Can the euro be saved? Not long ago we were told that the worst possible outcome was a Greek default. Now a much wider disaster seems all too likely.
True, market pressure lifted a bit on Wednesday after central banks made a splashy announcement about expanded credit lines (which will, in fact, make hardly any real difference). But even optimists now see Europe as headed for recession, while pessimists warn that the euro may become the epicenter of another global financial crisis.
How did things go so wrong? The answer you hear all the time is that the euro crisis was caused by fiscal irresponsibility. Turn on your TV and you’re very likely to find some pundit declaring that if America doesn’t slash spending we’ll end up like Greece. Greeeeeece!
But the truth is nearly the opposite. Although Europe’s leaders continue to insist that the problem is too much spending in debtor nations, the real problem is too little spending in Europe as a whole. And their efforts to fix matters by demanding ever harsher austerity have played a major role in making the situation worse.
The story so far: In the years leading up to the 2008 crisis, Europe, like America, had a runaway banking system and a rapid buildup of debt. In Europe’s case, however, much of the lending was across borders, as funds from Germany flowed into southern Europe. This lending was perceived as low risk. Hey, the recipients were all on the euro, so what could go wrong?
For the most part, by the way, this lending went to the private sector, not to governments. Only Greece ran large budget deficits during the good years; Spain actually had a surplus on the eve of the crisis.
Then the bubble burst. Private spending in the debtor nations fell sharply. And the question European leaders should have been asking was how to keep those spending cuts from causing a Europe-wide downturn.
Instead, however, they responded to the inevitable, recession-driven rise in deficits by demanding that all governments — not just those of the debtor nations — slash spending and raise taxes. Warnings that this would deepen the slump were waved away. “The idea that austerity measures could trigger stagnation is incorrect,” declared Jean-Claude Trichet, then the president of the European Central Bank. Why? Because “confidence-inspiring policies will foster and not hamper economic recovery.”
But the confidence fairy was a no-show.
Wait, there’s more. During the years of easy money, wages and prices in southern Europe rose substantially faster than in northern Europe. This divergence now needs to be reversed, either through falling prices in the south or through rising prices in the north. And it matters which: If southern Europe is forced to deflate its way to competitiveness, it will both pay a heavy price in employment and worsen its debt problems. The chances of success would be much greater if the gap were closed via rising prices in the north.
But to close the gap through rising prices in the north, policy makers would have to accept temporarily higher inflation for the euro area as a whole. And they’ve made it clear that they won’t. Last April, in fact, the European Central Bank began raising interest rates, even though it was obvious to most observers that underlying inflation was, if anything, too low.
And it’s probably no coincidence that April was also when the euro crisis entered its new, dire phase. Never mind Greece, whose economy is to Europe roughly as greater Miami is to the United States. At this point, markets have lost faith in the euro as a whole, driving up interest rates even for countries like Austria and Finland, hardly known for profligacy. And it’s not hard to see why. The combination of austerity-for-all and a central bank morbidly obsessed with inflation makes it essentially impossible for indebted countries to escape from their debt trap and is, therefore, a recipe for widespread debt defaults, bank runs and general financial collapse.
I hope, for our sake as well as theirs, that the Europeans will change course before it’s too late. But, to be honest, I don’t believe they will. In fact, what’s much more likely is that we will follow them down the path to ruin.
For in America, as in Europe, the economy is being dragged down by troubled debtors — in our case, mainly homeowners. And here, too, we desperately need expansionary fiscal and monetary policies to support the economy as these debtors struggle back to financial health. Yet, as in Europe, public discourse is dominated by deficit scolds and inflation obsessives.
So the next time you hear someone claiming that if we don’t slash spending we’ll turn into Greece, your answer should be that if we do slash spending while the economy is still in a depression, we’ll turn into Europe. In fact, we’re well on our way.
I'll tell you what ... This whole 'stuff' in europe has really really made me think abut things .. such as ..What on EARTH would have happened here IF our people (as much as I despised them).. took all most over a year to solve OUR economic crisis ? ... how would that have worked ? ..... I really don't know ..maybe it wouldn't be as bad as it now ... it just makes me wonder ..... .. I realize Angela has much to lose .. but I'm telling you I would absolutely vote against her ... If I lived there ......my GOD ..imo, right now, in THIS crises, she's been horrid ... I know she has her strong points and I know things just aren't going her way .. however, long term inaction in anything usually is NOT the best solution ... sheesh .. anyway ........I wonder if WE, the US had taken a year or more to handle our financial crises in 2008 ..what OUR outcome would be .... ? just wondering ...
