Somebody rush deliver the Europeans a proper dose of Kierkegaard.
The European sovereign debt crisis has for two years been an exercise in indecision that represents the worst of the juncture between clumsy political decision-making processes and lightning speed financial markets. Now, according to a dire International Monetary Fund (IMF) forecast issued late last month, the crisis may thrust the global economy into a double-dip recession.
Europe has for two years faced down its moment of existential truth, the point at which it must either supplement monetary integration with fiscal coordination, or dissolve the Eurozone. There are solid arguments for either decision, and each would be respectable enough. What is intolerable is the series of non-decisions in which continental leadership has sought to stake out an untenable middle ground, but has instead engendered financial market instability and thus undermined continental recovery. If the IMF is now to be believed, the crisis may be responsible for as much as a GDP shrinkage of 4% in Europe and 1% across the globe in 2012. Compare this to 4-6% Eurozone growth between 2004 and 2009, and the full impact of the crisis is apparent.
I first encountered the European debt crisis when, in Athens last December, I accidentally meandered into a crowd of desperate anti-austerity demonstrators. The angry shouts of the protesters, upon whom police had just fired tear gas canisters, captured the senselessness of the Greek tragedy into which I had stumbled. Just a year before, then incoming Prime Minister George Papandreou revealed that the budget deficit was in fact five times larger than the previous government had led the public to believe. As interest rates on Greek bonds spiked to an unmanageable 12%, Greece sought to calm financial markets by slashing tens of thousands of public sector workers and increasing taxes. Yet the desperate attempt to rein in the budget deficit backfired, aggravating already insufficient demand and shrinking the Greek economy by 7% in 2010.
This is the point at which governments would typically turn to monetary policy, by either devaluing the currency to boost export competitiveness or tasking its central bank with an expansionary monetary mandate. Yet because nations in currency unions such as the Eurozone abrogate monetary independence, Greece had to either give up the euro or seek aid from its European neighbors.
Nobody would have begrudged Eurozone members had they negotiated Greek’s withdrawal in the spring of 2010. European policy makers have long understood that a currency union with as diverse economies and inflexible labor markets as Europe would eventually require increased fiscal integration. Because Eurozone members lack both monetary independence and real continental labor mobility, the long-term integrationist project requires a system of transnational transfers to pull suffering economies through recession. Yet political resistance to such integration incentivized Europe’s elite to push it off, which was possible when times were good. Recession has now rained on this illusional parade. When the crisis intensified nearly two years ago, Eurozone policy makers should have decisively moved in favor of either fiscal integration or monetary dissolution.
Unfortunately, Europe has dithered pathetically between its two options, wreaking uncertainty in global financial markets in the process. Nowhere is this more evident than in Greece. While no European leader has come near to calling for Greece’s withdrawal from the Eurozone, lending to Greece has fallen far short of what would be required to keep a growing Greece in the Eurozone.
Instead, Eurozone leaders have tried to occupy an uneasy middle ground: the ‘troika’–the European Commission, the European Central Bank and the International Monetary Fund– has made rescue funds available to Greece, but this lending has been contingent on severe budget cuts that have dramatically contracted the Greek economy. This has further exacerbated the debt crisis, requiring more troika lending, which has been continually contingent on the same disastrous contractionary policies. In 2011, the Greek economy shrunk by 5.3%. Yet instead of reevaluating the contractionary strings attached to the Greek aid, European leaders have preferred to wax moralistic about the irresponsibility of southern European governments.
What Europe has failed to grasp is that monetary union is not a one-night stand. If the Eurozone is to be preserved, its members must end the never-ending merry-go-round of austerity-contingent aid. There is no question that the Greek economy needs long-term restructuring. Its public sector is too large, and its tax collection system is about as serious as Michele Bachmann’s presidential aspirations. In Athens last winter, it took me all of two days to realize I was the only one paying for the metro (I stopped). But the solution is not to force short term austerity that guarantees only further shrinkage. Rather, lending must be linked to medium-term tax and spending reforms, including credible anchors of fiscal responsibility to be enforced by threat of expulsion from the Eurozone. Without the mutual trust for this vital coordination, there is no future for the common currency.
The IMF report indicates that the time for Europe to decide if its future holds increased integration or currency devolution can no longer be delayed. Integration is a worthy project that has contributed immensely to the maintenance of peace in the post-war period. But if Europe lacks the will to pursue further integration, its leaders might as well quit all pretense at rescuing troubled economies and begin the difficult project of dismantling the Eurozone before the consequences are felt far beyond European shores.