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December 2, 2011
The financial and economic crisis in Europe is getting worse. The eurozone appears to be unravelling under the weight of sovereign debt and many eurozone banks are now too weak to function. There is a need for both debt restructuring and bank recapitalisation.
Britain faces a decade of austerity due to the Cameron Government's politics of austerity to enforce fiscal discipline. Italy's debt is unsustainable and the policy to reduce it will make matters worse. Both countries face a future of minimal economic growth, as does Europe with the more vulnerable countries facing a downward spiral of fiscal austerity, weakening demand, higher unemployment, poor fiscal outcomes and then even more austerity.
Martin Rowson
Waynne Godley in Maastricht and All That in the London Review of Books provides us with a historical perspective on the why of this crisis.
In this article, which was written in 1992, he says:
The central idea of the Maastricht Treaty is that the EC countries should move towards an economic and monetary union, with a single currency managed by an independent central bank. But how is the rest of economic policy to be run? As the treaty proposes no new institutions other than a European bank, its sponsors must suppose that nothing more is needed. But this could only be correct if modern economies were self-adjusting systems that didn’t need any management at all.
As a Keynesian, Godley didn’t believe in self-adjustment. He took it as axiomatic that what had prevented another Great Depression was the worldwide adoption of counter-cyclical policies. Faced with the onset of a recession, governments typically relaxed fiscal policy and devalued their currencies to make their exports more competitive, he pointed out. But inside a monetary union, policymakers wouldn’t have either option available, and the outcome could well be disastrous.
Godley ended his essay with these prophetic words:
If a country or region has no power to devalue, and if it is not the beneficiary of a system of fiscal equalisation, then there is nothing to stop it suffering a process of cumulative and terminal decline leading, in the end, to emigration as the only alternative to poverty or starvation. I sympathise with the position of those (like Margaret Thatcher) who, faced with the loss of sovereignty, wish to get off the EMU train altogether. I also sympathise with those who seek integration under the jurisdiction of some kind of federal constitution with a federal budget very much larger than that of the Community budget. What I find totally baffling is the position of those who are aiming for economic and monetary union without the creation of new political institutions (apart from a new central bank), and who raise their hands in horror at the words ‘federal’ or ‘federalism’. This is the position currently adopted by the Government and by most of those who take part in the public discussion.
Te euro-project is flawed yet Germany continues to insist that fiscal discipline is all that matters; and the European Central Bank (ECB) continues to affirm its belief that budget cuts in a depressed economy will actually promote expansion, by raising business and consumer confidence.
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Osborne's measures in the UK were heavily regressive, taking money away from families on low incomes and public sector workers in order to fund tax breaks for small businesses and the construction firms that will benefit from the extra spending on the infrastructure.
His plan A – cutting spending to bring down the deficit – is not working out as he hoped. The better days are over the horizon.