Published: February 17, 2012
Struggling euro-zone economies like Greece, Portugal, Spain and Italy cannot cut their way back to growth. Demanding rigid austerity from them as the price of European support has lengthened and deepened their recessions. It has made their debts harder, not easier, to pay off.
(February 14, 2012)
This is not an issue of philosophical debate. The numbers are in.
As The Times’s Landon Thomas Jr. reported this week, Portugal has met every demand from the European Union and the International Monetary Fund. It has cut wages and pensions, slashed public spending and raised taxes. Those steps have deepened its recession, making it even less able to repay its debts. When it received a bailout last May, Portugal’s ratio of debt to gross domestic product was 107 percent. By next year, it is expected to rise to 118 percent. That ratio will continue to rise so long as the economy shrinks. That is, indeed, the very definition of a vicious circle.
Meanwhile, shrinking demand and fears of a contagious collapse keep pushing more European countries toward the danger zone of unsustainable debt.
Why are Europe’s leaders so determined to deny reality? Chancellor Angela Merkel of Germany and President Nicolas Sarkozy of France, in particular, seem unable to admit that they got this wrong. They are still captivated by the illogical but seductive notion that every country can emulate Germany’s export-driven model without the decades of public investment and artificially low exchange rates that are crucial to Germany’s success.
Mrs. Merkel also seems determined to pander to the prejudices of German voters who believe that suffering is the only way to purge Greece and other southern European countries of their profligate ways.
There’s no question that Greece has behaved inexcusably, spending more than it could afford, failing to collect taxes from some of its richest citizens and fudging its books. And while we sympathize with Greek protests against excessive austerity, we have no patience with politicians who continue to drag their feet over pro-growth reforms and privatizations. But the cure is neither collective punishment nor induced recession. Europe must be willing to help Greece grow out of its problems — on the condition that Greek politicians finally commit themselves to market reforms.
Under strong pressure from international investors, euro-zone leaders have recently adjusted some of their policies. Europe’s central bank has injected much needed liquidity into the Continent’s banking system. Plans are finally under way to add money to a chronically underfinanced European Union bailout fund. But until they abandon the mistaken belief that austerity is the way to debt relief, even those steps won’t be enough.
With Greece rapidly approaching the day (probably next month) when it can no longer pay government salaries and foreign creditors, Europe still has not released needed bailout money. It is not clear whether Mrs. Merkel and Mr. Sarkozy and others are playing chicken with Athens or think they could withstand Greece defaulting and leaving the euro zone. The risks are enormous.
At a minimum, a Greek default would send damaging aftershocks rippling through government finances and banks across Europe. The ideal and the practice of a united Europe would suffer a major blow. Those are high prices for all of Europe to pay for clinging to a failed idea.