by Dirk Ehnts
Most of the time, I am disappointed by the picture the media paints when it comes to the crisis of Europe. For instance, the NY Times quote on June 17:
ATHENS — The instability rocking Greece this week is the latest manifestation of a troubling new phase in the global financial crisis: political turmoil is sweeping through Europe, toppling governments and threatening to undermine efforts to rescue the financial system and, ultimately, the euro zone itself.
This reporting, I think, is biased.From my point of view, there are two options of how to get out of the mess that are on (or close to) the table. Number one: austerity. From the start, many economists – myself included – argued against this policy on the grounds that we are in a Keynesian economy with a liquidity trap and all that and that it would be to repeat the policy mistake of Hoover in the Great Depression to basically starve everything. Number two: any policy that aims to revive growth. Be that through partial default, bail-in, more exporting, EU-sponsored investment, more breaks in the European tax system for corporation, etc.
The media depicts austerity policy as saving the financial system when in fact, it isn’t. What it does is give time to banks to move debts out of their balance sheets and then onto those of the taxpayer. German banks have reduced their exposure to Greek sovereign debt by one-third since one year ago, and instead the Greek sovereign turned to ECB/IMF funding. Which, in case of bankruptcy, means: the taxpayer. Austerity will not save the financial system, and it won’t save the euro. We need a policy to restart growth in the indebted countries, and that must mean that it fixes the price level problem as well. The price level in the periphery is too high, which prohibits more exports that would be necessary to repay foreign debt.
So here is my alternative take on the situation:
ATHENS — The instability rocking Greece this week is the latest manifestation of a troubling new phase in the global financial crisis: political turmoil is sweeping through Europe, toppling governments and threatening to undermine misguided efforts that so far failed to rescue the financial system and,
ultimately, the euro zone itself.
The ECB, the IMF and the German government are clearly speaking for the capital owners. They want no default, at least not until financial institutions have unloaded their toxic assets at the cost of the taxpayer. (After all, every financial crisis has been paid by the taxpayer.) To solve the debt crisis in the periphery, there is more required than just moving some numbers around on spreadsheets.
The price levels in Europe are wrong, because the free market financial firms completely miscalculated and invested heavily in countries that are now bankrupt or very close. The price levels need to come down in the periphery, while in the core prices need to move up. Delaying Greek bankruptcy is a sure way to delay price adjustments in the real economy as well. However, it seems that politically the creditors are stronger than the debtors, and so much so that no serious discussion of a solution for the ongoing problems is possible. This is a sad state for the people Europe. They deserve to be saved, and not some financial system or currency that leads to persistent mass unemployment in wide regions of Europe.
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Dr. Dirk Ehnts is a research assistant at the Carl-von-Ossietzky University of Oldenburg (Germany). His focus is on economic integration and economic geography, covering trade, macro and development. He is working at the chair for international economics since 2006 and has recently co-authored a book on Innovation and International Economic Relations (in German). Ehnts has written at his own blog since 2007: Econblog 101. Curriculum Vitae.
