Tuesday, November 22, 2011

The political economy of the Euro crisis

The solution for the euro crisis seems increasingly out of reach. The victory of the conservative Popular Party in Spain, and the promise of more austerity, following the same in Italy and Greece, bodes badly for a more rational solution. Further, the German officials, and the ECB, in particular, its new head, Mario Draghi were very clear that they would not support anything but austerity.

A question that was raised in my talk last Friday was why would anybody favor such a suicidal policy. Think of the US for a second. Why would the Republicans play with the possibility of a self-imposed default (by not raising the debt-ceiling limit last summer)? The point is that the idea that there is a fiscal crisis (yep there isn't), would allow them (and some pro-business Dems too) to cut spending on welfare programs like Social Security and Medicare. And by the way, high unemployment helps to keep workers in line and wages low. The same is true in Europe.

A severe fiscal crisis, that forces adjustment in the periphery, helps to keep workers in line, not just in the periphery, but also in the core countries. And helps if they want to roll back their Welfare State too. Jerry Epstein says essentially the same thing here.


  1. I've just made a little blog entry with links to some readings of what I consider should be the way for Europe to take.


    Sadly, like this post says, it seems the path will be austerity.

  2. Gracias Juan Carlos. No había visto el post de Robert con el comentario de Pivetti.

  3. Apart from this issue of taking advantage of the crisis to dismantle the welfare state, I fear and suspect there is also a project to curtail democracy itself.

    If anything, the recent scandal of the "doner murders" in Germany reveal that European elites aren't too worried about right-wing extremism.

  4. Agreed. In many ways democracy has been curtailed. Think of how the Greek referendum was liquidated and a pro-adjustment coalition was railroaded into power.


Inequality and Stagnation by Policy Design

By Thomas Palley (guest blogger) This paper argues the mainstream economics profession is threatened by theories of the financial crisis a...