When historians look back at last week’s European Union summit, their most likely reaction will be: “Huh?”
Confronted with looming catastrophe in Greece, Italy and Spain, European leaders convened but accomplished nothing of relevance. They signed a pact that penalizes E.U. nations if their budget deficits exceed 3 percent of their gross domestic product. But the pact fails to address what these nations are supposed to do if interest rates skyrocket when they roll over billions of euros’ worth of bonds in the coming weeks. The European Central Bank has declared it won’t ride to the rescue by issuing euro-bonds that would federalize European public debt — the only plausible solution to Europe’s impending smash-up.
Going into the summit, there were widespread hopes that once German Chancellor Angela Merkel extracted a pledge of fiscal austerity from her fellow leaders, she would drop her opposition to the euro-bond solution. Coming out of the summit, it was depressingly clear that there was, in fact, no quid for her quo — an outcome that has upset the markets and the Obama administration, which worries that the European financial crisis will drag down the global economy and the president’s reelection prospects.
But the nuttiness of the E.U. summit extends well beyond its failure to grapple with imminent disaster. In embracing Merkel’s prescription of fiscal austerity, it misdiagnosed Europe’s ailment: Of the European nations hanging by a thread (Greece, Italy, Spain, Portugal and Ireland), only Greece has failed to meet the standards European leaders set for budget deficits and national debt. Between 1999 and 2007, the budget deficits of Italy and Portugal came in, on average, under the 3 percent target, while Spain’s budget was balanced and Ireland ran a surplus. The “solution” enacted last week wouldn’t have changed anything.
Yet as the Financial Times’ Martin Wolf has shown, those embattled euro-zone members did run deficits during those years — only they weren’t budgetary. Each had a deficit in its current accounts, ranging from 1 percent of GDP in Italy to 9 percent in Portugal. That chiefly means they had a negative trade balance, or imported more than they exported. The euro-zone members whose finances aren’t threatened — Germany, Finland, the Netherlands, Austria, Belgium and France — all ran trade surpluses (ranging from 1 percent of GDP in France to 6 percent in Finland). The nations in crisis didn’t get into this mess because their governments overspent. They got there because their economies produced too little and imported too much.
The lead exporter to these nations is Germany, which through its fiscal austerity pact is demanding that these nations curtail investments in education and infrastructure — the very investments that could help make these nations more productive and more competitive with . . . Germany. Merkel doesn’t intend to crush southern Europe — she understands that if Italy or Spain goes under, Germany would suffer. But if her motivations aren’t diabolical, her solutions are dunderheaded.
The kind of perspective embodied by Merkel’s misdirection is, alas, not confined to Europe. Try to think of another nation whose economy has been weakened and misshapen by chronic trade deficits but where public discussion has been dominated by fiscal deficits, and our very own U.S. of A. springs to mind. The U.S. current-accounts deficit rose from 3.2 percent of GDP in 1999 to 6 percent in 2006, though it has declined somewhat since with the waning of consumer capacity. True, the parallels between the United States and southern European economies are limited: Our manufacturing productivity remains the envy of the world while theirs lags far behind, thanks in part to their preservation of small-scale, undercapitalized, labor-intensive firms.
But the combined result of U.S. actions over the past three decades reads as though we intended to diminish America’s economic edge. We offshored high-tech industries. Almost all new jobs came in the less-productive service sector. U.S. infrastructure has been allowed to sag. And as good jobs dwindled and wages declined, we retained our living standards by taking on debt — until credit dried up in 2008, compelling the government to take on more debt to keep the private sector from crashing altogether.
So while Americans decry our lack of spending discipline, our larger problem is that we have exported industries and eliminated, downgraded or failed to deliver the jobs that once made our economy vibrant. Like Merkel and her minions, we misread our weakness as fiscal when, fundamentally, it is the result of policies — financial, corporate and governmental — that have failed to preserve, expand and reward productive work.
Those clueless European summiteers? We’re every bit as clueless as they.