John Buell

Profligate Europeans?

Beware of pundits bearing lessons from Greece! With rare exceptions, the mainstream media have seen Greece’s hardship as punishment for the profligacy of its welfare state. The Washington Post’s Robert Samuelson is typical:

“You might think that Europe’s economic turmoil would inject a note of urgency into America’s budget debate. After all, high government deficits and debt are the roots of Europe’s problems, and these same problems afflict the United States. But no. Most Americans, starting with the nation’s political leaders, dismiss what’s happening in Europe as a continental drama with little relevance to them.”

Perhaps when a message fits so snugly with long received wisdom, other facts or interpretations don’t matter. But at the risk of tilting at windmills, I’ll summarize some considerations mostly omitted in the corporate media, courtesy of Dean Baker, Paul Krugman, and Harvard economist Dani Rodrik.

For starters, high government deficits are not the root of Europe’s problems. Spain, whose collapse would be far more consequential than Greece, ran budgetary surpluses up until two years ago. In the early years of this century Spain became Europe’s Florida and enjoyed — for a time — an immense housing bubble. That bubble triggered a rise in wages in Spain, but when that bubble collapsed it left Spain with a cost structure that made it uncompetitive — especially in slumping world markets. Even in the Greek case, where governments have been fiscally irresponsible, at least half of current deficits are attributable to the world recession, which has shrunk government revenues and increased obligations.

As for those generous European welfare states, readers of the mainstream press might be surprised to learn that the states under most sustained scrutiny by the bond vigilanties are those with the least generous welfare states in Europe. Germany’s welfare state is far more generous than Italy’s, but the former’s bonds remain attractive. In the Greek case, the welfare state could easily be afforded — if the rich in Greece stopped evading or were forced to pay their fair share of taxes.

If anything, some of Europe’s problems spring from Germany’s being too successful. Casual observers would hardly know that economic inequalities among the European states are much greater than those within any single state. The EU today encompases nations with vastly different levels of worker productivity, infrastrure, and technological sophistication. German productivity has continued to grow, but fiscal and monetary authorities have kept a tight lid on German wages. Germany is thus an export superpower, but one that has in effect created substantial trade balance problems for the EU’s peripheral nations.

As Paul Krugman has pointed out, before the EU era, a nation in Spain’s or Greece’s situation could simply allow its currency to devalue, thus easing some of the problems of adjustment by stimulating more exports and avoiding prolonged and deep unemployment.

Alternatively, if the EU were a genuine federal system, Greece’s situation would be more akin to California’s. It is hurting, but system- wide automatic stabilizers would kick in, including unemployment compensation and social security. Greater population mobility would further diminish the hardship.

Though the currency has been unified, fiscal policy in Europe has not been federalized, and this is probably not accidental. The EU has been primarily an economic elite undertaking. One of its goals has been to curb the welfare state through trade agreements and a single currency, which would squeeze the ability of individual governments to pursue generous welfare policies. European elites would hardly like to see these extended continent- wide, but they continue to face the problem of engineering popular consent to some form of bailout of banks and bondholders in order to save the Euro.

Europe is perhaps on the brink of a tragedy, but not the Greek tragedy being portrayed by the media. The bailout of Greece is deeply unpopular among many working class Germans, but few seem to realize that imposed austerity will place even more competitive pressures on German workers and lead to further cracks in the welfare state. Higher wages and more spending by Europe’s haves and a system wide commitment to improve infrastructure and productivity in the periphery are a better answer than forced austerity, but that message has too few takers on both sides of the Atlantic.

John Buell lives in Southwest Harbor, Maine, and writes regularly on labor and environmental issues. Email

From The Progressive Populist, October 1, 2010

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