What America Must Learn from the Euro Crisis

With the fiscal cliff approaching both the left and right are ready to misinterpret Europe's economic woes.

With the so-called fiscal cliff looming, policy makers in Washington are preparing for debate and, perhaps, some compromise. Across the Atlantic economic collapse is unfolding, and on both sides of the economic spectrum the fiasco in Europe is being used as rhetorical ammunition by pundits and politicians. On the right the eurozone crisis is being portrayed as the inevitable future of the United States if spending is not curbed. On the left the failure of so-called austerity is all the evidence that is needed for Congress and the White House to avoid spending cuts and lower taxes. Indeed even President Barack Obama has tried to persuade some European leaders into spending more. Both of these interpretations are misguided, however, and each one threatens to endanger fiscal and monetary reform in the United States.

Much of Europe was relieved by Obama’s re-election. The German newspaper Der Spiegel ran a piece on what Obama’s re-election means for the eurozone in the midst of the euro crisis. The piece included an observation on how Democrats view many of the austerity programs being implemented in the eurozone nations:

For the Democrats, Europe has pursued a tin-eared draconian policy of cutting deeply in the euro-zone South. The result has been economic pain and political unrest with little prospect of near-term growth. This critique holds that the current institutional set-up within the euro zone robs governments in Greece, Spain, and Italy of the policy tools necessary to animate their economies, put vast swaths of unemployed workers back to work, and, consequently, reignite growth. This stance sees the euro-zone crisis as vindication for the Troubled Asset Relief Program (TARP). 

This is an accurate portrayal of how many liberals view the euro crisis: Austerity has failed, government intervention and fiscal activism is required to return to growth. One of the left’s most vocal supporters of this sort of argument is the neo-Keynesian economst and New York Times columnist Paul Krugman, who has been criticizing European attempts at austerity. For those of Krugman’s persuasion, economic stimulus can help provide the growth needed for economic recovery. Such a theory views wars and natural disasters as opportunities to grow the economy, not massive drains on productivity.   

It is true that the economic progress made by governments that have been explicitly pro-austerity, like the British government, has been disappointing. However, what many on the American left do not understand is that there have been very few spending cuts in the U.K. and other countries in Europe, and in fact the British government has increased taxes. What meager cuts have been made to the British budget are in large part thanks to inflation; nominally the British budget has been increased. A New York Times editorial (which mentions Britain specifically) from October codifies this misunderstanding while criticizing Romney’s thoughts on Greece.

One of the most important recent developments in Europe has been the 2013 Greek “austerity” budget. To most people “austerity” means a reduction in spending. However, the 2013 Greek budget projects that the Greek debt to GDP will be 191.6 percent in 2014 (up from the 144.3 percent debt to GDP rate proposed in the 2010 bailout plan). European politicians and policy makers had hoped to have the Greek debt to GDP down to 120 percent by 2020, something that the IMF still supports. However, it now seems that the deadline could be extended to 2022. When the prime minister of Luxembourg announced this possible change in deadline it was greeted by laughter.

On the American right we can expect the anti-European rhetoric to continue. Throughout Obama’s first presidency he was accused, especially during the health care reform debate, of trying to implement “European-style socialism.” To most Europeans this characterization is confusing (especially considering the levels of government spending under Republican presidents), and any digging into many of these criticisms leaves only empty politically useful rhetoric to be found.

Given the closeness of the fiscal cliff, chances are that Republicans, who claim to favor small government and lower taxes, will invoke what is happening in Europe as a good reason to cuts spending. During the campaign Mitt Romney made sure to mention Spain and Greece.

Unfortunately, to call the euro crisis a problem of spending is too simplistic. Although Greece certainly spent too much money in the years before the recent crash other countries on the brink of fiscal collapse are in their situation for reasons other than government overspending.

