The outcome of the Italian elections should send a clearmessage to Europe’s leaders: the austerity policies that they have pursued arebeing rejected by voters.
The European project, as idealistic as it was, was always a top-downendeavor. But it is another matter altogether to encourage technocrats to runcountries, seemingly circumventingdemocratic processes, and foistupon them policies that lead to widespread public misery.
While Europe’s leaders shy away from the word, the reality is that muchof the European Union is in depression. The loss of output in Italy since thebeginning of the crisis is as great as it was in the 1930’s. Greece’s youthunemployment rate now exceeds 60%, and Spain’s is above 50%. With thedestruction of human capital, Europe’s social fabric is tearing, and its futureis being thrown into jeopardy.
The economy’s doctors say that the patient must stay the course.Political leaders who suggest otherwise are labeled as populists. The reality, though, is that thecure is not working, and there is no hope that it will – that is, without beingworse than the disease. Indeed, it will take a decade or more to recover thelosses incurred in this austerity process.
In short, it is neither populism nor shortsightedness that hasled citizens to reject the policies that have been imposed on them. It is anunderstanding that these policies are deeply misguided.
Europe’s talents and resources – its physical, human, andnatural capital – are the same today as they were before the crisis began. Theproblem is that the prescriptions being imposed are leading to massiveunderutilization of these resources. Whatever Europe’s problem, a response thatentails waste on this scale cannot be the solution.
The simplistic diagnosis of Europe’s woes – that the crisiscountries were living beyond their means – is clearly at least partly wrong.Spain and Ireland had fiscal surpluses and low debt/GDP ratios before thecrisis. If Greece were the only problem, Europe could have handled it easily.
An alternative set of well-discussed policies could work.Europe needs greater fiscal federalism, not just centralized oversight of nationalbudgets. To be sure, Europe may not need the two-to-one ratio of federal tostate spending found in the United States; but it clearly needs far moreEuropean-level expenditure, unlike the current miniscule EU budget (whittled down further by austerity advocates).
A banking union, too, is needed. But it needs to be a realunion, with common deposit insurance and common resolution procedures, as wellas common supervision. There will also have to be Eurobonds, or an equivalentinstrument.
European leaders recognize that, without growth, debtburdens will continue to grow, and that austerity by itself is an anti-growthstrategy. Yet years havegone by, and no growth strategy is on the table, though its componentsare well known: policies that address Europe’s internal imbalances andGermany’s huge external surplus, which now is on par with China’s (and more than twice as high relative to GDP). Concretely, thatmeans wage increases in Germany and industrial policies that promote exportsand productivity in Europe’s peripheral economies.
What will not work, at least for most eurozone countries,is internal devaluation – that is, forcing down wages and prices – as thiswould increase the debt burden for households, firms, and governments (whichoverwhelmingly hold euro-denominated debts). And, with adjustments in differentsectors occurring at different speeds, deflation would fuel massive distortions in theeconomy.
If internal devaluation were the solution, the gold standard would not havebeen a problem in the Great Depression. Internal devaluation, combined withausterity and the single-market principle (which facilitates capital flight andthe hemorrhaging ofbanking systems) is a toxic combination.
The European project was, and is, a great political idea.It has the potential to promote both prosperity and peace. But, rather thanenhancing solidarity within Europe, it is sowing seeds of discord within and between countries.
Europe’s leaders repeatedly vow to do everything necessaryto save the euro. European Central Bank President Mario Draghi’s promise to do“whatever it takes” has succeeded in providing a temporary calm. But Germanyhas consistently rejected every policy that would provide a long-term solution.The Germans, it seems, will do everything except what is needed.
Of course, the Germans have reluctantly come to accept thenecessity of a banking union that includes common deposit insurance. But thepace with which they accede to such reforms isout of kilter with the markets. Banking systemsin several countries are already on life support. How many more will be inintensive care before a banking union becomes a reality?
Yes, Europe needs structural reform, as austerity advocatesinsist. But it is structural reform of the eurozone’s institutionalarrangements, not reforms within individual countries, that will have thegreatest impact. Unless Europe is willing to make those reforms, it may have tolet the euro die to save itself.
The EU’s Economic and Monetary Union was a means to an end,not an end in itself. The European electorate seems to have recognized that,under current arrangements, the euro is undermining the very purposes for whichit was supposedly created. That is the simple truth that Europe’s leaders haveyet to grasp.