May 2011, Week 4


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Mon, 23 May 2011 00:53:14 -0400
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Solving the Euro Crisis
Mark Weisbrot
The Nation
May 19, 2011
This article appeared in the June 6, 2011 edition of 
The Nation.

The eurozone crisis is in some ways less complicated in
its foundations than most people are making it. The
fundamental problem is that Greece, Spain, Ireland and
Portugal are stuck in recession or near recession and
have not been allowed to adopt the policies needed to
get out of it. In 2009 most countries followed
expansionary policies to get out of recession: for
example, a fiscal stimulus or expansionary monetary
policy (witness the more than $2 trillion the US Federal
Reserve has created since our recession began). In some
cases countries also got a boost from a depreciating
currency, which increased their exports and reduced
their imports.

The bottom line on bailouts for Greece, Spain, Portugal
and Ireland must be help, not punishment.

The peripheral European countries are stuck in a
currency union where their monetary policy is dictated
by the European Central Bank (ECB), which is far to the
right of the US Federal Reserve and has little interest
in helping them. Because these countries have adopted
the euro, they also do not control their exchange rate;
and their fiscal policy, with the imposition of budget
cuts, is going in the wrong direction, under pressure
from the European Commission, the ECB and the IMF.

No wonder, then, that Spain has more than 20 percent
unemployment, Greece has nearly 15 percent unemployment
and is sinking further into debt, and Ireland has lost
about 17 percent of its income per person since the
crisis began. Portugal just signed an agreement with the
IMF that is projected to give it two more years of

This does not make any economic sense, except from the
point of view of creditors who want to make sure these
countries are punished for their "excesses"-although,
for the most part, it was not overborrowing but the
collapse of the bubble and the world financial crisis
and recession that brought them to this situation.
Unfortunately, the view of the creditors is what
prevails among the European authorities.

IMF managing director Dominique Strauss-Kahn, currently
jailed on sexual assault charges, understood the
futility of some of these policies, but he was unable to
change them very much, since IMF management is
subordinate to the European authorities (and US
Treasury). His imminent departure is therefore unlikely
to change much, although it may speed up the process of
Greece's inevitable move toward debt restructuring.

Argentina defaulted on its foreign public debt in 2001,
after years of trying the IMF route to recovery and
sinking further into recession. The currency was cut
loose from the dollar, and although economic free fall
accelerated for one more quarter, it then recovered and
grew 63 percent over the next six years. Within three
years Argentina had reached its pre-crisis level of
output; by contrast, Greece is not expected to reach its
pre-recession level of GDP for at least eight years.

When will it end? So long as these governments are
committed to policies that shrink their economies, their
only hope is that the global economy will pick up steam
and pull them out with demand for their exports. This
does not look likely in the foreseeable future-the rest
of Europe is not growing that rapidly and the US economy
is still weak.

The governments of Greece, Portugal and Ireland need to
tell the European authorities that they will not accept
any "bailout" agreements that do not allow their
economies to grow. That has to be the bottom line: help,
not punishment. Spain has not yet entered into a loan
agreement, but its situation is similar. These
governments have a lot of unused bargaining power, since
the European authorities are very much afraid of a
default and/or exit from the euro by any one of them.
And the European authorities have the money to help each
and every one of these economies recover with
expansionary macroeconomic policies. They just need to
be told that "there is no alternative."


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