How’s that austerity workin’ for ya? Just as sequestration takes hold here in the US, Europe is looking to go the other way, releasing more Euros (and even Pounds) in order to get things going again. The new US “policy” of budget balancing, backed into without thinking, is now being formally abandoned by everyone else.
There is probably some kind of requirement that any blog on economics has to write about Europe every so often, even if nothing new is happening. But today there may well be something worth writing about as the Central Banks develop the whiff of panic that has been absent so far. As Japan becomes more urgent and the US shoots itself, Europe has some tough choices to make. What, or better yet can, they do?
What is new to Europe is highly increased political instability. Italy held elections on 24 February that make it appear nearly impossible to form a stable government. Indeed, 25% of the vote went to the “5 Star Alliance” headed by Beppe Gillo, Italy’s rough equivalent of Jon Stewart. That bloc of politicians, the second largest overall, was elected on a platform of … well, no one is exactly sure. They are anti-austerity and in favor of a number of reforms, but overall the whole thing was simply a protest vote. It’s unclear if they will be willing to join any coalition government or do anything productive at all.
The result is that Italy, and after some strange rumors Spain, have seen their bond rates rise in response to the chaos. It’s time for the European Central Bank to step in and buy those bonds up to keep the rates low – or so the reasoning goes. But they have not announced any such action yet. The big question is what, exactly can they do beyond what has already not worked? ECB Chief Mario Draghi hasn’t come up with anything publicly. “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro,” he has cryptically said, “And believe me, it will be enough.”
In the UK, the situation is dire enough to consider more innovative action. They are facing a triple-dip recession if this quarter goes negative only because no one wants to call anything, even a triple-dip recession, a “depression”. The Bank of England is considering instituting negative interest rates to member banks as a policy to make it costly to park money in the bank without putting it to some use in the economy. The idea was floated a week ago but has not been implemented yet. The short version of this story is that they are willing to consider any and everything to get their economy moving again.
We’ve talked about Japan at some length, and so far most of the developed world is indeed giving them a pass to print about as many Yen as they want. South Korea is responding somewhat timidly, unwilling to spark an open currency war. But there is no doubt that more Yen will be met with more Won in due time.
That leave the US as the only major economy considering austerity. More to the point, we aren’t considering anything given that austerity was supposed to be such a terrible idea we’d do anything to avoid it. Apparently “anything” didn’t logically involve our politicians working together to do anything. Even places like Italy, where that is less possible, aren’t doing anything as stupid as we are.
Nevermind. The point is that the rest of the world has learned from us, over time, that economic stimulus is the only possible way out of this situation. While they flounder to figure out just how they will make that happen in their own systems, our system has broken down completely. It makes no sense at all to anyone anywhere in the world, but there it is.
What can any of our nations do? The point is that many nations are trying just about anything – and sooner or later something has to work. We have no excuse for doing nothing given that we were the only ones doing anything that was making progress.
Given time, we’ll figure out that this is a very bad situation. Everyone else did regardless of their own political instability. The only question is how long it will take.
You are starting to sound like Krugman and in my view that is a good thing. I don’t know if you have ever looked at his mini class using slides but some are very good. Recently read an article about instability/stability in Hungary with one party rule and how they are rewriting the whole country and pushing it back to pre WWII ideas (instituting death penalty, clearing out opposition judges etc. and they are being abetted by conservative religious leaders). Once again as you say the conservative reactionary forces are being the real radicals or change agents..
On a more personal note I start my new job today driving a circulator bus for Anoka county. My wife is looking for health insurance for me as I was turned down by Blue cross. It is not fun being 55 and in relatively good health but getting turned down because of weight (245) and some relatively minor health issues (on 1 med).
Eric keep up the good work and I hope you get to spend some time this week following the health care debate in the Minnesota legislature.
Ha! I guess I am like Krugman when the debate gets this polarized. I’ve never liked his call for more spending without being carefully targeted to things that transform the economy, but given where we are we can’t be picky.
The reactionaries are a serious problem. They can’t be allowed to have so much power, either here or in Europe. It’s very sad that it comes down to this.
Good luck on the new gig, and sad that you’re one of us who can’t get health care. That will change in a year – we just have to hold on a bit longer. Yes, I’m watching the legislature and should say more about what’s going on there.
I can’t believe they let the sequestration happen. By their own admission their inability to work together resulted in something that was never supposed to happen becoming law. They have all failed.
Mainly, I’m disgusted beyond words. What a bunch of losers posing as a government.
I am not against budget cuts by any means but this is a stupid way to do it.
I totally agree.
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