Part 1 of 2
For many years progressives in the US have looked longingly to the social democratic states of Europe, and with good reason. Europeans enjoy a quality of life significantly higher than Americans, with more leisure time, better healthcare, and massively less social violence. Europe has extended this quality of life far more equitably, and has done so while producing far less environmental destruction. In fact, if the Occupy movement’s demands were actually met, the kind of society we might evolve toward would be basically the kind that Europe already has.
So as the crisis in Europe increasingly appears headed toward global catastrophe, it’s worth realizing that not only is the brutal neoliberalism of the US mired in crisis, so too is the much more pleasant version in Europe.
This debate falls along lines that Americans will recognize. On one side are the advocates of austerity, who see the problem as arising from the incontinent spending and slow growth of the southern states (Greece, Spain, Portugal, Italy). Their solution is government budget cuts to reduce deficits and neoliberal reforms to increase the power of capital over labor, which will supposedly spur growth and indirectly reduce the debt problem by increasing government revenue and shrinking the size of debt relative to GDP. For the austerity side, the problems in the southern economies are fundamentally structural: rigid labor markets, too much public ownership, excessively large government workforces. Germany in particular has neoliberalized its labor market far more than other European states in the last decade, and attributes its success in weathering the crisis to this and responsible spending policies. Germany also wields hegemony over the institutions of the European economy, so the austerity advocates have dominated the policy process to an even greater extent in Europe than in the US.
On the other side are those who see the crisis itself and misguided austerity policies as the forces that have made debt a concern. They argue that the eurozone’s monetary system is the main reason that things keep getting worse because the European Central Bank, dominated by austerity advocates, refuses to extend enough credit to the deeply indebted countries to allay the doubts of bond traders. As bond traders increasingly fear that the southern countries (and now even France) could default, they drive the costs of borrowing through the ceiling and threaten to make default a self-fulfilling prophecy.
For the opponents of austerity, the solution is to make the ECB a proper central bank supplying adequate liquidity to all members to prevent a run on their bonds, combined with stimulus spending to promote growth. Many agree that economic competitiveness is a real problem in the south and that labor costs need to be reduced, but that doing so through inflation would be far less destructive than forcing wages down through severe unemployment brought on by austerity. That is, with an inflationary monetary policy (which the ECB has so far resolutely refused), nominal German wages would rise (but stay the same in real terms) while nominal wages in the south would stay the same, drawing capital south. Thus wages in the south would actually fall in real terms, but without the devastating effects of outright wage deflation.
Simultaneously, an inflationary policy would devalue the euro against other currencies, stimulating the domestic economy by making exports cheaper and imports more expensive. Inflation would also reduce the debt burden on the southern countries. Advocates of inflation see much less of a structural problem in the southern economies; they argue instead that the problem lies in policy-erected blockages impairing the flow of credit and capital.
On policy grounds, the progressives clearly have the stronger argument here. If Italy or Spain had its own central bank, it would have no trouble selling its bonds. Japan, for example, has a massively greater debt burden than even the worst indebted in Europe and a two-decade failure of growth but faces no attacks from bond traders. What’s more, as has been proven time and again in the crisis (and which has been orthodox economic theory since the Depression), government austerity is always contractionary. The austerity advocates have insisted that the only solution is to force the spendthrift southern states to cut their government budgets in exchange for bailouts. But by shrinking their economies, this approach makes the debt burden a far more intractable problem, not to mention making people’s lives much worse. Only the power of neoliberal ideology has been able to overcome the massive empirical evidence that austerity will deepen the crisis.
Yet what if the austerity side has grasped part of the larger problem that escapes the inflation advocates? What if the fundamental problem with the European economy really is structural rather than a result of policy mistakes over the last three years? What if the ECB and German government converted to the inflationists’ position and in the short term brought the crisis under control, only to find themselves facing a long-term failure of growth?
Continue reading: Part 2
Continue reading: Part 2