Europe is in recession. Portugal, Italy and Greece are basket cases. The British and Spanish economies have contracted for the last two quarters. It seems highly likely that France and Germany are in a double dip as well.
Why should we care? Because a recession in the world’s third-largest economy (Europe) combined with the current slowdown in the world’s second-largest (China), spells trouble for the world’s largest (that’s still us).
Remember, it’s a global economy. Money moves across borders at the speed of an electronic impulse. Wall Street banks are part of a global capital network extending from Frankfurt to Beijing. Notwithstanding their efforts to dress up balance sheets, big U.S. banks are becoming more fragile.
Meanwhile, goods and services slosh across the globe. If there’s not enough demand for them in the world’s second- and third-largest economies, demand in the U.S. can’t possibly make up the difference. That could mean higher unemployment here as well as elsewhere. The U.S. economy is already showing signs of slowing.
Don’t blame Europe’s problems on its so-called “debt crisis.” There was no debt crisis in Britain, for example, which is now experiencing its first double-dip recession since the 1970s.
Blame it on austerity economics ― the bizarre view that economic slowdowns result from excessive debt, so government should cut spending.
German Chancellor Angela Merkel, who has led the austerity charge, and the other European policymakers who have followed her have overlooked two big truths.
First, the real issue isn’t debt per se but the ratio of the debt to the size of the economy.
In their haste to cut the public debt, Europeans forgot the denominator of the equation. By reducing public spending, they removed a critical source of demand at a time when consumers and the private sector are still in the gravitational pull of the Great Recession. The resulting slowdown is worsening the ratio of Europe’s debt to its total GDP.
A large debt with faster growth is preferable to a smaller debt sitting atop no growth at all. And it’s infinitely better than a smaller debt on top of a contracting economy.
The second big truth they’ve overlooked is the social cost of austerity. Cutting spending during a time of high unemployment and flat or declining wages doesn’t just worsen unemployment. It also removes public services and safety nets that people depend on when times are tough.
This causes political upheaval. Last week, Dutch Prime Minister Mark Rutte was forced out. British Prime Minister David Cameron is on the ropes. In the upcoming presidential election in France, incumbent Nicolas Sarkozy could well be unseated by Socialist Francois Hollande. European fringe parties on the left and the right are gaining ground. Across Europe, record numbers of young people are unemployed ― including many recent college graduates ― and their anger and frustration is adding to the upheaval.
Such social and political instability is itself a drag on growth, generating even more uncertainty about the future.
Sound familiar? The United States is heading down the same path.
Even if the U.S. economy (as well as President Obama’s re-election campaign) survives Europe’s recession, we have our own big dose of austerity economics coming in less than eight months ― when drastic spending cuts are scheduled to kick in, as well as tax increases on the middle class. But the U.S. economy isn’t healthy enough to bear this burden. That means a double-dip recession.
Policymakers in the United States and in Europe should abandon austerity economics. Instead, set targets for growth and unemployment. Continue to increase government spending and reduce long-term interest rates until those targets are met. Only then adopt austerity.
It may be too late for Europe, but it’s not too late for us. We don’t have to follow Europe off the cliff.
By Robert B. Reich
Robert B. Reich, Chancellor’s Professor of Public Policy at the University of California and former U.S. secretary of labor, is the author of the newly released “Beyond Outrage: What has gone wrong with our economy and our democracy, and how to fix it,” a Knopf e-book original. ― Ed.
(Tribune Media Services)