Those Revolting Europeans 

By PAUL KRUGMAN

May 6, 2012 

The New York Times

http://www.nytimes.com/2012/05/07/opinion/krugman-those-revolting-europeans.html?_r=1

The French are revolting. The Greeks, too. And it's
about time.

Both countries held elections Sunday that were in
effect referendums on the current European economic
strategy, and in both countries voters turned two
thumbs down. It's far from clear how soon the votes
will lead to changes in actual policy, but time is
clearly running out for the strategy of recovery
through austerity -- and that's a good thing.

Needless to say, that's not what you heard from the
usual suspects in the run-up to the elections. It was
actually kind of funny to see the apostles of orthodoxy
trying to portray the cautious, mild-mannered Francois
Hollande as a figure of menace. He is "rather
dangerous," declared The Economist, which observed that
he "genuinely believes in the need to create a fairer
society." Quelle horreur!

What is true is that Mr. Hollande's victory means the
end of "Merkozy," the Franco-German axis that has
enforced the austerity regime of the past two years.
This would be a "dangerous" development if that
strategy were working, or even had a reasonable chance
of working. But it isn't and doesn't; it's time to move
on. Europe's voters, it turns out, are wiser than the
Continent's best and brightest.

What's wrong with the prescription of spending cuts as
the remedy for Europe's ills? One answer is that the
confidence fairy doesn't exist -- that is, claims that
slashing government spending would somehow encourage
consumers and businesses to spend more have been
overwhelmingly refuted by the experience of the past
two years. So spending cuts in a depressed economy just
make the depression deeper.

Moreover, there seems to be little if any gain in
return for the pain. Consider the case of Ireland,
which has been a good soldier in this crisis, imposing
ever-harsher austerity in an attempt to win back the
favor of the bond markets. According to the prevailing
orthodoxy, this should work. In fact, the will to
believe is so strong that members of Europe's policy
elite keep proclaiming that Irish austerity has indeed
worked, that the Irish economy has begun to recover.

But it hasn't. And although you'd never know it from
much of the press coverage, Irish borrowing costs
remain much higher than those of Spain or Italy, let
alone Germany. So what are the alternatives?

One answer -- an answer that makes more sense than
almost anyone in Europe is willing to admit -- would be
to break up the euro, Europe's common currency. Europe
wouldn't be in this fix if Greece still had its
drachma, Spain its peseta, Ireland its punt, and so on,
because Greece and Spain would have what they now lack:
a quick way to restore cost-competitiveness and boost
exports, namely devaluation.

As a counterpoint to Ireland's sad story, consider the
case of Iceland, which was ground zero for the
financial crisis but was able to respond by devaluing
its currency, the krona (and also had the courage to
let its banks fail and default on their debts). Sure
enough, Iceland is experiencing the recovery Ireland
was supposed to have, but hasn't.

Yet breaking up the euro would be highly disruptive,
and would also represent a huge defeat for the
"European project," the long-run effort to promote
peace and democracy through closer integration. Is
there another way? Yes, there is -- and the Germans have
shown how that way can work. Unfortunately, they don't
understand the lessons of their own experience.

Talk to German opinion leaders about the euro crisis,
and they like to point out that their own economy was
in the doldrums in the early years of the last decade
but managed to recover. What they don't like to
acknowledge is that this recovery was driven by the
emergence of a huge German trade surplus vis-a-vis
other European countries -- in particular, vis-a-vis the
nations now in crisis -- which were booming, and
experiencing above-normal inflation, thanks to low
interest rates. Europe's crisis countries might be able
to emulate Germany's success if they faced a comparably
favorable environment -- that is, if this time it was
the rest of Europe, especially Germany, that was
experiencing a bit of an inflationary boom.

So Germany's experience isn't, as the Germans imagine,
an argument for unilateral austerity in Southern
Europe; it's an argument for much more expansionary
policies elsewhere, and in particular for the European
Central Bank to drop its obsession with inflation and
focus on growth.

The Germans, needless to say, don't like this
conclusion, nor does the leadership of the central
bank. They will cling to their fantasies of prosperity
through pain, and will insist that continuing with
their failed strategy is the only responsible thing to
do. But it seems that they will no longer have
unquestioning support from the Elysee Palace. And that,
believe it or not, means that both the euro and the
European project now have a better chance of surviving
than they did a few days ago.

___________________________________________

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