Paul Krugman points out that if austerity is economic answer to America's problems, austerity involving massive government spending cuts to social programs in a time of high unemployment, austerity involving cutting taxes on corporations to stimulate business activity and hiring, then the austerity being imposed upon Europe right now should be restoring economic confidence across the Eurozone.
The reality is that austerity measures being put into practice there are grinding the economy to a halt.
Nobody bought into the doctrine of expansionary austerity more thoroughly than Jean-Claude Trichet, the president of the European Central Bank, or E.C.B. Under his leadership the bank began preaching austerity as a universal economic elixir that should be imposed immediately everywhere, including in countries like Britain and the United States that still have high unemployment and aren’t facing any pressure from the financial markets.
But as I said, the confidence fairy hasn’t shown up. Europe’s troubled debtor nations are, as we should have expected, suffering further economic decline thanks to those austerity programs, and confidence is plunging instead of rising. It’s now clear that Greece, Ireland and Portugal can’t and won’t repay their debts in full, although Spain might manage to tough it out.
Realistically, then, Europe needs to prepare for some kind of debt reduction, involving a combination of aid from stronger economies and “haircuts” imposed on private creditors, who will have to accept less than full repayment. Realism, however, appears to be in short supply.
Remember, this is the exact economic prescription that the Republicans, especially the "serious fiscal hawks", want us to swallow. And yet these European countries are closer than ever to defaulting on their debt. We hear the same thing must be imposed here immediately, that we're "broke" and that we can't afford the social safety net anymore, that we are just scant inches away from a Greek-style debt crisis and that Weimar Germany and Zimbabwe style hyperinflation is looming for an America where it will soon be cheaper to burn money than fuel.
We're next, they say. Cut trillions from government spending, they say. Give that money instead to the job creators, the wealthiest among us and the corporations they run, so that only then will the power of the markets create millions of jobs, and only then will American consumer rise again as the engine of prosperity.
So how's that working out for Europe?
On one side, Germany is taking a hard line against anything resembling aid to its troubled neighbors, even though one important motivation for the current rescue program was an attempt to shield German banks from losses.
On the other side, the E.C.B. is acting as if it is determined to provoke a financial crisis. It has started to raise interest rates despite the terrible state of many European economies. And E.C.B. officials have been warning against any form of debt relief — in fact, last week one member of the governing council suggested that even a mild restructuring of Greek bonds would cause the E.C.B. to stop accepting those bonds as collateral for loans to Greek banks. This amounted to a declaration that if Greece seeks debt relief, the E.C.B. will pull the plug on the Greek banking system, which is crucially dependent on those loans.
If Greek banks collapse, that might well force Greece out of the euro area — and it’s all too easy to see how it could start financial dominoes falling across much of Europe. So what is the E.C.B. thinking?
Why, they are thinking exactly what Republicans here are thinking, that we have to raise interest rates, that we have to stop the specter of hyperinflation, that we have to reduce government at a time when the government is the economic engine of last resort, in order to force the economy to magically work on the principles of supply-side economics.
And yet even here in the United States, corporations continue to have record quarters in nominal and percentage terms. Corporations are flush with trillions in King Cash. Are they creating jobs with it? Of course not. Because wages are stagnate and the government is forbidden to stimulate demand, nobody is stepping up to buy new goods and services, so why should corporations plow money into the US market?
Instead they are investing in China and India's consumer markets, including creating jobs overseas to support these markets and their growing consumer base of billions. Wage pressure there is getting bad enough that companies are starting to move manufacturing jobs back to the US because it's cheaper to pay US workers with our stagnant wages.
In other words, we're becoming a third world manufacturing country. That's what Republicans are thinking. And they like the sound of that.
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