What Ails Europe?
By PAUL RUGRAT
(If you must, read the original here.)
Things are terrible here, as unemployment soars past 20 percent on its way to 30 percent or more. Things are even worse in Greece, Ireland, and arguably in Spain, while Europe as a whole appears to be sliding back into recession.
Why has Europe become the sick man of the world economy? Everyone knows the answer. They haven’t printed or borrowed enough money.
Read an op-ed piece on Europe — or, all too often, an allegedly factual news report (you absolutely can’t believe anything in the media, trust me) — and you’ll probably encounter one of two storylines, which I think of as the Republican European narrative and the German German narrative.
The Republican European story — it’s one of the themes of Mitt Romney’s campaign — is that Europe is in trouble because it has printed and borrowed too much money and that we’re watching the death throes of their so-called welfare state. This favorite right-wing fantasy falls back on the early 1920s, when Germany suffered a killer bout of hyperinflation brought on by money printing.
Did I mention that Germany (after World War I, hyperinflation, the depression, the rise of Nazism, and after the end of World War II) now has a very generous welfare state, is currently a reasonable economic performer, and depends on Turkish immigrants to perform many of its low-value and distasteful tasks?
So let’s do this systematically. Look at the European nations of my choosing who are using the Euro and rank them by the ration of their GDP to debt. Do the troubled PIIGS nations (Portugal, Ireland, Italy, Greece, and Spain) stand out for having unusually catastrophic GDP to debt ratios? Well, yes, but the question becomes “Can’t they just inflate their debt away, as Germany did to great success long ago?” No, because they’re stuck with the Euro, having given up having their own sovereign currencies.
Next up, the post World War II German German story. It is about fiscal responsibility (that is, their free-riding on U.S. provided security throughout the Cold War and beyond) and productivity. This story seems to fit Germany, and a few other non-Euro nations like Canada.
But what about those countries that aren’t on the Euro who seem able to run massive deficits and carry these unimaginable debts without facing much of a crisis at all? For example, Britain (ignore those stories about them being out of money. Lies, all lies, believe me) and the United States can borrow long-term at interest rates of around 2 percent. Why? Because they can create ever more government debt by having their Central Banks purchase the borrowings. It’s like magic: money for nothing, chicks for free!
What about calls for austerity, like cuts, living within one’s means, or even savings? Dismissed: those things are for clueless schmucks.
In other words, the idea we’re on the road to becoming like the PIIGS nations is completely off base because the U.S. is not on the Euro. (However, it should be noted that the PIIGS nations, like the United States government, have been accused of not using generally accepted accounting procedures).
So what does ail Europe? The truth is that the story is mostly demographic and productivity driven. By stupidly having their “elites” lock them into a single currency but without having a work ethic to make that currency work (Germany is the exception that proves the rule), Europe has built an entire continent with too many takers and not enough makers. Sort of like the old Soviet Union, in a way.
Even worse, the creation of the Euro fostered a false sense of security among private investors, unleashing huge and totally unwarranted flows of capital into the nations of Europe and around Europe’s periphery. As a consequence of these inflows, costs and prices rose, they became even more uncompetitive, and nations that had roughly balanced trade as recently as 1999 began running large trade deficits instead. That was the day the music died.
If these PIIGS had their own currencies, like Germany of old, they could and would use devaluation to restore competitiveness. But they don’t, which means that they are in for a long period of mass unemployment and unless they decouple from the Euro, slow, grinding deflation. (Deflation, warranted or not, is a favorite bogey man of the hobby economist community.) Ipso facto, their debt crises are mainly a byproduct of not being able to print and borrow their own money.
Germany could help by reversing its own austerity policies and bailing out the rest of Europe, but it won’t. Here in the United States, we too should reverse the ridiculous and pathetic calls for more austere governmental policies and instead print and borrow more.
Getting the European governments to create more debt would make a huge difference, because otherwise, we in America may face a contagion used to push policies that would be cruel, destructive to the welfare state, or even both. The next time you hear people saying government debt is something that must be repaid at value, here’s what you need to know: they have no idea what they’re talking about.
Print. Borrow. Borrow. Print. Trust me; I’m a writer and an economist.