As my regular readers know, the NYT coverage of the EU financial crisis has been shameful, economically illiterate, and harmful. In the last two weeks, however, that coverage has finally begun to mention the concept of inadequate demand, the fact that governmental spending can provide demand, and that austerity is not the only available choice. In the last 10 days the coverage even began to quote economists who made the point that austerity is the problem rather than the solution. This modest improvement has taken six years, two gratuitous Great Recessions, and Great Depressions for about one-third the eurozone's population.
In the last two days, however, the NYT has given space to an outsider and a newly hired journalist not from the EU beat to write about EU austerity. Each column contain more blunt truths than six years of the NYT's regular coverage of EU austerity -- combined. The columns have considerable common elements in their emphasis on the struggle between Germany and the eurozone officials trying to limit the damage inflicted by Germany's austerity diktats.
Yesterday's column was by Anatole Kaletsky. Kaletsky does not mince words.
"The [EU's] fiscal compact rules, if applied literally, would make economic recovery in France a mathematical impossibility."
Kaletsky's conclusion is correct. The explanation is a bit subtle. "Austerity" has no exact definition. With the exception of Germany, the Eurozone nations that are inflicting even the severest austerity have overwhelmingly also run (seriously inadequate) budget deficits. A few nations can maintain significant growth even while slowing their growth through austerity if they are very large net exporters. There are three critical limits on this strategy. First, we can't all be net exporters, and only a small number of nations can be very large net exporters. Second, it is very hard to maintain being a very large net exporter continuously. Third, being a very large net exporter strongly tends to suppress workers' wages while making the wealthy far wealthier. In most countries this causes severe social and political strife.
One implication of what I have written is that most eurozone nations forced gratuitously back into a second Great Recession by austerity (and now, in the case of Italy, a third Great Recession that actually has Great Depression levels of unemployment) still have modest (though sharply inadequate) levels of fiscal stimulus through their deficits. This has reduced the self-destructive impact of austerity. As the EU's oxymoronic "Stability and Growth Pact" (which causes instability and destroys growth) goes forward, however, it will require substantial budget surpluses in many of the EU nations of the periphery already suffering the most from austerity (in order to meet the Pact's debt-to-GDP requirements) at a time when growth in these nations will already be grossly inadequate. At this juncture, when even the deeply inadequate demand provided now by the far too small excess of government spending over government revenue is eliminated and the surplus drains demand from the already battered economies the destruction inflicted by austerity will be ruinous. Kaletsky is correct that the economies of nations like France would be crushed if they actually inflicted the full economic self-destructiveness of the Stability and Growth Pact's austerity demands in coming years.
Kaletsky also gets the importance of these issues for Europe and global economy correct.
"Why are the stakes suddenly so high? With most of Europe sliding back into recession over the summer as a result of the war in Ukraine and the failure to implement the kind of monetary and fiscal stimulus that revived the United States, Japanese and British economies, Europe now has an obvious choice: stick to failed policies that are almost certain to perpetuate economic stagnation, or change course."
Kaletsky correctly identifies the critical question -- can German politicians find a way to climb down from the disastrous policies they have inflicted on the peoples of the eurozone? Can they give up their ideology and accommodate reality -- and can they admit error?
"When faced with this choice, the German guardians of the euro's monetary and fiscal rule book defend the status quo, no matter how dismal. Germany's central bank and constitutional court are steeped in a tradition in which rules must be obeyed at all costs and following the letter of the law is more important than observing its spirit or achieving a desired outcome. But this legalistic philosophy is now running run up against the even more inexorable laws of mathematics, democracy and geopolitics.
What if it is mathematically impossible for the governments in France and Italy to abide by European Union budget rules, because raising taxes and cutting public spending would crush economic activity and thus widen budget deficits instead of reducing them? What if electorates refuse to accept a decade of austerity and stagnation simply for the sake of preserving the Union's monetary and fiscal rules?"
Today's NYT column is by Neil Irwin. Irwin is the former Washington Post journalist and author of The Alchemists: Inside the Secret World of the Central Bankers. His focus is on the conflict between Mario Draghi, the head of the ECB and Germany's political leaders, including the ultra-ideological head of the German Central Bank.
"It's not an overstatement to say that the future of Europe depends on how this conflict is resolved.
Mario Draghi, the E.C.B. president, is barely on speaking terms with Jens Weidmann, the president of the German Bundesbank (and a member of the E.C.B.'s policy-setting governing council), Reuters reported Thursday. When Mr. Draghi dispatched a deputy to Berlin to visit aides to Chancellor Angela Merkel, the message received was that vocal German attacks on the central bank were unlikely to end anytime soon."
Irwin explains his view of the stakes.