Pain in Spain

The European authorities seem determined to drive the continent into a repeat of the Great Depression.

The European Central Bank keeps playing a cute game designed more to impress the Germans than the financial markets or to provide real relief. Mario Draghi, ECB president, offers to buy unlimited amounts of the bonds of states that are being pummeled by speculators, but then undercuts his own offer by conditioning it on punishing austerity.

In Spain, in the days after Draghi’s latest pronouncement, the rate on government bonds briefly fell, but is now rising again as markets realize that Draghi’s conditions make it impossible for any elected government to accept the offer. Meanwhile, unemployment is rising to record levels and Spain’s depression keeps feeding on itself.

Draghi’s game reminds me of a battery-operated novelty toy I had when I was a kid. It was a mysterious box with a switch. When you turned on the switch, the lid opened, a mechanical hand came out of the box, and turned off the switch.

It was the opposite of a perpetual-motion machine: a perpetual stall machine. Draghi and Angela Merkel must have one of these machines.

For a glimpse of the future of Europe, have a look at Greece, where GDP has dropped by one-fifth in four years. There, it’s clear that the deep depression is cutting into government’s revenues, causing the budget deficit to keep increasing despite (actually because of) relentless budget cuts. The team of EU and IMF officials in Athens monitoring the “progress” of the Greeks, in destroying their economy to qualify for aid, is pressing for even deeper cuts as a condition of releasing the latest installment.

There is a high-stakes game of chicken here. If the Greeks call the EU’s bluff and don’t make the deeper cuts, the EU’s failure to deliver the next installment of aid would create a Greek collapse, with dangerous reverberations all across Europe and the globe. On the other hand, if the Greeks do give in, their economy will just keep bumping downward.

As economic policy, all this is just insane. As politics, it risks stimulating right-wing populism and destroying the European Union.

Thanks to Mitt Romney—in addition to the dawning realization by voters that the tea-soaked Republicans are far to the right of the country—Barack Obama is odds-on favorite to win re-election. But our friends across the pond could still screw it up for Obama.

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