Wednesday, August 17, 2011

Europe and the US, holding hands and jumping off that proverbial cliff together

The failure of the ruling elites on both sides of the Atlantic is really staggering. And the economies in both places are staggering toward another recession as a result. This PBS Newshour report (08/16/2011) features two authorities on EU matters, Scheherazade Rehman of George Washington University and Heather Conley of the conservative-leaning Center for Strategic and International Studies (CSIS). Both are well-informed on EU issues. But Conley seems to have a definite agenda to trash the EU as incompetent. Rehman, on the other hand, has more substantial things to say, such as her explanation early on of why austerity politics in some EU countries winds up damaging the German economy.

Robert Reich in How Austerity Is Ushering in a Global Recession 08/17/2011 writes:

We all know about the weaknesses in Europe's "periphery" – Greece, Ireland, Spain, Portugal, and Italy. But the drop in Europe's core [essentially Germany and France] is dizzying. ...

But chalk up a big part of Europe's slowdown to the politics and economics of austerity. Europe – including Britain – have turned John Maynard Keynes on his head. They've been cutting public spending just when they should be spending more to counteract slowing private spending.

The United States has been moving in the same bizarre direction. Cutbacks by state and local governments have all but negated the federal government's original stimulus, and no one in Washington is talking seriously about a second. The pitiful showdown over increasing the debt limit has produced the opposite: a Rube-Goldberg-like process for capping spending rather than increasing it, and a public that's being sold the Republican lie that less government spending means more jobs.
Joschka Fischer Europe's Sovereignty Crisis 07/31/2011 Project Syndicate (Original in German here) praises the recognition (as it stood at the end of July) on the part of Chancellor Angela Merkel's German government that there needs to be more substantially unified economic policymaking on the part of eurozone countries. As Fischer puts it, with "Europe" referring to the European Union or, as it's often called, the "European project":

If the euro is to survive, genuine integration, with further transfers of sovereignty to the European level, will be unavoidable. This historic step cannot be taken through the bureaucratic backdoor, but only in the bright light of democratic politics. The EU's further federalization enforces its further democratization.

If the eurozone is to endure, a majority of its citizens, especially in Germany and France, must embrace the euro as their currency. This is not a technocratic issue, but a profoundly political and democratic one. To paraphrase Bill Clinton: "It's the sovereignty, stupid!" Therefore, the first step must be to ensure a strong role for national parliaments in this process.

In Germany, there has been a broad consensus for a stability union, but not for a transfer or liability union. This is particularly true for Merkel’s electorate. From now on, governments will have to fight for majorities supporting the euro. This is good, because only then will a reliable democratic consensus on Europe's future be reached. The German chancellor and the French president will have to present their policies openly and fight for further integration and the single currency.

The outcome will decide their fate and continuance in office. Whether they succeed is anything but certain, given the current state of European public opinion. But if they do not even try, their defeat – and that of Europe – is certain.
The EU is square up against two key weaknesses in its structure up until now. The euro as it's currently structured puts countries at risks of attacks from the bond markets, as we've seen with Greece, Ireland, Spain, Portugal and Italy and leaves them without the option of allowing their currencies to float downward against others. And while EU membership was initially popular, the leading parties in Germany and France have tended to treat EU business as more of an elite affair and have failed in recent years have to build a strong popular base supporting "Europe." The economic slump has brought both those problems to a critical point.

Merkel and French President Nicolai Sarkozy on Tuesday came out with a new promise to promote a more unified economy policy. But it was largely cosmetic, and did not include a commitment to the concept of euro-bonds that would allow eurozone countries to borrow against the credit-worthiness of the whole eurozone, though it did say they might consider it someday. It also did not include any recognition that the loan principal of Greece and maybe Portugal and Ireland will have to be written down, i.e., recognized as bad debt that will never be paid.

Stefan Kaiser's report, Wirtschaftsregierung: Der Preis für den Pakt, notes that the "true economic government" that Sarkozy and Merkel promised has meant for Merkel what amounts to establishing an EU-wide commitment to fiscal austerity in good times and in bad, the very policy that has pushed Europe to the brink of another recession.

David Case in Merkozy's baby steps won’t save Europe Global Post 08/17/2011 also discusses the weakness of the German-French proposals of this week:

Apparently aware that the announcement was underwhelming, even by the standards of a European August, Merkel struggled to defend it — particularly the decision not to embrace euro bonds.

"People always seem to have the feeling that there is one method that will spring us out of the crisis and in this context there seems to be that the last resource we have is euro bonds," Merkel said, according to Bloomberg. "I don't think Europe has come to its last resource and I don’t think we can solve the problem with a single big bang." Rather, "we need to work steadily and step by step to win back confidence. I don’t think that euro bonds will help us now with this."
The EU is still trying to skate with stopgap measures, avoiding major political choices on economic union and on recognizing the reality of bad debts by Greece and possibly others. And they are compounding all their problems with austerity economics:

For now, the euro zone contagion is migrating from the periphery to the core economies. In Spain and Italy, interest rates are rising and the governments are tottering toward a possible debt trap. In France, investors are dumping shares in banks, which hold a fortune in dubious debt, and the government’s credit rating is rumored to be at risk of a downgrade (although credit agencies deny this). And the economy of Germany, the motor of the euro zone, is stalling, reporting only 0.1 percent growth in the past quarter.
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