Archives for: May 2012, 15
It wasn't long ago that Ireland was proposed as a model for US economic recovery. Great Britain and Germany were considered good runners up. In fact, the Germany Chancellor Angela Merkel was the preacher to the European Union regarding the path to economic prosperity. Austerity was the linchpin, the essential ingredient to that recovery.
There is an appealing intuitive lesson involved, a sort of moral hazard avoided. Those who behave irresponsibly on the economic front must eventually pay for their spendthrift ways. Time to bite the bullet. Anything else is an affront to common sense.
Germany led the way, dictating to Greece and Italy the harsh medicine they would be forced to swallow. If they were to follow Ireland on the pathway to health, they would have to endure dramatic slashes. Republicans in the United States pointed to Europe as leading the path the US must follow to get out of recession.
Belt-tightening, austerity, bravery in the face of hardship, bite the bullet until your teeth crack. Then enjoy a well earned prosperity. The key word was "earned".
A couple of weeks ago, John Peet, an influential editor of The Economist, was asked about the economic future of Europe.
Well, I think Germany continues to be the absolutely key country in Europe. It's by far the biggest and it's also currently doing best. But the debate in Germany is not very sort of pro-growth at the moment. Some countries not in the eurozone, like Poland and Sweden are doing pretty well. And of the countries that were in trouble, I would say Ireland looks as if it's the best at the moment because Ireland has implemented very heavy austerity programs, but is now beginning to grow again. So there are some examples but when you look at countries like France, Spain, Italy, there's an awful long way to go.
Glowing references to Ireland are harder to find among US pundits these days. Nobel Prize winning economist Paul Krugman posted figures from Ireland's own Central Statistical Office, showing a shocking decline in Irish well being. (Note to our friend John Myste: the data is in chart form, so you may wish to discard it without looking.)
Xenophobic resentment toward Germany's Nazi past, resistance to cold-light-of-day economic reality, and just plain laziness were seen as major reasons for major upset elections in Greece. Hard won austerity measures necessary for economic health were in danger. Italy had already gone down.
French austerity measures as an approach to recovery were a major cause for the electoral defeat of Nicolas Sarkozy. And on Sunday, Angela Merkel, Chancellor and chief economic moralist of Europe got slapped around, as the parliamentary election in North Rhine-Westphalia got taken over by a united opposition. This part of central Germany has been politically divided since approximately the beginning of Creation. This week the Social Democrats and the Green Party together got a majority of votes cast.
It was a major embarrassment for Chancellor Merkel.
The big argument, the only real argument, at least on paper, that conservatives have presented for the anti-Keynesian measures has been investor confidence. If painful austerity measures were put into place, investors would see a seriousness of purpose. Severe grownup policies would signal an end to the self-destructive juvenile joyride. Investors would respond. Growth would come quickly.
Investor confidence turned out to be more measured than the austerity measures had been intended to produce. As more sober thinking takes over, it appears that investors had waited to see what actual numbers were produced. They didn't like the economic activity they saw. What mainstream economists derisively call "the confidence fairy" does not always produce automatic results. "We have nothing to fear but fear itself" does not always translate to the opposite formula. Confidence does not always feed on a confidence that originates from a demonstration of severe resolve.
These are dicey times. The impending doom feared by the current economic masters of Europe may come true as the careful plans of mice and economists go off the charts (with more apologies to friend Myste).
Or, or, or. It may be that, just as the pleasant dreams of austerity promoters failed to materialize, so their fears might also slip away. The best outcome, the best newest hope, may be that somehow Europe will settle into textbook style Keynesian recovery. Deficits followed by recovery followed by a disciplined, but far less painful, austerity with surpluses all around.
That last part may be the harder sell. The elusiveness of austerity during good times is the best argument conservatives have. Oddly, it is never heard.
For now, the bold European experiment in harsh economic policy has given us its first tentative lesson. Starving the patient back to health has produced less health than hunger.