Are there any alternatives to austerity? Six ideas for fixing Europe
Roughly speaking, here’s the euro zone’s current approach to its debt crisis: Individual countries are pursuing austerity measures to shrink their budget deficits. There’s a bailout fund for countries in truly terrible shape, such as Greece and Portgual. And the European Central Bank is propping up the continent’s rickety banks. Basically, muddle through and hope for the best.
But muddling through doesn’t seem to be working. Voters are now revolting against austerity, especially as the euro zone slides into yet another recession. Countries like Spain are finding that austerity is hurting growth and making deficits harder, not easier, to control. The bailout fund isn’t big enough to prop up countries like Italy and Spain if they run into serious trouble borrowing money. And many poorer euro zone countries are finding it difficult to grow and reduce their trade imbalances so long as they’re yoked to a single currency and a central bank that can’t cater to everyone’s needs.
So many observers are wondering whether Europe will shift course now that France’s newly elected president, Francois Hollande, has called for a change. But what else could Europe do? Here’s a list of six policies that various experts have suggested that the euro zone might consider instead:
1) More inflation from the European Central Bank. More economic growth would make Europe’s problems a lot easier to handle. If Spain and Italy were growing at a healthy clip, their deficits would naturally shrink. One institution that could, potentially, help the euro zone grow faster is the European Central Bank. Here’s Paul Krugman: “The Continent needs more expansionary monetary policies, in the form of a willingness — an announced willingness — on the part of the European Central Bank to accept somewhat higher inflation.” More inflation would help uncompetitive countries like Spain bring down their costs more quickly, and it would potentially spur more spending and growth.
The problem? Both Germany and Europe’s central bank have long been temperamentally hawkish on inflation. Most recently, the ECB declined to cut interest rates, even though the euro zone is tumbling back into yet another recession.
2) More stimulus from euro zone countries that are in sound budget shape. It would be hard for countries like Greece or Spain to borrow money now and spend it on stimulus projects, with the promise of cutting spending later once the economy’s improved. As Joe Gagnon told me a while back, there’s no way to make that promise of future austerity credible — unlike in the United States, where there’s lots of policy inertia, future European parliaments can easily undo past pledges. Lenders would likely balk.
But just because Greece, Italy, Spain, Portugal and others have to rein in their budgets doesn’t mean everyone in the euro zone necessarily has to follow suit. Joseph Stiglitz, for one, has called on wealthier countries such as Germany to invest more in infrastructure and technology to stimulate Europe’s economy. “I hope,” Stiglitz said, “the debate will be what are the things we can do to promote growth rather than how do we strangle each other together.”
3) Open the bailout fund for bigger countries. Right now, Europe’s wealthy countries have bailed out smaller peripheral countries such as Ireland, Portugal and Greece. But some commentators think the bailout fund may need to get even bigger — and extend to countries that threaten to haul down the whole euro zone, like Spain.
Here’s Wolfgang Munchau, writing in the Financial Times: “Fixing the Spanish crisis will have to start with the banks. … The only halfway benign solution I can see would involve a European rescue programme for Spain that focuses specifically on the recapitalisation and downsizing of the financial sector. Spain would also need to undershoot the eurozone’s average inflation rate over many years to redress some of the lost price competitiveness. At the same time, the country needs to go easy on austerity.” The trouble, again, is that this will require more money from wealthy countries like France, Germany, the Netherlands, and Finland.
4) Eurobonds. Many individual members of the euro zone have large budget deficits. Spain’s is 8.5 percent. Ireland’s is 13.1 percent. But if you look at the euro zone as a single entity, things look better. Last year, the euro zone’s deficit was just 4.1 percent of GDP — less than half of the United States’. In theory, Europe should be able to borrow money at fairly cheap rates if it could issue a single bond for the entire continent. And that would give the euro zone some breathing room to deal with its current woes. Many Europeans, from politicians like Hollande to commentators like Gavyn Davies, have called for just such a “eurobond.”
But there are all sorts of hitches. If the euro zone had one single bond, then countries like Spain and Italy would see their borrowing costs fall, but countries like Germany and Finland would have to pay more to borrow money. It could also create moral hazard — spendthrift countries would feel less pressure from investors to rein in their debts. The Economist’s Ryan Avent recently ran through a few proposals from European think tanks to surmount these problems.
5) More fiscal integration. The euro zone, as we’ve seen, is made up of a bunch of wildly disparate countries. German workers are much more productive than Spanish workers, for instance. And that makes it hard for Spain to compete as long as it’s using a currency, the euro, that’s better-suited for more productive workers in Germany.
One idea, then, has been for the euro zone to do what the United States does and redistribute resources from rich to poor. As James Galbraith explained here, the U.S. has long used programs such as Social Security or unemployment insurance or the TVA to lift up the poorer regions and make sure that states don’t implode when they fall into recession. Hollande, for one, has suggested that Europe move in this direction, with wealthier states funding a bigger European Investment Bank that can bankroll industrial projects in poorer countries.
But is that enough? One problem is that thorough fiscal integration could involve some truly colossal sums. Remember, West Germany spent $1.9 trillion over 20 years in an attempt to modernize East Germany. And, because there were no language barriers, millions of East Germans could simply migrate West. Greek and Portuguese workers would have a tougher time doing that.
6) Countries could just start leaving the euro zone. Of course, it’s possible that none of the above ideas would work. Germany doesn’t exactly sound thrilled with the idea of expending further vast resources to prop up countries like Italy and Spain and Greece.
In that case, it’s always possible that individual nations could decide that being part of the euro is an unworkable idea and just leave. Jacob Goldstein explains how this would work for Greece. The country would default on its debt and would no longer have to keep spending money on interest payments. It could also devalue its currency in order to make its exports more competitive. Of course, in the short run, foreign investors would flee Greece, the country would have to slash spending considerably, and its economy would likely collapse.
As Slate’s Matt Yglesias writes, “If Greece tried to exit the [euro] — or more likely was forced out by Spain or Italy cutting the cord — they’d be in for a dose of much more severe austerity. Think about Greek living standards converging with Serbia and Bulgaria.” Still, the fact that it’s a painful option doesn’t mean it’s not an option.