What Europe — and the U.S. — Should Be Doing

From “Hey, Not So Fast On European Austerity,” Christina D. Romer, NYT:

“The result is that austerity is uniquely destructive right now.  Indeed, because of the harsh effect of budget cutting on growth, debt-to-GDP ratios in Europe have continued to rise.

“The core of a more sensible approach is to pass the needed budget measures now, but to phase in the actual tax increases and spending cuts only gradually — as economies recover.  To use economists’ terminology, the measures should be backloaded.

“They should also be specific — no more deficit targets without specifying how they’ll be  achieved.  Instead, lay out right now whose taxes will be raised and what spending will be cut.  And specify when the measures will take effect — either along a set schedule, or tied explicitly to indicators of economic recovery.

[C]ountries that are not in distress, both inside and outside Europe, could help by stimulating their own economies.  For example, Germany has a relatively modest long-run deficit and an enormous trade surplus.  A tax cut for German consumers would raise domestic growth at a time when it’s anemic, and increase imports from its neighbors, helping them to grow as well.

“What about the United States, which faces a terrible long-run budget problem, but no immediate threats from the bond market?  The best policy here is to combine the backloaded consolidation I’m recommending for troubled countries with the short-run stimulus I’m advocating for countries like Germany.  We could enact something like the Bowles-Simpson plan to reduce the deficit sharply over 10 years, and include in it more near-term investment in infrastructure, education and scientific research.”

Dream on, Christina.  Angela Merkel is not about to listen to you, and neither is Mitt if he is elected.  If President Obama wanted to take your advice, you’d still be Chairwoman of his Council of Economic Advisers.

While the Storm Clouds Gather, Far Across the Sea…

Once again (see WWI, WWII), we will get dragged into Europe’s mishegas and suffer for it.  In a global economy, the Atlantic Ocean really is just a pond, or maybe just a puddle.

From “Europe’s Economic Suicide,” Paul Krugman, NYT:

“The question then was whether this brave and effective action [the European Central Bank’s making money available to banks late last fall] would be the start of a broader rethink, whether European leaders would use the breathing space the bank had created to reconsider the policies that brought matters to a head in the first place.

“But they didn’t.  Instead they doubled down on their failed policies and ideas.

“Consider the state of affairs in Spain, which is now the epicenter of the crisis.  Never mind talk of recession; Spain is in full-on depression, with the overall unemployment rate at 23.6 percent…, and the youth unemployment rate over 50 percent.  This can’t go on — and the realization that it can’t go on is what is sending Spanish borrowing costs ever higher.

“[T]he prescription coming from Berlin and Frankfurt is, you guessed it, even more fiscal austerity.

“This is, not to mince words, insane.  Europe has had several years of experience with harsh austerity programs, and the results are exactly what students of history told you would happen:  such programs push depressed economies even deeper into depression.  And because investors look at the state of a nation’s economy when assessing its ability to repay debt, austerity programs haven’t even worked as a way to reduce borrowing costs.

The Continent needs more expansionary monetary policies, in the form of a willingness…on the part of the European Central Bank to accept somewhat higher inflation;  it needs more expansionary fiscal policies, in the form of budgets in Germany that offset austerity in Spain and other troubled nations around the Continent’s periphery, rather than reinforcing it.

“What we’re actually seeing, however, is complete inflexibility.

“Rather than admit that they’ve been wrong, European leaders seem determined to drive their economy — and their society — off a cliff.”  Emphasis added.

The lamps are going out all over Europe, and we shall not see them lit again in President Obama’s first term, which may make it his only term.  He’s not just facing Mitt, he’s facing Merkel.

Germany Is Leading Europe Off a Cliff

Predictions for 2012 are all over the map, but one area where there is consensus is that Europe is heading for a recession.*  The question is how deep it will be and how much it will affect the U. S. (and President Obama’s re-election).

The Europeans are grimly following Germany’s Angela Merkel off the cliff of austerity, rather than using short-term stimulus to promote growth, which will lead to further contraction of economies in Greece, Italy and Spain.

I agree 110% with Charles Wyplosz, an economics professor in Geneva:  “We’re going straight into a wall with this kind of policy.  It’s sheer madness.”

I also agree with Julian Callow, the chief European economist for Barclays, when he talks about the wimpiness of the European Central Bank:  “Europe is going about this the hard way.  It’s not really using the central bank to alleviate these pressures in a dominant way.”

Once again, Germany is messing with the rest of Europe and with us.  Obama has more to fear from the Germans than the Republicans.

*See “Austerity Reigns Over Euro Zone As Crisis Deepens,” by Nelson D. Schwartz, NYT

The Fourth Reich?

Angela Merkel is saying that the answer to Europe’s debt crisis is “not less Europe but more.”  More Europe really means more Germany telling other euro zone members what to do and how to run their governments.  We’ve seen this movie before in 1870, 1914, and 1939.

It was a tad insensitive of Merkel to say that Europe is facing “the most difficult hours since World War II.”  Um, whose fault were all those “difficult hours” under the Nazis?

I don’t think we have to worry about “more Europe.”  Ain’t gonna happen.  But the shift to less Europe won’t be pretty.

Papandreou Scurries Home, Tail Between His Legs

After promising his people a referendum on the bailout plan for their economic crisis, Greek Prime Minister George Papandreou had to go home from Cannes and tell them that Angela Merkel and Nicolas Sarkozy vetoed it.  The Germans control everything, the French roll over, and the Greek government is just a puppet.  You know, European history.

Not only is the referendum dead, so is Mr. Papandreou politically.  He’s promised to resign and give way to a coalition government that will approve the bailout without that pesky referendum.

Who was the genius who decided to hold the G-20 meeting in Cannes this time around?  It’s not a film festival, people, it’s a worldwide economic crisis.