No one should be surprised that the economy of the eurozone is once more going in reverse. This is an entirely predictable outcome of the misguided policies that European leaders stubbornly insist on pursuing, despite all evidence that they are exactly the wrong medicine.
The acute phase of the financial crisis in Greece, Spain, Ireland and other European countries ended months ago. But the European Union’s insistence, led by Germany, that governments reduce their deficits by cutting spending and raising taxes has continued to impede further recovery. In addition, the European Central Bank has been slow and timid in lowering interest rates and buying bonds, both of which would help. And Europe has allowed problems in its banking sector to fester — witness the emergency bailout of one of Portugal’s biggest banks.
The numbers tell the story. In the second quarter of the year, the 18-country euro area registered no growth, down from a 0.2 percent increase in output in the first three months of the year. The economies of Germany and Italy contracted 0.2 percent, while France registered no growth for the second quarter in a row. Other data released in recent days provide little reason for hope that conditions will get better soon. The inflation rate in the eurozone fell to 0.4 percent in July, down from 1.6 percent in the same month a year earlier. Industrial production fell 0.3 percent in June.
Big changes are plainly needed. As other central banks around the world have done, the European Central Bank should be buying government and other bonds to drive down interest rates and encourage banks to lend more to businesses and consumers. The bank’s president, Mario Draghi, has argued that governments must adopt more pro-growth policies. He’s right, but he cannot ignore his own responsibility. There is little to no risk that more aggressive central bank policies would cause runaway inflation, given that prices are increasing at a far slower pace than the central bank’s target of just below 2 percent.
It’s true, of course, that monetary policy alone will not be sufficient to revive the eurozone economy. Fiscal policy must also be rethought and reworked. The E.U. (encouraged, again, by Germany) has demanded that nations like France and Italy reduce their budget deficits, while at the same time undertaking “structural reforms” that, for instance, make it easier for entrepreneurs to start businesses and for companies to fire workers.
But it is politically difficult, not to mention counterproductive, for governments to do both of those things at a time when the eurozone unemployment rate (11.5 percent in June) is so high. Governments need more flexibility. If anything, they should be taking advantage of low bond yields — Germany can borrow money for 10 years at an interest rate of about 1 percent, and France can borrow at 1.4 percent — to increase spending to kick-start their economies. Once the laggards get going again, their leaders can more easily make the case to their legislatures and citizens for tough economic reforms. But far greater patience is needed, as well as a big change in attitude in Germany and among the E.U.’s senior leadership.
The Forever Slump
AUG. 14, 2014
Paul Krugman
It’s hard to believe, but almost six years have passed since the fall of Lehman Brothers ushered in the worst economic crisis since the 1930s. Many people, myself included, would like to move on to other subjects. But we can’t, because the crisis is by no means over. Recovery is far from complete, and the wrong policies could still turn economic weakness into a more or less permanent depression.
In fact, that’s what seems to be happening in Europe as we speak. And the rest of us should learn from Europe’s experience.
Before I get to the latest bad news, let’s talk about the great policy argument that has raged for more than five years. It’s easy to get bogged down in the details, but basically it has been a debate between the too-muchers and the not-enoughers.
The too-muchers have warned incessantly that the things governments and central banks are doing to limit the depth of the slump are setting the stage for something even worse. Deficit spending, they suggested, could provoke a Greek-style crisis any day now — within two years, declared Alan Simpson and Erskine Bowles some three and a half years ago. Asset purchases by the Federal Reserve would “risk currency debasement and inflation,” declared a who’s who of Republican economists, investors, and pundits in a 2010 open letter to Ben Bernanke.
The not-enoughers — a group that includes yours truly — have argued all along that the clear and present danger is Japanification rather than Hellenization. That is, they have warned that inadequate fiscal stimulus and a premature turn to austerity could lead to a lost decade or more of economic depression, that the Fed should be doing even more to boost the economy, that deflation, not inflation, was the great risk facing the Western world.
To say the obvious, none of the predictions and warnings of the too-muchers have come to pass. America never experienced a Greek-type crisis of soaring borrowing costs. In fact, even within Europe the debt crisis largely faded away once the European Central Bank began doing its job as lender of last resort. Meanwhile, inflation has stayed low.
However, while the not-enoughers were right to dismiss warnings about interest rates and inflation, our concerns about actual deflation haven’t yet come to pass. This has provoked a fair bit of rethinking about the inflation process (if there has been any rethinking on the other side of this argument, I haven’t seen it), but not-enoughers continue to worry about the risks of a Japan-type quasi-permanent slump.
Which brings me to Europe’s woes.
On the whole, the too-muchers have had much more influence in Europe than in the United States, while the not-enoughers have had no influence at all. European officials eagerly embraced now-discredited doctrines that allegedly justified fiscal austerity even in depressed economies (although America has de facto done a lot of austerity, too, thanks to the sequester and cuts at the state and local level). And the European Central Bank, or E.C.B., not only failed to match the Fed’s asset purchases, it actually raised interest rates back in 2011 to head off the imaginary risk of inflation.
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The E.C.B. reversed course when Europe slid back into recession, and, as I’ve already mentioned, under Mario Draghi’s leadership, it did a lot to alleviate the European debt crisis. But this wasn’t enough. The European economy did start growing again last year, but not enough to make more than a small dent in the unemployment rate.
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RECENT COMMENTS
LeschatsDeux 16 hours ago
I guarantee you, the cure for this slump is to elect a Republican president. When that dreadful event happens, the Republicans in Congress…
Doug Brockman 16 hours ago
I am not so sure inflation is that low. I have read if you measure it by 1979 metrics it is running at 9%. And the price of groceries and…
George Woolfe 16 hours ago
I am on the side of the not-enoughers. How can we prosper when so many of us are working at jobs that don’t pay enough to put us above the…
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And now growth has stalled, while inflation has fallen far below the E.C.B.’s target of 2 percent, and prices are actually falling in debtor nations. It’s really a dismal picture. Mr. Draghi & Co. need to do whatever they can to try to turn things around, but given the political and institutional constraints they face, Europe will arguably be lucky if all it experiences is one lost decade.
The good news is that things don’t look that dire in America, where job creation seems finally to have picked up and the threat of deflation has receded, at least for now. But all it would take is a few bad shocks and/or policy missteps to send us down the same path.
The good news is that Janet Yellen, the Fed chairwoman, understands the danger; she has made it clear that she would rather take the chance of a temporary rise in the inflation rate than risk hitting the brakes too soon, the way the E.C.B. did in 2011. The bad news is that she and her colleagues are under a lot of pressure to do the wrong thing from the too-muchers, who seem to have learned nothing from being wrong year after year, and are still agitating for higher rates.
There’s an old joke about the man who decides to cheer up, because things could be worse — and sure enough, things get worse. That’s more or less what happened to Europe, and we shouldn’t let it happen here.