Mario Draghi, who runs the European Central Bank, made clear yesterday that he now feels the current arrangements for the Eurozone are unsustainable. He called on the leadership of the zone to make clear and unequivocal commitments to either its sustainability or to significant change, while clearly signaling his preference for the latter. He noted that the real battle for the Euro was being fought in Italy and Spain – suggesting he already sees Greece out iof the zone following a default.
At almost the same time, the EU commissioner for economic matters, Olli Rhen, was making similar statements. Suggesting it was time for some serious and focused leadership from his political masters, Rhen said that the single currency’s members needed “a genuine stability culture and a much upgraded common capacity to contain common contagion. This is the case, at least if we want to avoid a disintegration of the Eurozone and if we want it to survive.”
As these words were being uttered, the electrorate in Ireland were being asked to vote in favour or against the fiskalunion compact and its austerity implications for Ireland, with a “yes” vote looking likely.
So an eventful day in Europe. The clock is indeed ticking and the time for a Greek exit and a Spanish and Italian bailout appear imminent. Greece will default and leave the Euro, though some are floating the idea of “defaulting” within the Euro – impossible under all of the agreements Greece has signed and all members of the fiskalunion compact have agreed to. Spain is wandering around in the wilderness of debt financing looking for someone or something to save its ailing banking system and support its government. Italy is reeling from two major earthquakes and the earth shattering silence of its core economy. It’s a mess.
Paul Krugman is in Europe promoting the view that almost everyone who is supporting the Eurozone strategy of austerity has it dead wrong. Austerity is not inspiring business confidence, is not working and is morally wrong. Austerity is leading to a lost generation of young people and the idea that they will all go off and start their own businesses is just pure nonsense (as indeed it is). What is needed, he suggests, is more infrastructure and public spending, modest rise in inflation and the encouragement of risk.
He is getting some serious negative reaction, with most who discuss the issue with him being simply incredulous that a Nobel prize winning economist could be so out of tune with the dominant view. Precisely. This is what thinkers do – challenge orthodoxy. This is why he won the Nobel prize.
He does make the point that, once unemployment starts to go down and we see economic growth occurring, then is the time to reduce public spending and lower debt – but most don’t hear this part.
His suggestion that the current fixation on austerity is actually an ideology not an evidence based strategy also gets people upset. “If a family is in serious debt they must reduce it” say his critics and he responds, politely but firmly, that an economy is very different from a household and we cant see the analogy taking us very far.
But at least he is a willing crusader against wrong-minded and failing economic policies. Someone should listen.