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By John Weeks and Howard Stein. This article was first published on Project Syndicate.
LONDON/ANN ARBOR – More than four years into the worst economic downturn since the Great Depression, Europe remains mired in a vicious cycle of low or no growth, unsustainable debt, and strict austerity measures. In May, 24.9 million people were unemployed across the European Union’s 27 member states – an increase of nearly two million from last year, and nine million from the first quarter of 2008. In the same month, eurozone unemployment reached 11.1%, with Spain and Greece at Great Depression levels of 24.6% and 21.9%, respectively. Nevertheless, to paraphrase Karl Marx, the policies that created this tragedy seem destined to be endlessly and farcically repeated.Illustration by Dean Rohrer
Existing prescriptions for saving the eurozone will not work. Internal devaluation – cutting wages and benefits across the southern periphery to restore competitiveness – will impede growth further. Nor would the type of liberalizing reforms that contributed to triggering the crisis – including privatization of public resources and deregulation of markets – invigorate the eurozone’s ailing economy. And the idea that a eurozone breakup would help countries to escape stagnation by fostering competition is deeply flawed.
European policymakers must begin to address the euro tragedy with fresh thinking. There are many options for expanding economic activity and employment other than the neoliberal orthodoxies pushed by some economists, the International Monetary Fund, bankers, corporate managers, and sovereign-wealth funds.
First, Europe’s leaders must face the truth about deficits and debt, rather than the cynically filtered faux-facts presented by the European Commission and the IMF. The appropriate debt measure – “net debt” (public liabilities minus all financial assets) – reveals that eurozone countries’ debt burdens are considerably lower than portrayed.
Likewise, according to the IMF’s fiscal-performance indicators, the “primary balance” (government revenue minus government expenditures, excluding interest expenditure) in only three eurozone countries – Slovenia, Ireland, and Spain – shows a deficit in excess of the Maastricht Treaty’s 3%-of-GDP limit. And, for Ireland and Spain, the deficit is the result of twenty-first-century entitlement payments: bank bailouts.
The welfare of a country’s citizens should never be sacrificed in the name of unpredictable sovereign-debt markets or inadequate fiscal calculations. Rather, governments should prioritize increasing domestic sources of spending – including consumption, housing, and investment – while slowing capital outflows. To this end, countries should temporarily suspend interest payments on foreign debt (the portion of total debt owed to creditors outside the country). Payments would be resumed upon reducing unemployment levels below agreed thresholds.
A country with its own currency can monetize its budget deficits: the central bank purchases public debt in the form of bonds, boosting otherwise weak demand. This is akin to the “quantitative easing” practiced liberally by the United States Federal Reserve, the Bank of England, and even the European Central Bank, whereby the monetary authority buys financial assets to increase the money supply.
While eurozone countries lack the monetary sovereignty needed to implement such policy tools, they can employ a two-step back-door process to monetize the deficit. First, they would nationalize major banks (or use already nationalized banks) and appoint new directors and CEOs. Then, these banks would create public-sector checking accounts worth billions of euros at an interest rate equal to the ECB’s (roughly 1%).
Furthermore, to escape sovereign-debt markets’ unpredictable interest rates, governments should encourage their citizens to purchase bonds, similar to the war bonds that generated roughly $186 billion in the US during World War II – a massive sum at the time. Revenue from such bonds could be used to expand public works, allowing the government to act as a lender of last resort, while supporting the construction industry, which in many countries was crushed after 2008 by imploding real-estate bubbles.
National policymakers should also establish incentives – such as transitory export subsidies and import taxes – aimed at improving the balance of payments and stimulating growth without internal devaluation. At the European level, France’s proposal to issue Eurobonds to support infrastructure expansion should be implemented. These jointly guaranteed bonds would reduce borrowing costs for public-works projects, thus helping to revive Europe’s economy without burdening national budgets.
Workers and companies from the most depressed countries could be employed to undertake the projects, regardless of their location. And improved infrastructure would lower production and transport costs, thereby helping to balance competitiveness across eurozone countries.
Finally, the European Commission should temporarily abandon deficit-spending targets in countries that have fallen into recession, or where unemployment has risen above established thresholds. The recent austerity package for Spain, for example, falls just short of madness, given that it involves a net reduction in public-sector demand of €80 billion ($97 billion) – more than 6% of current national income – after a cumulative decline in GDP of more than 5% in three years.
Cutting spending during an economic downturn merely exacerbates slow growth and makes deficit targets more difficult to reach. Escaping this economic quagmire requires Europe’s governments to focus on improving their citizens’ welfare, rather than on financing international debt and, in turn, bolstering the incomes of the world’s richest individuals.
John Weeks is Professor Emeritus at the School of Oriental and African Studies, University of London.
Howard Stein is a professor at the University of Michigan, Ann Arbor.