In Greece, fears that austerity is killing the economy
Leaders aim to hammer out a plan to save the euro, while demonstrators take to the streets to show opposition to austerity measures in cash-strapped countries.
By Anthony Faiola, Published: January 10
ATHENS — Deeply indebted and nearly bankrupt, this Mediterranean nation was forced to adopt tough austerity measures to slash its deficit and secure an international bailout. But as Greece’s economy slides into free fall, critics are scanning the devastated landscape here and asking a probing question: Does austerity really work?
Unemployment has surged to 18.8 percent from 13.3 percent only a year ago. Overburdened public hospitals are facing acute shortages of everything from syringes to bandages because of budget cuts, with hiring freezes forcing the mothballing of operating rooms even as more unemployed are relying on the public health system. Rates of homelessness, suicide, crime and HIV cases from intravenous drug use are jumping
Greece has been forced to cut spending and raise taxes in the middle of a severe downturn, slashing pensions as well as state salaries, jobs and services. As public confidence has evaporated, consumer spending — the biggest driver of the economy — has plunged, generating cascading losses at private firms. The result is a dizzying economic plummet and social crisis that is bringing the cradle of Western civilization to its knees.
“Conditions have deteriorated so dramatically that doctors in this country now believe that the Greek crisis is no longer just a financial crisis but a humanitarian crisis,” said Dimitris Varnavas, the president of the Federation of Greek Hospital Doctors’ Unions.
The economic pain here is intensifying the debate over how to fix Europe’s fiscal woes, potentially influencing U.S. policymakers as they chart their own course to cut the deficit.
On Monday, German Chancellor Angela Merkel and French President Nicolas Sarkozy turned up the heat on Greece, suggesting that its bailout deal is in danger of unraveling if Athens does not press ahead quicker with pledged budget reforms and seal a deal with bondholders to voluntarily restructure its massive debt. But they also acknowledged that new steps are needed to combat slowing growth in the euro zone, where economists fear a looming regional recession as other indebted nations from Italy to Spain to Ireland also make deep spending cuts to reassure worried investors.
Greece, proponents of austerity say, has no one to blame but itself. After a decade of excessive borrowing and spending, evidence emerged in late 2009 that Greek officials had lied about the extent of the country’s whopping deficit. That lighted the first sparks of the European debt crisis, touching off a firestorm of investor panic that spread across Europe and is jeopardizing the global economy.
European powers, led by fiscally conservative Germany, have been insisting that Greece correct years of mismanagement by enacting swift waves of cuts and other major economic reforms to regain the confidence of investors and ensure the integrity of the euro. Slashing the deficit quickly is essential to ushering in a sustainable future, they have argued, and the resulting social pain is necessary to impress on Greek politicians and society that such excesses should never happen again.
Fueled by borrowing and overly generous government handouts, Greek living standards, they argue, became artificially high. As the standard of living and average wages here shrink dramatically, supporters of quick cuts say, Greece will also become more globally competitive. This month, Greece is set to negotiate a second, more sweeping bailout — valued at $175 billion — that could bring more cuts, force a reduction of wages in the private sector and compel the country to make good on promises to slash tens of thousands of public- sector jobs.
But increasingly, critics of the quick-cuts theory are pointing to the worsening recession here as evidence that the medicine is killing the patient, with the nation’s sharp, sustained decline leading some economists to suggest that the country has entered a more serious depression. Some are calling for more-staggered cuts, an increased focus on modernizing the economy, and tax incentives — as opposed to recent tax increases — that could spur growth or at least ease the downturn.
“This idea of cut, cut, cut and tax, tax, tax is not going to work,” said Andonis Papagiannides, an economist and editor of Greece’s Economic Review. “It has sent Greece into a depression with no end in sight. They want milk, but you don’t get milk by killing the cow.”
