Aug
19
By Paolo von Schirach
Augsut 19, 2012
WASHINGTON – Europe is not even close to fixing its debt crisis. Antonis Samaras, the Greek Prime Minister, will be going to Berlin asking for more flexibility in the implementation of the austerity programs his government promised but not implemented. Of course, he has cause. Austerity alone will do no good to a devastated Greek economy.
Who will solve the crisis?
But the Germans, de facto the eurozone paymasters, do not want to hear this, even though they may have to. They are torn between the desire to let Greece sink, and the fear of what the consequences of any Greek exit from the common currency might bring about. In all this, markets wait for the next move by Mario Draghi and the European Central Bank, as if the monetary authority could magically solve Europe’s crisis –all by itself.
The US is doing a bit better than Europe, but poorly by any historic standard. And yet, even in America there is hope in some magic potion: more easing by the Fed, more stimulus will take care of things.
Tired societies bent on over spending
But this is wishful thinking. The reality is that we have tired societies that have lost economic vibrancy, while the people have become accustomed to benefits whose costs routinely exceed revenue. Massive and growing public debt is the outcome. And yet on both sides of the Atlantic we have a deep reluctance to seriously talk about both: what is to be done to grow faster and how to rein in spending so that we do not go into bankruptcy before we have managed to rev up the economy.
Much of Southern Europe is in such deep trouble that it is really beyond repair. In the US, we re doing a bit better; but we lack determined leadership. Sadly, Americans seem to like the incumbent. Indeed, Barack Obama, a president who has presided over stagnation and who has shown that he prefers to talk about benefits rather than growth, is still doing rather well in the polls, notwithstanding 8.3% unemployment and the worst recovery in modern history. Meanwhile, serious commentators ridicule the fiscal reform plans of Romney and Ryan, his Republican challengers. So, one should conclude that it is better to have no plan at all, hoping that things somehow will be magically fixed. By whom?
Europe and the US in denial
Although the intensity of the problem varies, I see both in Europe and in America a serious denial issue. What we are going through right now is not a temporary problem. The nefarious consequences of protracted dismal growth and high debt have created a new environment in which it is becoming impossible to have any bold initiatives, because they cannot be funded.
But instead of squarely confronting the issues, we try to pretend that things are better than they are. We magnify small good news as if they were real achievements. In so doing, we have created a “new normal” in which enduring mediocrity is actually alright, our new standard. By these metrics, since others are doing a lot worse, we must be doing fine.
Mediocrity is the new benchmark
Indeed, a recent headline in the on line edition of The International Herald Tribune reads: “Recovery in US, though lackluster, trumps Europe’s“. And this is true. But the hard truth is that this is hardly good news. Europe is a disaster while America, growing just a little, is doing very poorly by any historic standard.
Likewise, a financial analyst asked whether we should fear any further deterioration in Europe, answered (with a straight face) that we should take heart because the yield on Spanish 10 year bonds is down to “only” 6.4%. Sure, and as we are at it, let’s celebrate the good news that Greek 10 year bonds are down to “only” 24%, therefore in far better shape than just a few months ago when the yield reached 36%. (Germany’s 10 year bonds are 1.5%, in case you wondered).
Europe is a disaster
Who’s kidding whom here? In Spain unemployment is 24%. Youth unemployment about double that. The country’s regions are essentially bankrupt. The banking system is broken. Even France is in bad shape. High debt and zero growth, while newly elected president Francois Hollande is already down in opinion polls. In all this the French still crave a shorter work week and early retirement –all of this financed, of course, by more taxes on the wealthy. Now that looks like a winning formula for growth, doesn’t it? Less work, more benefits and soak the rich –so that they will pay the social spending bill.
Even in the US there are more votes in promising benefits
In the US it is a bit better; but not much better. Barack Obama, notwithstanding his poor economic stewardship, has still an excellent chance to be re-elected on the strength of his pledge to defend social spending against Republican attacks. Translated into plain language, just like in Europe, the focus in America is on promises to give benefits to more people, not on better ways to produce more wealth. At the rate we are going, at some point without real growth there will be little left to redistribute.
Even Karl Marx admonished that his idea of socialism was not about socializing poverty. A good socialist society had to be predicated on robust growth.
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