As the global economic crisis grinds into its fourth year, we now have a clearer sense of which countries responded appropriately to the crisis and those that perpetuated or aggravated their situation. That discussion must begin with a comparison of the differing approaches taken by European governments and the United States.
Let’s start in Greece, where I recently gave some lectures about the American presidential elections. Once the center of one of the world’s most influential empires, Athens now finds itself at the center of the European crisis.
Borrowing on the strength of the euro, Greeks during the past decade took on Olympic-level personal debt. When the credit crisis — fueled by the global mortgage-backed security meltdown — reached the Aegean, the Greek economy tanked. Early, false government estimates about the size of the Greek national debt temporarily but misleadingly calmed European and global markets; when the true scope of Greek indebtedness was eventually revealed, its economy collapsed even further.
Now, few if any creditors will lend to Greek businesses or citizens, and those willing to take that risk expect unaffordable interest rates. Half of Greeks under age 30 are unemployed. In advance of the country’s upcoming national elections, Greece’s politics may be more unstable than at any time since the nation’s modern founding in the 1830s. Greece’s economic problems infected the rest of the European Union. Though not as bad as Greece, Spain and Italy are facing similar crises.
In Athens, I heard a lecture by Haralambos Papasotiriou, professor of strategic studies in the Department of International and European Studies at Panteion University. He noted that in America the tea party movement responded to the Obama administration’s stimulus by calling for fiscal austerity, whereas the austerity measures embraced by European governments fueled protests against public sector employment or compensation cuts.
“Europe and America ought to swap protesters,” said Mr. Papasotiriou, with a grin.
So if troubled European governments responded to the global financial crisis differently from the United States, can we conclude that America got it right?
Preliminarily, yes, we can: Economic indicators strongly suggest that the Obama administration and those who called in 2009 for a massive, Keynesian stimulus made the prudent, informed choice. The annualized real GDP growth rate in the United States for the last quarter of 2011 was 3.0 percent; in Europe, there is either zero growth or GDP contraction in many countries. Optimism, investment and hiring are on the rise here, while panic and rising unemployment persist on the other side of the Atlantic.
“Growth-damping austerity packages seem to be sweeping across Europe, testing the Continent’s approach to managing the sovereign-debt crisis,” wrote Christopher Emsden this month in The Wall Street Journal. “The scenario — unfolding now in Italy, Greece and Spain — would leave troubled euro-zone countries with higher public debt ratios even as they take painful efforts to reduce them.”
Austerity measures — tax increases and public sector payroll and benefit reductions — actually resulted in higher, not lower debt ratios for some European economies because GDP contraction yielded lower tax revenues, which more than offset any short-term economic savings from budget-slashing. European countries that should have increased aggregate demand through some combination of government spending and tax cuts instead exacerbated their financial problems by opting for austerity-minded tax increases and public sector cuts.
The bottom line? The Obama administration’s 2009 economic stimulus package — a third of which was dedicated to low-stimulus tax cuts — worked. So did the Detroit auto bailout. So did the TARP loans supported in 2008 by both President-elect Obama and then-President George W. Bush.
“Europe has had several years of experience with harsh austerity programs, and the results are exactly what students of history told you would happen: such programs push depressed economies even deeper into depression,” Nobel-winning Princeton economist Paul Krugman wrote in his New York Times column this week about what he called Europe’s “economic suicide.”
America should take Mr. Papasotiriou’s advice and put the tea party protesters on a slow barge to Europe. Their calls for austerity were wrong. At a time of serious crisis, they proved themselves to be unserious demagogues with no sense of economic history.
• Schaller teaches political science at the University of Maryland-Baltimore County.