Global Crisis Blog

No, the Global Crisis is NOT Over –  and Europe and America  Are Making It Much Worse, and May Yet Sink Our Boats!

By Shlomo Maital

  How will historians record the 2007-11 era,  50 years from now?  In a few short sentences:

         European governments, led by Germany, pursued a wholly erroneous policy.  They chose to bail out errant banks, by forcing draconian bailout terms on Greece, Ireland, and Portugal, impoverishing those nations so that the wealthy could be reimbursed for their disastrous and irresponsible mistakes.  Europe chose deficit reduction over fiscal stimulus, thus prolonging the recession.  America deepened the error, as Tea Party candidates pushed President Obama into deficit-reduction mode rather than economy-stimulating mode, further diminishing economic growth. Neither America nor Europe realized, at the time, that the only real way to reduce deficits was to stimulate economic growth, thus boosting tax revenues, by stimulating demand, and replacing weak private consumption and investment demand with public spending on infrastructure.  It took many years of stumbling before America and Europe realized their utter stupidity. But by then, several years of unemployment and stagnation had inflicted enormous and needless suffering.

   What are my sources to support this ‘extreme’ view?

  • Nobel Laureate Paul Krugman, writing in today’s New York Times, excoriates Europe and America, for failing to spur demand and instead squeezing spending to battle fiscal deficits. 
  • Writing in Carnegie Foundation Policy Brief 90, Feb. 2011,  Uri Dadush describes “global rebalancing” as a “dangerous obsession”.  His main point:  “rebalancing” is not needed, because the current account deficits in the West can continue to be financed.  The main agenda, says Dadush, should be sustainable growth.  He notes: “In the United States, short-term growth will be slower in the absence of additional fiscal stimulus; without medium-term fiscal reforms, growth will become unbalanced again and the economy will be vulnerable to a sudden loss of market confidence”. In other words: Another crisis, perhaps sooner rather than later!

  It is frustrating to watch Europe, in particular, led by staid Germany and Chancellor Merkel, struggling to reduce electoral losses in regional elections,  make crises worse again and again, with only the name of the peripheral country changing, from Greece to Ireland to Portugal.  Substantial debt write-off must occur, inflicting pain on the wealthy and the bankers who bear most responsibility in the first place.  It is simply unacceptable to make the poor of Portugal bear the burden. 

      Ireland, Greece and Portugal have a doomsday weapon – leaving the euro bloc.  They would lose, but Germany would lose as well.  If I were they, I would threaten to use this weapon.