As usual, Paul Krugman aptly summarizes the latest failure in Europe to abandon austerity economics and politics. The default of the Greek government's on its debt now seems inevitable to most economists:
On one side, Europe's situation is really, really scary: with countries that account for a third of the euro area's economy now under speculative attack, the single currency's very existence is being threatened - and a euro collapse could inflict vast damage on the world. On the other side, European policy makers seem don't seem at all ready to acknowledge a crucial fact - namely, that without more expansionary fiscal and monetary policies in Europe's stronger economies, all of their rescue attempts will fail.
The EU is struggling with great difficulty to convince the 16 voting countries to establish a monetary fund sufficient to absorb the EU-wide bank losses and the financial crisis that will result from a disorderly Greek default. Yet already economists are saying the $600 billion proposed fund it is less than a third of what is needed to prevent runs on EU banks.
And staving off bank failures is only half the problem. The draconian austerity cutbacks in workers' incomes, retirement, health and security demanded by banks of debt-plagued EU members in return for access to cash are unprecedented and unsustainable under democratic government. Without the kind of fiscal stimulus that only central governments, not central banks, can provide - unemployment insurance, direct spending to create jobs, etc. - political instability, the return of military rule, and worse threatens any and all efforts to stabilize the banking system.
Witness the massive demonstrations in Greece against the visit of EU "Inspectors," there to determine if Greece is sufficiently savaging its peoples' welfare. From the EU nations' perspective, perhaps the "inspection" makes sense. But the Socialist Party trying to negotiate with the EU is down to less than 12 percent popular support. What "inspector" would reasonably believe any assurance they try to give? The "inspectors" could not even meet the Greek finance minister in the finance building, because it is being occupied by its own employees in protest!
It's not pretty, and we begin to see the wisdom of Lord Keynes' observation that "we are all dead in the long run" as the fitting response to those who fear stimulus and investment in the face of depression, and counsel faith that markets will correct them selves in the long run."
Europe in particular need only recall the impact of austerity on Germany after the onerous and "austerity" peace enforced on it after WWI to measure the catastrophe that can arise from faith in some ideal "long run" market model.
We see here in the U.S. the extraordinary difficulties pushing a "more expansionary fiscal and monetary policy" upstream against a fierce Republican opposition since the 2010 Congressional elections. And we already solved the biggest problems of having 50 separate states and many races and nationalities. The truth is that only solid steps toward an updated kind-of "United States of Europe" can implement a "more expansionary fiscal and monetary" policy needed for recovery - and to avoid a breakup of the EU. The latter calamity will certainly throw the U.S. into another depression on top of the one we are still in.
The loss of sovereignty required for each EU member to embrace a Europe-wide governing entity is a powerful countervailing force for many nations: Germany fears inflation most, partly because of the runaway inflation in the 30s leading to the Nazi catastrophe. Each country - including Greece - has its own version of "anti-imperialist" politics that draws on these fears. But shying away from political union now means the collapse of the Euro, the common market and the growth and economies of scale it promises. "Vast damage," Krugman's words, may be an understatement - especially when the political ramifications are taken into account.
The fears associated with a loss of sovereignty are understandable, especially for weaker countries contemplating unity with stronger ones, but also for stronger ones fearing competition from lower wage, less productive, nations. The only comfort, and solace, however is not nationalism, but internationalism. The unity of European working people, like the unity of the many races and peoples of the "American working people", is the path forward. And the slogan of internationalism is "peace and prosperity, not war and austerity."
Photo: Demonstration in Greece. Mehran Khalili // CC 2.0