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How Can Europe Save Itself? (Again.)

Filed by KOSU News in World News.
May 1, 2012

In the past week, the debate over how Europe can save itself has shifted away from austerity (government spending cuts) and toward policies that would slow spending cuts and try to promote economic growth.

There have been a few big drivers of this shift. It became clear that Francois Hollande, a Socialist who says he would push for more growth in Europe, is likely to be the next president of France.

Then came news that Spain, which has been enacting austerity measures, is officially in a recession (along with the UK, Belgium, Greece, Ireland, Italy, the Netherlands, Portugal and Slovenia are in recession).

The point of austerity is to get debt under control. But a recession — a shrinking economy — makes it harder, not easier, to pay off debts.

In the short term, then, a shift away from austerity seems likely.

But Spain, France and lots of other European countries spend more money than it collects in taxes. They constantly have to borrow money, which they do by selling bonds.

When the people who buy these bonds get nervous, they demand higher interest rates. And rising interest rates have been a key driver of the European crisis.

So if bond investors start demanding higher interest rates, the anti-austerity camp might be pushed into a corner.

“It may well be that these emerging anti-austerity coalitions dissolve in the face of the financial markets,” economist Charles Wyplosz told us “Hollande, as president, might have to do things he doesn’t want to do.”

In the long run, possible solutions to the problem would likely include closer integration within Europe, such as a eurobond that would be backed by all of the euro zone and which would allow governments such as Spain to borrow more cheaply. But that would be a big shift, and would likely take a while to get off the ground.

In the short term, the one wildcard is the European Central Bank, which can step in and buy bonds to keep borrowing costs low for troubled countries. The ECB has already done some of this, both directly, by buying bonds on the open market, and indirectly, by lending money to European banks, which in turn lend money to troubled governments.

“Germans want that to be stopped,” Wyplosz said. “But that is up for debate.” [Copyright 2012 National Public Radio]

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