The Fire Next Time: The Euro Financial Crisis – G-8 to Germany: End Austerity

Posted by AzBlueMeanie:

In advance of the G-8 Summit at Camp David this weekend, Paul Krugman's column on the the Euro financial crisis was decidedly pessimistic with the government in Greece this week rejecting the austerity plan forced on them by European Union leaders a few weeks ago, forcing new elections to be called in Greece. Apocalypse Fairly Soon:

Suddenly, it has become easy to see how the euro — that grand, flawed experiment in monetary union without political union — could come apart at the seams. We’re not talking about a distant prospect, either. Things could fall apart with stunning speed, in a matter of months, not years. And the costs — both economic and, arguably even more important, political — could be huge.

This doesn’t have to happen; the euro (or at least most of it) could still be saved. But this will require that European leaders, especially in Germany and at the European Central Bank, start acting very differently from the way they’ve acted these past few years. They need to stop moralizing and deal with reality; they need to stop temporizing and, for once, get ahead of the curve.

I wish I could say that I was optimistic.

Greece is, for the moment, the focal point. Voters who are understandably angry at policies that have produced 22 percent unemployment — more than 50 percent among the young — turned on the parties enforcing those policies. And because the entire Greek political establishment was, in effect, bullied into endorsing a doomed economic orthodoxy, the result of voter revulsion has been rising power for extremists. Even if the polls are wrong and the governing coalition somehow ekes out a majority in the next round of voting, this game is basically up: Greece won’t, can’t pursue the policies that Germany and the European Central Bank are demanding.

So now what? Right now, Greece is experiencing what’s being called a “bank jog” — a somewhat slow-motion bank run, as more and more depositors pull out their cash in anticipation of a possible Greek exit from the euro. Europe’s central bank is, in effect, financing this bank run by lending Greece the necessary euros; if and (probably) when the central bank decides it can lend no more, Greece will be forced to abandon the euro and issue its own currency again.

This demonstration that the euro is, in fact, reversible would lead, in turn, to runs on Spanish and Italian banks. Once again the European Central Bank would have to choose whether to provide open-ended financing; if it were to say no, the euro as a whole would blow up.

* * *

Realistically, the only way to provide such an environment would be for the central bank to drop its obsession with price stability, to accept and indeed encourage several years of 3 percent or 4 percent inflation in Europe (and more than that in Germany).

Both the central bankers and the Germans hate this idea, but it’s the only plausible way the euro might be saved. For the past two-and-a-half years, European leaders have responded to crisis with half-measures that buy time, yet they have made no use of that time. Now time has run out.

So will Europe finally rise to the occasion? Let’s hope so — and not just because a euro breakup would have negative ripple effects throughout the world. For the biggest costs of European policy failure would probably be political.

Think of it this way: Failure of the euro would amount to a huge defeat for the broader European project, the attempt to bring peace, prosperity and democracy to a continent with a terrible history. It would also have much the same effect that the failure of austerity is having in Greece, discrediting the political mainstream and empowering extremists.

… The whole world is waiting to see whether they’re up to the task.

Meeting at Camp David the leaders of the world’s richest countries banded together to press Germany to abandon its obsession with austerity and to back more pro-growth policies to halt the deepening financial crisis in Europe. The New York Times reports, World leaders urge Growth, Not Austerity:

President Obama for the first time gained widespread support for his argument that Europe, and the United States by extension, cannot afford Chancellor Angela Merkel’s one-size-fits-all approach emphasizing austerity.

Pointedly recognizing “that the right measures are not the same for each of us,” the leaders of the Group of 8 nations, at a meeting hosted by Mr. Obama at Camp David, committed to “take all necessary steps” to strengthen their economies. They said they wanted to keep Greece in the euro zone and vowed to work to promote growth in Europe, though behind the scenes distinct differences remained over what kinds of stimulus policies to pursue.

“Our imperative,” the leaders said in their statement, “is to promote growth and jobs.”

* * *

Even with the future of the European currency union in doubt, Germany has insisted that Europe’s ailing economies tackle their financial problems through spending cuts, a policy that critics say has caused higher unemployment, brought Greece to the edge of bankruptcy and worsened the crises in Spain and Italy. 

The leaders did concede somewhat to Ms. Merkel’s position on austerity, acknowledging that national budget deficits had to be addressed. But they added that spending cuts must “take into account countries’ evolving economic conditions and underpin confidence and economy recovery,” a recognition of how much the austerity packages have dampened consumer and political confidence in Europe.

* * *

Ms. Merkel and Mr. Obama met privately after the meeting ended. In her public remarks, the German chancellor said that growth and deficit-cutting reinforced each other, and that “we have to work on both paths, and the participants have made that clear, and I think that is great progress.”

* * *

Mr. Obama was pushing hard on Saturday for a euro-zone growth package. American officials said they hoped that after the full-court press this weekend at Camp David, Ms. Merkel would be more amenable to the pro-growth argument when she meets with European leaders this week at a summit to come up with specific steps to fight rising debt while spurring the economy.

He said that while Europe’s predicament is “more complicated” since it requires coordination among multiple governments, steps his own government took to blunt the impact of the American financial crisis in 2008 and 2009, including the stimulus, can stand as an example for Europe.

Now if only we could end conservative economics austerity here at home that is depressing our economy and job growth.

Ezra Klein interviewed Paul Krugman on the Rachel Maddow Show about the Euro financial crisis.

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h/t graphic crooksandliars.com