There was a bit of good news from Europe last week. Two of the nations that desperately need some respite from austerity essentially told German Chancellor Merkel to stuff it.
France, under pressure from Germany and the European Union to meet the E.U.'s straightjacket requirement that member nations carry deficits of no more than 3 percent of GDP (whether or not depression looms), informed the E.U. that it will not hit this target until 2017. The government of President François Hollande, under fire for failing to ignite a recovery, now plans economic stimulus measures—deficit target be damned. Under E.U. rules, France can be fined up to 0.2 percent of its GDP for this infraction. The French seem to be saying: "So sue us!"
Italy, under Prime Minister Matteo Renzi, has followed suit, with a budget that plans cuts in labor taxes. Meanwhile, the European Central Bank is in open rebellion against the German austerity-mongers. The ECB would like to pursue a policy more like that of the Federal Reserve, giving direct support to government bonds to keep interest rates low. But the Merkel government remains adamantly opposed. Even the International Monetary Fund, traditionally the citadel of fiscal orthodoxy, has warned that Europe's recovery policy is too tight, not too loose.
But even if a few more member governments of the E.U. decide to face down Merkel, the trouble with these green shoots of resistance is that they are far too feeble. With the bond market determining interest rates and serving as Merkel's enforcer, dissenting governments like France and Italy dare not venture very far lest they face higher interest costs. The money markets are already punishing the long-suffering Greeks once again by demanding higher interest rates to purchase their bonds.
The European Central Bank, though more pro-growth than the German government or the E.U.'s bureaucrats, tempers its call for easier money with demands for "structural reforms" that are a polite euphemism for reduced social protections.
Common-sense calls for a shared assumption of part of Europe's sovereign debt are going nowhere. Likewise proposals for a significant increase in public investment funds. As long as these larger forces dominate Europe's economic policy, Europe's stagnation is likely to continue.
Last fall, there was an interesting debate about whether the economies of the U.S. and Europe were in a period of what economists call "secular stagnation." The term means that the economy gets stuck in an equilibrium well below its potential. Economists such as Larry Summers and Paul Krugman considered whether the post-collapse stagnation revealed perhaps that the economy had become dependent on consumer borrowing and bubbles, or whether technology and changing demographics might be implicated.
Similar worries were voiced in economists in the late 1930s, when the Great Crash was already a decade old yet the economy seemed stubbornly unable to reach its potential and unemployment remained very high. Then World War II intervened.
The government borrowed money at levels previously unthinkable. Government spending recapitalized U.S. industry, and put people back to work. "Secular stagnation" vanished overnight. Oh, and the government also leashed the private money market for the duration of the war and several years beyond—the Federal Reserve simply bought bonds in the quantity necessary to keep interest rates (and war finance costs) extremely low.
After the great experiment of the Good War as an accidental recovery program, economists should understand that "secular stagnation" is never something that must be lived with. It is optional. Public investment and the leasing of private speculative finance are always available as a road not taken. But World War II as a public investment led recovery program is typically treated as an anomaly, not as an alternative path.
Neither in Europe nor in the U.S. are the political stars in alignment for the recovery led by social investment—that our economies on both sides of the Atlantic need. Barring a much more robust political revolt, stagnation and human suffering are likely to continue—and continue to be political gifts to the far right.
This is the tyranny of orthodox thinking and of governments still in thrall to the financial industry—fully six years after the collapse should have discredited such thinking. It is encouraging that there are some stirrings of dissent, but they need to imagine on a much grander scale.