Global Letdown

Paul Krugman, reporting from Europe, shows his concern with how European leaders are dealing with, or failing to deal with, the global economic crisis.

Europe has fallen short in terms of both fiscal and monetary policy: it’s facing at least as severe a slump as the United States, yet it’s doing far less to combat the downturn.

On the fiscal side, the comparison with the United States is striking. Many economists, myself included, have argued that the Obama administration’s stimulus plan is too small, given the depth of the crisis. But America’s actions dwarf anything the Europeans are doing.

The difference in monetary policy is equally striking. The European Central Bank has been far less proactive than the Federal Reserve; it has been slow to cut interest rates (it actually raised rates last July), and it has shied away from any strong measures to unfreeze credit markets.

The only thing working in Europe’s favor is the very thing for which it takes the most criticism — the size and generosity of its welfare states, which are cushioning the impact of the economic slump.

Actually, the social welfare system may be the reason why the crisis is being faced with such less urgency, because the popular outrage is necessarily more muted than in a country whose social safety net is frayed. On balance, I'd rather have the state protect its citizens from harm, but the policymakers cannot rely on the automatic stabilizers of social democracy to sustain them through a massive crisis.

There's a bigger problem, however; the continent has a loose affiliation without any institutional strength from the structures that the EU has put in place, and the result is chaotic:

Europe’s economic and monetary integration has run too far ahead of its political institutions. The economies of Europe’s many nations are almost as tightly linked as the economies of America’s many states — and most of Europe shares a common currency. But unlike America, Europe doesn’t have the kind of continentwide institutions needed to deal with a continentwide crisis.

This is a major reason for the lack of fiscal action: there’s no government in a position to take responsibility for the European economy as a whole. What Europe has, instead, are national governments, each of which is reluctant to run up large debts to finance a stimulus that will convey many if not most of its benefits to voters in other countries.

You might expect monetary policy to be more forceful. After all, while there isn’t a European government, there is a European Central Bank. But the E.C.B. isn’t like the Fed, which can afford to be adventurous because it’s backed by a unitary national government — a government that has already moved to share the risks of the Fed’s boldness, and will surely cover the Fed’s losses if its efforts to unfreeze financial markets go bad. The E.C.B., which must answer to 16 often-quarreling governments, can’t count on the same level of support.

Hendrik Hertzberg calls this particles of confederation - the limits of a weak federal system and a bias toward, in effect, state's rights. On issues where they have a rough consensus, like re-regulation of the banks, they can move forward; but since no country wants to create the deficits necessary to make up for demand, the urgent short-term crises go unfixed. I am happy that Switzerland and smaller countries are loosening their bank secrecy rules, for example, which will lead to a greater crackdown on offshore tax havens. But that's not going to create any jobs in the short term. So the confederation has to make up for a lack of institutional muscle by relying on international economic diplomacy, which is not advisable. And the crisis deepens.

Someone needs to help do the lift of picking up global demand, and we're running out of countries.