U.S. and Europe: slow strangulation is much more likely than financial catastrophe
16/08/2011
- Opinión
The prevailing understanding of economic troubles in the U.S. and Europe, the world's two largest economies, is misunderstood in a number of ways. First: imagine that you are driving a car down a road packed with snow and ice, and you are worried about an accident. At the same time you are ignoring the fact that you are about to run out of gasoline, leaving you stranded and freezing in the middle of nowhere.
Such have been the main reactions to last week's extreme volatility in financial markets: there has been much more fear of financial crisis than the slow strangulation which poses the greater risk. Investors' panic attack subsided noticeably after the European Central Bank's (ECB's) decision to reverse its prior stance [http://www.guardian.co.uk/
The European authorities also took some action to stem the immediate crisis of the European banks, which is of course related to the sovereign debt problems: France, Belgium, Italy, and Spain banned short-selling of the stocks of financial institutions. According to some press reports [http://www.ft.com/intl/cms/s/
But there is still a lot of fear that we are close to a repeat of 2008-2009, when the U.S. fell into a deep recession and much of the world economy was dragged down with it. For the U.S., this is not all that likely: the Great Recession was caused [http://www.cepr.net/index.
Of course, if unemployment remains at 9.1 percent or worsens, it will feel like a recession to most Americans even if we don't have negative growth. But the probability of an actual recession has been exaggerated, and the chance of a recession like the last one is very remote.
In Europe, where macroeconomic policy has been more right wing, recession is more likely. Portugal and Greece are already in recession, and others are not far away. In return for the ECB's buying up Italian bonds, the European authorities extracted a promise from the Berlusconi government to close a 3.9 percent of GDP budget gap by 2013. This could easily push Italy's two trillion dollar economy into recession. The latest GDP numbers for Europe's second quarter arrived this week, and they look dismal: just 0.2 percent growth in the second quarter in the eurozone, the worst for two years. Germany, Europe's largest economy, was practically stalled at 0.1 percent, and France, the second largest, came in at zero.
The most dangerous myth, and one repeated daily in much of the major media, is that these troubles on both sides of the Atlantic are a result of a "debt crisis," and can only be resolved through fiscal tightening. The United States is not facing any public debt crisis at all, with interest payments on the debt at just 1.4 percent of GDP. Some eurozone countries do have a "debt crisis" – for example Greece. But this is only because the European authorities have failed to take the necessary steps to resolve it, and have instead made it worse by shrinking the economy. In other words, there is no legitimate economic reason for a sovereign debt burden – even an unsustainable one – to result in years of economic stagnation and high unemployment. If the debt needs to be restructured because it is not payable, as in Greece, then that should be done as quickly as possible and with enough debt cancellation to make the resulting debt burden sustainable – as Argentina did with its successful default [http://www.nytimes.com/2011/
The eurozone is of course handicapped by the lack of a unitary fiscal authority, and many were disappointed that this week's meeting of French President Nicolas Sarkozy and German Chancellor Angela Merkel did not move toward the use of eurobonds. Much worse was their pledge to push for a Europe-wide balanced-budget amendment, starting in their own countries. This is ridiculous and – to the extent that it is not mere posturing – would only be another indicator of how far Europe's leaders are from reality-based economic policy.
- Mark Weisbrot is co-director of the Center for Economic and Policy Research http://www.cepr.net, in Washington, D.C He is also president of Just Foreign Policy [http://www.justforeignpolicy.
(This article was published in The Guardian (UK) on August 17, 2011. To reprint it, please link to the original [http://www.guardian.co.uk/
Such have been the main reactions to last week's extreme volatility in financial markets: there has been much more fear of financial crisis than the slow strangulation which poses the greater risk. Investors' panic attack subsided noticeably after the European Central Bank's (ECB's) decision to reverse its prior stance [http://www.guardian.co.uk/
The European authorities also took some action to stem the immediate crisis of the European banks, which is of course related to the sovereign debt problems: France, Belgium, Italy, and Spain banned short-selling of the stocks of financial institutions. According to some press reports [http://www.ft.com/intl/cms/s/
But there is still a lot of fear that we are close to a repeat of 2008-2009, when the U.S. fell into a deep recession and much of the world economy was dragged down with it. For the U.S., this is not all that likely: the Great Recession was caused [http://www.cepr.net/index.
Of course, if unemployment remains at 9.1 percent or worsens, it will feel like a recession to most Americans even if we don't have negative growth. But the probability of an actual recession has been exaggerated, and the chance of a recession like the last one is very remote.
In Europe, where macroeconomic policy has been more right wing, recession is more likely. Portugal and Greece are already in recession, and others are not far away. In return for the ECB's buying up Italian bonds, the European authorities extracted a promise from the Berlusconi government to close a 3.9 percent of GDP budget gap by 2013. This could easily push Italy's two trillion dollar economy into recession. The latest GDP numbers for Europe's second quarter arrived this week, and they look dismal: just 0.2 percent growth in the second quarter in the eurozone, the worst for two years. Germany, Europe's largest economy, was practically stalled at 0.1 percent, and France, the second largest, came in at zero.
The most dangerous myth, and one repeated daily in much of the major media, is that these troubles on both sides of the Atlantic are a result of a "debt crisis," and can only be resolved through fiscal tightening. The United States is not facing any public debt crisis at all, with interest payments on the debt at just 1.4 percent of GDP. Some eurozone countries do have a "debt crisis" – for example Greece. But this is only because the European authorities have failed to take the necessary steps to resolve it, and have instead made it worse by shrinking the economy. In other words, there is no legitimate economic reason for a sovereign debt burden – even an unsustainable one – to result in years of economic stagnation and high unemployment. If the debt needs to be restructured because it is not payable, as in Greece, then that should be done as quickly as possible and with enough debt cancellation to make the resulting debt burden sustainable – as Argentina did with its successful default [http://www.nytimes.com/2011/
The eurozone is of course handicapped by the lack of a unitary fiscal authority, and many were disappointed that this week's meeting of French President Nicolas Sarkozy and German Chancellor Angela Merkel did not move toward the use of eurobonds. Much worse was their pledge to push for a Europe-wide balanced-budget amendment, starting in their own countries. This is ridiculous and – to the extent that it is not mere posturing – would only be another indicator of how far Europe's leaders are from reality-based economic policy.
- Mark Weisbrot is co-director of the Center for Economic and Policy Research http://www.cepr.net, in Washington, D.C He is also president of Just Foreign Policy [http://www.justforeignpolicy.
(This article was published in The Guardian (UK) on August 17, 2011. To reprint it, please link to the original [http://www.guardian.co.uk/
https://www.alainet.org/en/articulo/151907?language=en
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