Europe’s Piecemeal Failure

„Today too many European advocates of austerity at all costs stand virtually unchallenged. Their solution is similar to that of dealing with troubled banks one by one: it is a fudge, addressing just one part of a much larger problem. What is needed instead is a balanced approach in which deficits are brought down quickly, but not in such a way as to destroy the economic or social fabric of those countries. The pace of deficit reduction needs to match the capacity of the private sector to pick up the slack.

The second principle is that countries with heavy debt burdens need more than just a bailout. Markets need to see that these countries have some hope of being able to manage their debt burdens in the future, especially after seeing their governments nationalize the balance sheets of collapsing banks. Consumers in these countries, seeing their economies in crisis, will not want to spend money or borrow more. Companies will be wary of making investments. So growth, and the means of meeting countries’ debt burdens, must come from exports. That means in the medium term, larger euro zone countries will need to increase their own spending to balance the contraction in demand they are imposing on their crisis-stricken neighbors.

Unfortunately, today the opposite is occurring: major European economies are undertaking their own austerity measures, shrinking demand for imports at home. This approach offers the peripheral countries no way out, and unwieldy transfer payments of one form or another, like bailouts or other aid packages, risk becoming unavoidable. I have spoken with too many European politicians who, when I ask them where growth will come from in the future, say they can’t be sure. But without a clear path forward, we will see minimal growth for Europe’s stronger economies; for those in danger already it could be disastrous. We cannot go on like this. The crisis in the euro zone is the single largest threat to the fragile global recovery we are now seeing. And this is not just a problem for Europe. It matters to us in Britain, as well as to the United States and Asia.”