Spain is perhaps the best example of a country in the eurozone in crisis for reasons other than overspending. In 2008 Germany had a higher debt to GDP than Spain and Ireland, two countries that have been among the hardest hit by the recent crash. Germany, by comparison, has become the European powerhouse that is the source of much of the rest of the eurozone’s bailout money. If government spending alone were the cause of Ireland and Spain’s present unfortunate situation we would expect Germany to be in a similar mess.  

There are lessons to be learned from the crisis in the eurozone, but is too simplistic to say that the main takeaway from the euro crisis is that overspending can wreck an economy.

What is happening in Europe can teach American policy makers the perils of not only overspending, but also the dangerous situation that bad banking and monetary policy inflict can inflict on a country. The real lesson from Europe is that the institutions that allow citizens to use and store money are in need of reform as much as the government’s attitudes towards spending.

Going forward the American left must acknowledge reality and recognize that no European country is practicing true fiscal austerity. The right, on the other hand, must accept that what is happening in Europe is not just a spending problem. There's no hope of tackling the fiscal crisis at home until politicians and policy makers on both sides of the aisle understand what's happening abroad. Needless to say, I’m not getting my hopes up.

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  • Hyperion||

    We will learn that you can continue looking over the edge of the fiscal cliff forever, and ever, and ever, as long as there are still brave and noble politicians left to save us from ourselves. All we need is MOAR revenue.

  • califernian||

    The right, on the other hand, must accept that what is happening in Europe is not just a spending problem.

    I'm befuddled here. What then causes deficits and debt other than spending too much?

  • Jerry on the road||

    If they reduce spending they still have the monetary policy problem called the euro.

  • Cytotoxic||

    Pretty sure the Right is against that too.

  • ||

    You are befuddled because Feeney is being an idiot again.

  • Ken Shultz||

    "The American right must accept that overspending alone did not cause the eurozone’s troubles."

    Feeney must accept that until we see massive unrest from government employees--like what we saw happen across Europe today--we'll always know that the biggest threat to our economic growth isn't really being addressed.

  • Ken Shultz||

    "This is an accurate portrayal of how many liberals view the euro crisis: Austerity has failed, government intervention and fiscal activism is required to return to growth."

    Where is Greece supposed to get stimulus funds?

    From the bond market?!

    Ha!

    For goodness' sake, the only reason Portugal, Spain, Italy, and Greece are cutting their budgets is because they have NO MEANS to get more money. They can't get it from the credit markets, and they can only get so much from Germany.

    ...and raising taxes at this point, for Greece especially, is trying to squeeze blood out of turnip. All the parties in Greece know that! It wouldn't matter what party the government of Greece was run by--they're out of choices. There's no decision to make anymore!

    When Krugman argues this, he argues it to an audience made up of Americans on the left. Krugman argues this crap becasue stimulus is what he thinks the U.S. should do--it isn't even an option in Portugal, Spain, Italy, or Greece.

  • Ken Shultz||

    "Throughout Obama’s first presidency he was accused, especially during the health care reform debate, of trying to implement “European-style socialism....[and] any digging into many of these criticisms leaves only empty politically useful rhetoric to be found."

    Let's see... $1.6 trillion in new taxes proposed today, and the healthcare system was more or less taken under government control.

    GM was nationalized--more so than, say, Airbus ever was!

    Why are the Europeans confused by the criticism that Obama is trying to implement European style socialism?

    Why would anybody be confused by this criticism?

    There's a reason why when French kids who just graduated from college want a job, they protest the government and demand one...

    The only person who seems to be confused by accusing Obama of trying to implement European style socialism is Feeney.

  • R C Dean||

    Did I miss it, or does Feeney never actually say what the problem is in Europe, except that its not overspending?

    Spain is fucked because its banks participated in a horrendous real estate bubble, and, of course, its national and provincial governments overspent.

    Germany has a higher debt to GDP ratio, but its current deficits are around, what 1% of GDP, as opposed to the 8 - 10% of GDP here in the US? Doesn't Germany actually prove that overspending is the problem?

