Eurozone Crisis: This Is what European political intransigence looks like

BY: SAM HUGHES

By pushing austerity measures instead of working to balance trade and capital proportionally among its constituent nations, the European Union is exacerbating its economic crisis and pushing us to the edge of global economic downturn.

The revolutionary experiment to create a common currency between European nations was risky, and everyone knew that. In order to join, each nation needed an inflation rate of no more than 1.5 percentage points above the average rate of the three lowest EU countries from the previous year, a national budget deficit at or below three percent of gross domestic product and public debt not higher than 60 percent of GDP.

They also created the European Central Bank to oversee and manage the euro currency. The ECB has one mandate–to keep inflation at or near two percent. In the recession, almost none of these goals have been met.

Last year, Greece, Italy, Spain, Portugal and Ireland experienced a debt crisis, making it increasingly expensive for them to pay to keep their governments running. Interest rates for their treasury bonds were very high, meaning that investors in each country’s debt demanded unsustainable high rates of return. This made it more expensive and difficult to borrow, pushing them to the brink of default.

One common explanation for this phenomenon is that investors did not have confidence in the abilities of the countries to pay back the bonds. Uncertainty drove interest rates higher, making it harder for the countries to pay back investors, creating a vicious cycle that continued to push interest rates higher.

The solution prescribed by punditry and the European elites was to force radical austerity measures onto these countries in return for a relatively small cash infusion to fund government debt and deficits in the near term. Instead, the European Central Bank cheaply found a way to open lines of cheap credit to most of the countries, temporarily alleviating the debt crisis.

In reality, the debt crisis was more of a symptom, rather than a cause, of economic hardship. These countries are trapped in a monetary union. Whereas an independent nation could print money and devalue its currency to stabilize its economy, these nations cannot. As a result of the Eurozone currency union, Germany has its lowest recorded unemployment rate since reunification (5.5 percent), while the GIPSI nations struggle at a persistent 15.8 percent unemployment.

This discrepancy is due to Germany accumulating high trade surpluses and lower inflation at the expense of the GIPSI nations. The problem pre-recession was not debt. In fact, in the ten years prior to the Great Recession, the ratio of GIPSI debt to GDP had decreased from nearly 90 percent to 75 percent. Instead, the problem is that GIPSI nations saw higher real inflation and higher trade deficits, making them less competitive in Europe compared to Germany.

What needs to happen is an adjustment to make GIPSI competitive with Germany. The price-level adjustment can either happen through deflation in GIPSI, causing massive economic and social hardship, or it can happen through higher levels of inflation in Germany.

But at the same time, Germany has no desire to see higher levels of inflation and no desire to fix the trade and capital imbalance. They could help fix the recession in GIPSI through direct transfer payments to stimulate their economies (like direct payments from the US federal government to states in particularly bad economic situations).

Instead, over the past few weeks, the leaders of the euro have opted to try to force down prices, wages and government spending in Greece, setting them on the path toward prolonged recession with no end in sight.

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