually make some sense (although it’s hard to tell given the
lack of detail). But these concessions remain tiny compared with the
scale of the problems.
What would it really take to save Europe’s single currency? The answer,
almost surely, would have to involve both large purchases of government
bonds by the central bank, and a declared willingness by that central
bank to accept a somewhat higher rate of inflation. Even with these
policies, much of Europe would face the prospect of years of very high
unemployment. But at least there would be a visible route to recovery.
Yet it’s really, really hard to see how such a policy shift could come about.
Part of the problem is the fact that German politicians have spent the
past two years telling voters something that isn’t true — namely, that
the crisis is all the fault of irresponsible governments in Southern
Europe. Here in Spain — which is now the epicenter of the crisis — the
government actually had low debt and budget surpluses
on the eve of crisis; if the country is now in crisis, that’s the
result of a vast housing bubble that banks all across Europe, very much
including the Germans, helped to inflate. But now the false narrative
stands in the way of any workable solution.
Yet misinformed voters aren’t the only problem; even elite European
opinion has yet to face up to reality. To read the latest reports from
European-based “expert” institutions, like the one released last week by
the Bank for International Settlements,
is to feel that you’ve entered an alternative universe, one in which
neither the lessons of history nor the laws of arithmetic apply — a
universe in which austerity would still work if only everyone had faith,
and in which everyone can cut spending at the same time without
producing a depression.
So will Europe save itself? The stakes are very high, and Europe’s
leaders are, by and large, neither evil nor stupid. But the same could
be said, believe it or not, about Europe’s leaders in 1914. We can only
hope that this time is different.
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