Athens’s ‘new poor’
To glimpse Greece’s spiral, step inside the Klimaka homeless shelter and soup kitchen in the center of this ancient capital. Here, the proprietors say, you can tell the newcomers by their clothes.
They knock on the bright-red door wearing clean, name-brand shirts and jackets. Their pants pockets and bags bulge with cellular phones and other totems of broken middle-class lives. They seem dazed for the first few days. Many, like Lambros Zackarrlos, a 55-year-old plasterer in a Formula One jacket who lost his job eight months ago as the Greek debt crisis built, cannot bear to tell loved ones how far they’ve fallen.
“I told my son I got a new job as a truck driver and am on the road outside Greece,” he said. “I did not want him to know where I am. Like all of us now, he has his own financial problems.”
The swelling numbers of “new poor” using Athens shelters and soup kitchens — up as much as 25 percent since the crisis began in earnest in 2010, according to nonprofit groups and city officials — speak to the effects of the economic medicine being imposed on Greece and other troubled economies in Europe. In a country where homelessness was largely limited for generations by a culture of close family ties, officials say the roughly 1,000 beds available in Athens shelters are now fully occupied, with weeks-long waiting lists for newcomers.
Most of them are economic refugees like Leon Hannen, 64, a fluent English speaker and a maker of sacred icons for the Greek Orthodox faithful. When Greece’s economy went from bad to worse in 2011, squeezing wallets, religious shops rapidly stopped purchasing his wares. He said he went from a monthly income of roughly $2,600 as recently as 2009 to about $260 a month by last summer.
“Before I knew it, rent was six months overdue and I was asked to leave,” he said. “I had nowhere to go. I slept under the stars, on park benches, at first. I chose the ones by street lamps to be careful. Frankly, I feel as if I’ve had an easy life up until now. But none of us do anymore.”
Health care takes hit
In May 2010, Greece pledged to meet tough targets to cut its deficit as part of a bailout deal with the European Union, the International Monetary Fund and the European Central Bank. But it resoundingly missed those targets in 2011, in part because the Greek economy went into a nose dive, estimated to have shrunk by nearly 6 percent, or twice as much as initially predicted. That happened despite the government actually putting into effect less than a quarter of pledged measures, suggesting, critics say, that a fuller embrace of the austerity would have been far more socially damaging.
Greece agreed to stringent bailout terms to avoid a catastrophic debt default that could force it to exit the euro, an event that would probably increase the immediate hardship here but potentially set the stage for future growth. But skeptics caution that a default may happen anyway. Some economists are suggesting that more cuts this year would force Greece into another economic contraction that would be far worse than the current estimates of a 3 percent drop this year. That could cause the government to again grossly miss its agreed-upon deficit targets, triggering a standoff with its lenders, who have suggested they would cut Athens off from rescue funds if it does not fulfill its pledges.
Greece is no newcomer to economic chaos. After decades of budget crises and high inflation, stabilization came with the adoption of the euro a decade ago. Using its new, solid currency to access record-low interest rates, Greece proceeded to rack up a massive national debt of roughly $442 billion — or $40,000 for each of Greece’s 11 million citizens.
The current cuts, critics say, are exacerbating a growing social crisis here, particularly in public health. A rising tide of unemployed Greeks have lost their private health-care coverage, leaving them turning to public hospitals left dangerously understaffed by hiring freezes. Suppliers are cutting off shipments of syringes, catheters, gauze and other medical materials because of the government cash crunch.
In the cold foyer of the Nikaia hospital in south Athens, Miranda Tzima, 37, said her husband almost died last week. After a car crash, his ambulance had to take him to a more distant public hospital because the closest one was overburdened, causing him to lose more blood en route.
Leaving her children with her parents, she has moved into her husband’s hospital room to tend to him amid a hospital staff shortage. She has been warned that it may take him months to learn to walk again, perhaps longer, given cutbacks in the public physical therapy staff. Once, she would have turned to private medicine, but her family lost its health coverage when she was laid off from her job at a Citibank branch in Athens as the economy tanked in 2011.
“They say we are doing this to stay in” the euro, she said. “But I look our situation, and I wonder, is it worth it?”
Special correspondent Elinda Labropoulou contributed to this report.
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