At long last, the US is showing signs of recovery from the crisis that erupted at the end of former US president George W. Bush’s administration, when the near-implosion of its financial system sent shock waves around the world. It is not a strong recovery; at best, the gap between where the economy would have been and where it is today is not widening. If it is closing, it is doing so very slowly; the damage wrought by the crisis appears to be long-term.
Then again, it could be worse. Across the Atlantic, there are few signs of even a modest US-style recovery: The gap between where Europe is and where it would have been in the absence of the crisis continues to grow. In most EU countries, per capita GDP is less than it was before the crisis. A lost half-decade is quickly turning into a whole one. Behind the cold statistics, lives are being ruined, dreams are being dashed and families are falling apart (or not being formed) as stagnation — depression in some places — runs on year after year.
The EU has highly talented, highly educated people. Its member nations have strong legal frameworks and well-functioning societies. Before the crisis, most even had well-functioning economies. In some places, productivity per hour — or the rate of its growth — was among the highest in the world.
However, Europe is not a victim. Yes, the US mismanaged its economy; but, no, it did not somehow manage to impose the brunt of the global fallout on Europe. The EU’s malaise is self-inflicted, owing to an unprecedented succession of bad economic decisions, beginning with the creation of the euro. Though intended to unite Europe, in the end the euro has divided it; and, in the absence of the political will to create the institutions that would enable a single currency to work, the damage is not being undone.
The mess stems partly from an adherence to a long-discredited belief in well-functioning markets without imperfections of information and competition. Hubris has also played a role. How else to explain that, year after year, European officials’ forecasts of their policies’ consequences have been consistently wrong?
These forecasts have been wrong not because EU countries failed to implement the prescribed policies, but because the models upon which those policies relied were so badly flawed. In Greece, for example, measures intended to lower the debt burden have in fact left the country more burdened than it was in 2010: The debt-to-GDP ratio has increased, owing to the bruising impact of fiscal austerity on output. At least the IMF has owned up to these intellectual and policy failures.
Europe’s leaders remain convinced that structural reform must be their top priority. However, the problems they refer to were apparent in the years before the crisis, but they were not stopping growth then.
What Europe needs more than structural reform within member countries is reform of the structure of the eurozone itself and a reversal of austerity policies, which have failed time and again to reignite economic growth.
Those who thought that the euro could not survive have been proved wrong, but the critics have been right about one thing: Unless the structure of the eurozone is reformed and austerity is reversed, Europe will not recover.
The drama in Europe is far from over. One of the EU’s strengths is the vitality of its democracies. However, the euro took away from citizens — especially in the crisis countries — any say over their economic destiny. Repeatedly, voters have thrown out incumbents, dissatisfied with the direction of the economy — only to have the new government continue on the same course dictated from Brussels, Frankfurt and Berlin.
For how long can this continue? And how will voters react? Throughout Europe, extreme nationalist parties are growing in popularity, running counter to the Enlightenment values that have made Europe so successful. In some places, large separatist movements are rising.
Now Greece is posing yet another test for Europe. The decline in Greek GDP since 2010 is far worse than that which confronted the US during the Great Depression of the 1930s. Youth unemployment is more than 50 percent. Greek Prime Minister Antonis Samaras’ government has failed and now, owing to the parliament’s inability to choose a new Greek president, an early general election is set for Jan. 25.
The left opposition SYRIZA coalition, which is committed to renegotiating the terms of Greece’s EU bailout, is ahead in opinion polls. If SYRIZA wins, but does not take power, a principal reason will be fear of how the EU would respond. Fear is not the noblest of emotions and it will not give rise to the kind of national consensus that Greece needs in order to move forward.
The issue is not Greece. It is Europe. If Europe does not change its ways — if it does not reform the eurozone and repeal austerity — a popular backlash will become inevitable. Greece might stay the course this time, but this economic madness cannot continue forever. Democracy will not permit it. How much more pain will Europe have to endure before reason is restored?
Joseph Stiglitz, a Nobel laureate in economics, is University Professor at Columbia University.
Copyright: Project Syndicate
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