WASHINGTON — The European economic crisis refuses to go gently into the night. As 2015 opens, Europe represents “the biggest economic threat” to the fragile global recovery, as The Economist magazine puts it. Few would dispute this assessment. There are two overarching problems.
The first is (you guessed it) Greece. The parliament’s inability to elect a new president has triggered an election in which the left-wing Syriza party is leading in the polls. Its agenda is to repudiate many of the austerity measures taken as conditions for the massive bailouts from other members of the eurozone (the 19 countries that use the euro) and the International Monetary Fund.
The danger is that if Greece and its creditors can’t agree, Greece would leave the eurozone and adopt its own money. The change would be disruptive and would raise fears that other debtors (Portugal, Spain, Italy) would be forced to follow suit. Then, turmoil would intensify, as contracts were rewritten and the stability of new national currencies was questioned.
True, this doomsday outcome is discounted by many economists and professional investors. One bulwark is the belief that the European Central Bank (ECB) — Europe’s Federal Reserve — would buy the bonds of distressed debtor countries if they came under fierce attack. But the pledge is untested and might prove inadequate if events spun out of control.
They might, because Greece symbolizes widespread disillusion with austerity policies. Protest could take to the streets. (Austerity generally involves policies to cut budget deficits by reducing spending and raising taxes.) Unemployment averaged 11.5 percent in November for the eurozone but was steeper in high-debt countries: 25.7 percent in Greece (September, the most recent available), 23.9 percent in Spain, 13.4 percent in Italy and 13.9 percent in Portugal. France was 10.3 percent, Germany 5 percent.
The eurozone’s second problem is meager economic growth. The easiest way for a country to service its debts is to generate rapidly rising incomes from which increased debt payments can be made. But since 2008, the eurozone has experienced two recessions. Growth over the entire period has been virtually nonexistent. Economic stagnation has now led to falling prices — deflation.
As a result, government debt for many countries has continued to rise, though annual deficits have diminished. The solution is to speed up economic growth, but it’s not clear how — or whether — this can be done. In a recent report, economists at the Peterson Institute for International Economics in Washington criticized Europe’s leaders for being too timid in stimulating growth. The report made three main proposals:
• The ECB should ease credit dramatically by buying European government and private-sector bonds. (This approach is known as “quantitative easing,” or QE, and has been employed by the Federal Reserve).
• Countries with small budget deficits or surpluses should enact stimulus programs equal to at least 0.5 percent of their economy. Germany, with the eurozone’s largest and healthiest economy, would be the most affected.
• Countries should increase their economies’ flexibility by making it easier to hire and fire workers. (In many countries, restrictions on firing permanent workers discourage companies from hiring.)
The ECB is expected to launch a large-scale QE. The idea is that the bond purchases will leave investors with cash that, committed to other securities, will reduce interest rates or raise prices. But interest rates are already low (the rate on a 10-year French bond is less than 1 percent), and a survey of 32 economists by the Financial Times found skepticism that QE would work as envisioned.
Bigger deficits by stronger countries might boost spending but would be controversial; Germany especially dislikes deficits. Although relaxing restrictions on firing workers might aid some countries in the long run, even the Peterson economists concede that it might initially increase joblessness. The Economist urges “something radical”: about $400 billion infrastructure spending and liberal bond-buying by the ECB.
With aging populations and generous welfare states, Europe is caught in a trap of high debts and low growth. The ultimate specter is of a write-down of some debts — default. But that would create other destabilizing problems. Europe has muddled through its crisis before and may do so again. But until the underlying issues are resolved, its troubles will stalk the world economy.
Robert Samuelson is a columnist for The Washington Post.
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