. The Spanish and Irish crises stem from too much cross-border private sector borrowing and lending. Irelandís financial crisis didnít destroy our nationís wealth; it just revealed how much wealth had already been destroyed by reckless lending, borrowing and speculation.
Prescribing government deficit reductions to fix these private capital imbalances is like prescribing chemotherapy for heart disease. Todayís large fiscal deficits are a result of, not the cause of,
. Both countriesí public debt ratios were actually lower than Germanyís in 2008 Ė but private debts exploded.
Ireland has been pointed to as an example of austerity working, but that's becoming less and less the conclusion that may be drawn. I think his point about this being a private debt problem, rather than a public spending issue, is quite astute.
As always, this doesn't mean the public deficit should be ignored, but we should delay action on that front until the economy recovers. Then hold our politicians accountable for using a strong economy to cut back on public deficits.
Interesting article. I also read an interesting piece by Fareed Zakaria, who always has a well-articulated opinion. His perspective is that what the southern European countries need is not just austerity, but real reform: opening up labor markets, liberalizing trade, and cracking down on government corruption:
Southern Europe has a long way to go on that score. In terms of the ease of doing business, the World Bank ranks Italy and Greece last (30th and 31st) among high-income countries. The World Economic Forum ranks Greece and Italy 125th and 126th in flexibility of hiring and firing and 133rd and 140th (out of 142!) in the burden of government regulation. Tax collection is almost nonexistent in both countries, and corruption is rampant.
German leaders have said again and again that they are willing to bail out weak euro-zone countries. But they have asked for reform as a condition of that aid. German Chancellor Angela Merkel is opposed to a sweeping solution like eurobonds not because of their cost--Germany will end up paying more--but because they would take off pressure to reform. The only leverage Germany has with countries like Greece is that the money gets to them incrementally as they enact reforms.
Greece might yet have to default and quit the euro zone. Its competitiveness problem is simply too great and its political leadership too weak. But if it goes down this path, Greece will find that the markets will refuse to lend it money at reasonable rates unless it does pretty much the same things Germany is asking it to do. Life without Germany will mean a lot more austerity than life with Germany.
I think that article highlights the other side of the coin that I've emphasized: reform is necessary. It's a matter of timing, though. Reform now would be at the expense of growth, which will be counter productive to those countries repaying their bailouts, either directly or indirectly. The political and societal changes need to happen during better economic times, though I admit that the leverage to force those changes may be gone, too. Of course, if Germany/EU provides a bailout, a new government in any of those countries could just as easily reject the austerity measures, so how much leverage does the EU have even now?