Over the past few months I have read a number of optimistic assessments of the prospects for Europe. Oddly, however, none of these assessments argue that Europe’s German-dictated formula of redemption through suffering has any chance of working. Instead, the case for optimism is that failure — in particular, a breakup of the euro — would be a disaster for everyone, including the Germans, and that in the end this prospect will induce European leaders to do whatever it takes to save the situation.
I hope this argument is right. However, every time I read an article along these lines, I find myself thinking about Norman Angell.
Who? Back in 1910, Angell published a famous book titled The Great Illusion, arguing that war had become obsolete. Trade and industry, he pointed out, not the exploitation of subject peoples, were the keys to national wealth, so there was nothing to be gained from the vast costs of military conquest.
Moreover, he argued that mankind was beginning to appreciate this reality, that the “passions of patriotism” were rapidly declining. He did not actually say that there would be no more major wars, but he did give that impression.
We all know what came next.
The point is that the prospect of disaster, no matter how obvious, is no guarantee that nations will do what it takes to avoid that disaster. This is especially true when pride and prejudice make leaders unwilling to see what should be obvious.
Which brings me back to Europe’s still extremely dire economic situation.
It comes as something of a shock, even for those of us who have been following the story all along, to realize that more than two years have passed since European leaders committed themselves to their current economic strategy — a strategy based on the notion that fiscal austerity and “internal devaluation” (basically, wage cuts) would solve the problems of debtor nations. In all that time the strategy has produced no success stories; the best the defenders of orthodoxy can do is point to a couple of small Baltic nations that have seen partial recoveries from Depression-level slumps, but are still far poorer than they were before the crisis.
Meanwhile the euro’s crisis has metastasized, spreading from Greece to the far larger economies of Spain and Italy, and Europe as a whole is clearly sliding back into recession. Yet the policy prescriptions coming out of Berlin and Frankfurt have hardly changed at all.
But wait, you say — did last week’s summit meeting not produce some movement? Yes, it did. Germany gave a little ground, agreeing both to easier lending conditions for Italy and Spain (but not bond purchases by the European Central Bank) and to a rescue plan for private banks that might actually make some sense (although it is hard to tell given the lack of detail). However, these concessions remain tiny compared with the scale of the problems.
What would it really take to save Europe’s single currency? The answer, almost surely, would have to involve both large purchases of government bonds by the central bank and a declared willingness by that central bank to accept a somewhat higher rate of inflation. Even with these policies, much of Europe would face the prospect of years of very high unemployment. However, at least there would be a visible route to recovery.
Yet it is really, really hard to see how such a policy shift could come about.