The moral of the story:
Legends of the Fail, by Paul Krugman, Commentary, NY Times: ...Not long ago, European leaders were insisting that Greece could and should stay on the euro while paying its debts in full. Now, with Italy falling off a cliff, it’s hard to see how the euro can survive at all.
But what’s the meaning of the eurodebacle? As always happens when disaster strikes, there’s a rush by ideologues to claim that the disaster vindicates their views. So it’s time to start debunking. ...
I’ve been hearing two claims, both false: that Europe’s woes reflect the failure of welfare states..., and that Europe’s crisis makes the case for immediate fiscal austerity in the United States.
The assertion that Europe’s crisis proves that the welfare state doesn’t work comes from many Republicans. ... The idea, presumably, is that the crisis countries are in trouble because they’re groaning under the burden of high government spending. But .. the nations now in crisis don’t have bigger welfare states than the nations doing well — if anything, the correlation runs the other way. Sweden, with its famously high benefits, is a star performer... Meanwhile, before the crisis ... spending on welfare-state programs ... was lower, as a percentage of national income, in all of the nations now in trouble than in Germany... Oh, and Canada ... has weathered the crisis better than we have.
The euro crisis, then, says nothing about the sustainability of the welfare state. But does it make the case for belt-tightening in a depressed economy?
You hear that claim all the time. America, we’re told, had better slash spending right away or we’ll end up like Greece or Italy. Again, however, the facts tell a different story.
First, if you look around the world you see that the big determining factor for interest rates isn’t the level of government debt but whether a government borrows in its own currency. ...
What has happened, it turns out, is that by going on the euro, Spain and Italy ... have to borrow in someone else’s currency, with all the loss of flexibility that implies. ... America, which borrows in dollars, doesn’t have that problem.
The other thing you need to know is that in the face of the current crisis, austerity has been a failure everywhere it has been tried...
The moral of the story, then, is to beware of ideologues who are trying to hijack the European crisis on behalf of their agendas. If we listen to those ideologues, all we’ll end up doing is making our own problems — which are different from Europe’s, but arguably just as severe — even worse.