  • ||

    Did I miss it, or does Feeney never actually say what the problem is in Europe, except that its not overspending?

    Not only that but he uses pretty sparse evidence as to why it is not overspending.

    he says in 2008 Spain had less debt then Germany....

    Hell for all we know Spain had less debt then Germany in 1962....of course Spain is in crisis right now and right now is 2012 not 2008 or 1962.

  • Drake||

    Nuanced. Not sure what it means, but you guys need more nuance.

  • Ken Shultz||

    "Germany had a higher debt to GDP than Spain and Ireland....If government spending alone were the cause of Ireland and Spain’s present unfortunate situation we would expect Germany to be in a similar mess."

    Right, it's because of the resiliency of Germany's economy. Germany has one of the most productive economies in the world, in terms of economic output per capita, so the world is willing to lend to Germany when things get bad--like they aren't willing to lend to Spain and Ireland.

    It's sort of like a p/e ratio on a stock. Some stocks get high multiples because investors think they have a lot of growth ahead of them. Some stocks get low multiples because investors think they don't have much growth ahead of them at all...

    Guess what? Investors think Germany's economy can stand a lot more weathering than Ireland or Spain. That means Germany can carry a lot more in the way of cost than Ireland or Spain can. That's why Spain and Ireland have to cut their costs--and Germany doesn't.

    Incidentally, have you looked at how austere government have fared amid all this? How's Sweden done?

  • swampleg||

    This article said nothing but the typical Reason magazine "Woe to both the left and the right" stuff. Except for a mention of a banking crisis, this article mentioned nothing of what the author thought the problem was. It certainly put forth no suggestions as to what the solution is.

    What is the author's idea for a solution to this problem. I know... "DO BETTER!!!!!!!!!"

  • ||

    In 2008 Germany had a higher debt to GDP than Spain and Ireland, two countries that have been among the hardest hit by the recent crash.

    Really?

    2008?

    4 years ago neither Germany or Spain were in crisis....what is their comparative debt now?

    That is some thin evidence that spending and debt is not the problem.

    Feeney you need to get better at your job.

  • Gladstone||

    I thought a more libertarian article would be that the Right are a bunch of hypocritical big government statists that aren't going to cut enough spending not that the Right is Wrong to be concerned about government spending. I mean what else causes huge deficits than overspending? What exactly is the problem that Feeney thinks the Right should be looking at?

  • Gladstone||

    Seems Feeney thinks the real problem is "bad banking and monetary policy." You mean policies that allow governments to spend lots of money?

  • ||

    Even if the problem in Europe wasn't overspending (it is, and Feeney doesn't even attempt to present a case that it's not), it has fuck-all to do with America and the "fiscal cliff". Europe isn't America, coincidence is not causation, and the plural of anecdote is not data.

  • ||

    To most people "austerity" means a reduction in spending. However, the 2013 Greek budget projects that the Greek debt to GDP will be 191.6 percent in 2014 (up from the 144.3 percent debt to GDP rate proposed in the 2010 bailout plan).

    Greece is reducing spending. The debt-to-GDP ratio keeps rising because the GDP keeps shrinking.

  • vootann||

    Sounds like a plan to me dude.

    www.Privacy-Webz.tk

  • ||

    If it's not a spending problem, what is it?

    A regulatory problem maybe?

  • Ken Shultz||

    Oh no! The problem is that Republicans and libertarians think spending is the problem.

    You're part of the problem, Hazel!

  • Lyle||

    This article taught me nothing.

  • Alien Invader||

    The right, on the other hand, must accept that what is happening in Europe is not just a spending problem.

    And those on the WAY FAR M-F'ing LEFT trot this kind of BS out all the time, hoping the smoke screen will distract somebody. Or something.

    So that the LEFT can keep spending way too fucking much, for as long as it's possible to get way with it.

    How did this guy ever come to write for Reason? He has no grip on anything that even resembles libertarian economics.

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