This is the way the euro endsnot with a bang but with bunga bunga. Not long ago,European leaders were insisting that Greece could and should stay on the euro while paying its debts in full. Now,with Italy falling off a cliff,its hard to see how the euro can survive at all.
But whats the meaning of the eurodebacle? As always happens when disaster strikes,theres a rush by ideologues to claim that the disaster vindicates their views. So its time to start debunking.
First things first: The attempt to create a common European currency was one of those ideas that cut across the usual ideological lines. It was cheered on by American right-wingers,who saw it as the next best thing to a revived gold standard,and by Britains left,which saw it as a big step toward a social-democratic Europe. But it was opposed by British conservatives,who also saw it as a step toward a social-democratic Europe. And it was questioned by American liberals,who worried about what would happen if countries couldnt use monetary and fiscal policy to fight recessions.
So now that the euro project is on the rocks,what lessons should we draw?
Ive been hearing two claims,both false: that Europes woes reflect the failure of welfare states in general,and that Europes crisis makes the case for immediate fiscal austerity in the United States. The assertion that Europes crisis proves that the welfare state doesnt work comes from many Republicans. For example,Mitt Romney has accused President Obama of taking his inspiration from European socialist democrats and asserted that Europe isnt working in Europe. The idea,presumably,is that the crisis countries are in trouble because theyre groaning under the burden of high government spending. But the facts say otherwise.
Its true that all European countries have more generous social benefitsincluding universal health careand higher government spending than America does. But the nations now in crisis dont have bigger welfare states than the nations doing wellif anything,the correlation runs the other way. Sweden,with its famously high benefits,is a star performer,one of the few countries whose GDP is now higher than it was before the crisis. Meanwhile,before the crisis,social expenditurespending on welfare-state programswas lower,as a percentage of national income,in all of the nations now in trouble than in Germany,let alone Sweden.
Oh,and Canada,which has universal health care and much more generous aid to the poor than the United States,has weathered the crisis better than we have.
The euro crisis,then,says nothing about the sustainability of the welfare state. But does it make the case for belt-tightening in a depressed economy?
You hear that claim all the time. America,were told,had better slash spending right away or well end up like Greece or Italy. Again,however,the facts tell a different story. First,if you look around the world you see that the big determining factor for interest rates isnt the level of government debt but whether a government borrows in its own currency. Japan is much more deeply in debt than Italy,but the interest rate on long-term Japanese bonds is only about 1 per cent to Italys 7 per cent. Britains fiscal prospects look worse than Spains,but Britain can borrow at just a bit over 2 per cent,while Spain is paying almost 6 per cent.
What has happened,it turns out,is that by going on the euro,Spain and Italy in effect reduced themselves to the status of third-world countries that have to borrow in someone elses currency,with all the loss of flexibility that implies. In particular,since euro-area countries cant print money even in an emergency,theyre subject to funding disruptions in a way that nations that kept their own currencies arentand the result is what you see right now. America,which borrows in dollars,doesnt have that problem. The other thing you need to know is that in the face of the current crisis,austerity has been a failure everywhere it has been tried: no country with significant debts has managed to slash its way back into the good graces of the financial markets. For example,Ireland is the good boy of Europe,having responded to its debt problems with savage austerity that has driven its unemployment rate to 14 per cent. Yet the interest rate on Irish bonds is still above 8 per centworse than Italy.
The moral of the story,then,is to beware of ideologues who are trying to hijack the European crisis on behalf of their agendas. If we listen to those ideologues,all well end up doing is making our own problemswhich are different from Europes,but arguably just as severeeven worse.