The outcome of the pro-cyclical policies imposed on the distressed countries in the Monetary Union was a foregone conclusion. Greece is bankrupt, Spain is teetering on the brink, the eurozone is going under, and the rest of the world is getting dragged down with it. The risk of another global recession is high, and a breakup of the common currency area has never seemed as likely. The chaos that such a combination would unleash is not only unfathomable; it is also so terrifying that no one can imagine just looking on in resignation. A sea change is urgently required.
The idea of trying to deleverage over-indebted countries through austerity policies that kill growth is sheer economic nonsense. That approach was predicted to fail, and now it has, as the situation in Greece and Spain makes excruciatingly clear. Nor is there any reason for the list of victims to stop there—it will keep getting longer unless the Europeans break swiftly with the policy they have been pursuing since the spring of 2010. It must be stressed over and over that by undermining growth, austerity automatically worsens the fiscal predicament of the States affected, and is driving the entire region into a crisis it may ultimately prove unable to overcome.
What should be done? There’s only one valid answer: a 180-degree turn away from the economic policy followed up until now.
This requires three simultaneous, urgent changes. 1) The unfolding recession must be short-circuited; 2) governments must be protected against rising borrowing costs; and 3) deficit reduction must be scheduled over longer periods to enable economies to catch their breath. Whatever the specifics, such a policy will necessarily involve unprecedented action by the ECB that boils down to monetization of sovereign debt to a greater or lesser extent. This is not an optional move, either. Assuming it isn’t too late already, it is the only way to put a stop to the destructive spiral in which the European countries have been trapped for over two years now—and which the Monetary Union has no chance of withstanding.
The danger would undoubtedly be less imminent if the global economy hadn’t taken such an abrupt turn for the worse in the last few months. Europe’s leading economic indicators reveal a particularly alarming picture today, bearing an uncanny resemblance to the one at the onset of the crisis in 2008. The latest data available point to a serious deepening of the recession in Italy and Spain. Household spending in both countries, which had previously held up fairly well, is poised for a sharp downward adjustment during the next few quarters. In Italy, retail trade has already slumped beneath the low reached in 2008. In Spain, where purchasing power has contracted by 4 percent over the past twelve months, the household confidence index strongly suggests there will be a similar decline in real consumer spending between now and year-end. Moreover, with the French economy showing flat growth—at best—and Germany feeling the after-effects of shrinking demand for its exports, the unfolding recession appears to be much deeper than anyone previously imagined. It will unquestionably lead to further fiscal deterioration in an increasing number of countries and an unavoidable worsening of the sovereign debt crisis, which is almost sure to balloon into a global systemic crisis. The key fact is that neither the United States nor China are growing fast enough to be in a position to absorb another shock from Europe. Time is running out. Unless there is a sharp, rapid break with previous economic policy, we should soon be bracing ourselves for the worst-case scenario.
