Europe's Dangerous Lag

You may have heard about the Czech Prime Minister making a bizarre rant against President Obama's spending policies, calling them "a road to hell." It turns out that the Prime Minister already faced a no confidence vote in the Czech Republic, where their right wing is far closer idelogically to US Republicans. So that's not really a big issue. The far bigger issue is Europe's persistent resistance of any stimulus measures for its countries, which could be partially due to their generous social welfare states, meaning that the people are less dramatically impacted (so far) by the crisis.

The Europeans say they have no need for further stimulus right now because their social safety nets, derided in good times by free market disciples as sclerotic impediments to growth, are automatically providing the spending programs that the United States Congress has to legislate.

Europe’s extensive job protections and unemployment benefits are “bad in the upswing, because firms don’t dare to hire people, because then they are glued to them,” said Hans-Werner Sinn, president of the Ifo Institute for Economic Research in Munich. “In the downswing, it’s good if the people are glued to the companies. They keep their jobs. They keep their income. They keep consuming.”

The Wall Street Journal has more. Certainly Europe's citizens have to be thankful for these "automatic stabilizers" that kick in to protect them, keeping them solvent and able to spend. At the same time, Paul Krugman argues that the automatic stabilizers have been exaggerated from a macroeconomic perspective, and the European response still comes up short. According to James Surowiecki, Europeans are simply more concerned with hyperinflation than they are with increasing economic growth, and the social safety net is being used as more of a cover story.

European economic policy seems to reflect the conviction that inflation, not stagnation, is the greatest threat to an economy. If the episode that haunts the U.S. is the Great Depression, in Europe, where the Germans have been dominant in shaping economic policy, the defining historical moment is the hyperinflation of Weimar Germany, when prices rose more than seventy-five billion per cent in just one year, 1923, and, in the words of Walter Benjamin, “trust, calm, and health” vanished. The legacy of that episode lives on not just in German policymakers’ inflation phobia but also in their sense that there is something fundamentally distasteful about debt. For Germany, fiscal rectitude even in the face of a crisis is not just economically sensible but morally correct.

There’s a price to be paid for hostility toward fiscal stimulus and easy money: Europe and, arguably, the world will take longer to recover. But European policymakers seem willing to weather this outcome in exchange for stability. They’re also probably counting on the fact that, even as they sit tight, their economies will get a boost from the American and Chinese stimulus packages. The thing about government spending is that it “leaks”: a good chunk of our stimulus package will buy other countries’ goods. So Europeans can avoid getting too deeply into debt and still reap some of the benefits of our borrowing. This is unfair: in effect, Europe is refusing to carry its share of the global economic burden and is piggybacking on us. But it’s hard to see how things could have turned out otherwise. The U.S. economy, much more than Europe’s, is like the proverbial shark: if it doesn’t keep moving forward, it dies (or at least creates a lot of misery). In some sense, we need economic growth more than Europe does. It’s not surprising that we’re going to be the ones who end up paying for it.

I don't think European policymakers are wrong at all - it just reflects a different philosophy. But at a time when coordinated global action may be needed, hopefully they won't be so resistant to meeting the moment. Ezra Klein reports that they won't, quoting Martin Wolf about Germany: "They will act, but only on the doorstep of Armageddon. Not a second before."