The worsening debt crisis in Europe has spread from the relatively small peripheral economies of Greece and Portugal to engulf significantly larger economies in the core of the European Union: the borrowing costs on Spanish and Italian debt are also increasing precipitously. Meanwhile, Germany, the principal economic power of the EU, has up until now remained relatively untouched; their competetive export-led economy has continued to grow, putting Prime Minister Merkel in the position of passing bailouts for struggling countries in return for imposing severe austerity measures. However, with 40% of its exports going to Eurozone countries, the crisis has even caught up with Germany; with a massive decrease in consumption from its European neighbors, German growth ground to a halt last quarter.
Economists and commentators had already pointed out that the EU was facing a choice between the disintegration of the eurozone or the establishment of common institutions of economic and fiscal governance. Today, Angela Merkel and Nicolas Sarkozy (President of France) revealed a bold proposal meant to demonstrate the sort of leadership that this debt crisis has been asking for. A proposal that amounted to the forced economic suicide of the Eurozone:
In what may likely be the most ambitious proposal, Mr. Sarkozy and Mrs. Merkel outlined a plan for each of the euro zone governments to enact legislation that would constitutionally bind their governments to balancing their budgets. This “golden rule” would be expected to be enshrined in the constitutions of all euro members by the middle of next year, the leaders said.
That's right, ladies and gentlemen, the centre-right leadership of Europe has just gone the full Tea Party. Despite extreme economic stagnation and high unemployment throughout Europe, Sarkozy and Merkel are proposing a requirement for a balanced budget amendment for all Eurozone nations. They are propelled by the same right-wing fantasy that when all governments cut their spending in the midst of a recession, it will not depress demand. Rather, despite the continual and documented failure of austerity measures to solve the debt crisis in Greece, they believe that extreme spending cuts, undertaken all at once by the nations of the eurozone, will magically boost the confidence of bondholders enough to reduce borrowing costs. In fact, the effects of such a massive reduction in spending would be utterly devestating to European economies, almost certainly tipping them into severe recession.
Sarkozy and Merkel are right in trying to save the eurozone by coordinating the economic policy of the eurozone states, but the form of that policy is a familiar form of crazy to us. Somehow Angela Merkel and Nicolas Sarkozy have adopted the economic worldview of Jim DeMint and Michelle Bachmann. The death of Keynesian ideology is a disaster which is leading the Western world towards Hooverist economic policy. Much as in the U.S, the political discussion is dominated by long-term debt when it should be focused on the imminent threat of economic recession.
At a time of anemic growth and high unemployment, European governments should be banding together to spend and stimulate growth, instead they are insisting that governments cooperate in removing massive amounts of money from the economy, which will make the situation far worse. Much as political elites on both sides of the Atlantic think they sound serious when talking about debt, the continual failure of austerity measures in decreasing debt has made crystal clear a fundamental truth: the only serious proposal for reducing sovereign debt is a proposal for economic growth.