“We are headed to a Greece-type collapse,” GOP presidential candidate Mitt Romney has warned repeatedly, while indicting President Obama’s stimulus plan. Romney promises to slash spending and balance the budget to unleash growth.
Only now his warning provides a starkly different caution. Portugal, Ireland, Spain, Italy, Britain — the countries that have responded to the economic crisis by focusing on slashing their deficits — are sinking. And the ruin inflicted on Greece threatens its democracy, as riots and resistance spread.
Katrina vanden Heuvel
Editor and publisher of the Nation magazine, vanden Heuvel writes a weekly column for The Post.
The advocates of austerity — here and in Europe — have argued that cutting spending and reducing deficits, even with interest rates already near zero, would revive the economy. The irresponsible — other than the banks — would be disciplined. This would reassure investors and “job creators,” and they would invest and start to hire again. With an added refrain about deregulation, this remains the mantra chanted ceaselessly by Republicans.
In the United States, President Obama resisted, but in Europe, austerians — led by Angela Merkel in Germany and the new Tory government of David Cameron in Britain — won the day. But what New York Times columnist Paul Krugman justly derided as the “confidence fairy” didn’t show up. Turns out businesses lacked customers, not confidence. And the countries that followed that advice have been sinking into recession or worse ever since. Unemployment is soaring — in Spain and Greece youth unemployment is at 50 percent; poverty is spreading. According to one important indicator — changes in GDP since the recession began — Britain is faring worse than it did during the Great Depression. And to add insult to injury, Moody’s, the bond rating service, has cut the ratings on the debt on six European countries — including Italy, Portugal and Spain — as Europe’s economy contracted last quarter.
Portugal offers the best example of the folly. The Portuguese have done everything that the International Monetary Fund and the European Union asked in exchange for a $103 billion bailout last May. Spending has been slashed and deficits reduced. Yet Portugal is going deeper in the hole. The ratio of its debt to its economy — or gross domestic economy — has gone up, not down — from 107 percent when the bailout took place to a projected 118 percent next year.
It’s not that its deficits have exploded, but its economy has shrunk. Portugal’s austerity has added greatly to human misery and suffering, while its fiscal progress sinks.
In comparison, the United States has fared better, with its economy enjoying slow growth and jobs beginning to reappear. But even here the austerian fallacies had ruinous effect. The president’s initial recovery plan was too small. It stopped the free fall of the economy but did not make up for the collapse of consumer demand and the drastic cuts in state and local government spending and employment. Wall Street was saved, but virtually nothing has been done for homeowners, the biggest victims of Wall Street’s excesses.