Economic Recovery & The Euro Debt Crisis

Bill Breakstone, June 9, 2010


Past, present and future. We learn from past events and apply the lessons to present challenges. What happens going forward is not always predetermined by what happened in the past. How do we balance this dichotomy?

The world’s financial system has suffered a blow that can only be compared to the Great Depression of the 1930’s. The United States was and remains at the center of that storm. Despite a three-decade adherence to outmoded ideological theories, present national economic policymakers are particularly well versed in the historical implications of the last and most severe economic meltdown. However, they are not acting in a policy-making vacuum, and political pressures on them, both nationally and internationally, will bring pressures to bear, indeed are already doing so, in ways that may prove counter-productive to setting the world’s financial house in order.

The Federal Reserve Bank of the United States is without a doubt the most influential economic policy making body in the world. It’s Chairman, Ben Bernancke, is a Nobel Prize Winning economist whose laureates were based on his studies of The Great Depression. We are fortunate that such a student of economic catastrophe now is so influential in economic policy-making. He is keenly aware of the difficulties faced by the Roosevelt Administration during the Depression, and the adverse effects that resulted from premature monetary tightening in the mid-1930’s, which prolonged the disaster. His advice at present is to concentrate on renewed economic growth rather than a fiscal deficit that is unconscionable by any standard. His opinion is that deficits must be addressed, but only after the present very fragile economy is back on its feet.

However, as so many economic commentators have rightly pointed out, the world’s economy has become totally interdependent; it is a global entity, and must be addressed as such. And economic conditions vary greatly on a global scale. We are now witnessing a major threat to the European economy, with possible defaults of national debt in several countries, as well as a likely collapse of the European currency. At the same time, China is experiencing a growth rate that is almost unheard of.

The Euro countries have become committed to taking corrective measures to haul in their debt levels, but given their history of social responsibility, are being met with severe opposition from their constituencies. Strikes and civil unrest are increasing, and will only become more serious as draconian cuts in civil services and employment policies are initiated. The results of these proposed austerity measures could well result in decreased consumer spending and an erosion of economic growth in the Euro sector, which will undoubtedly have worldwide consequences. And this is happening at a crucial time in the world’s economic recovery from a shock that has no parallel other that the Great Depression.

Chairman Bernancke testified today on Capitol Hill. One of his main points was that now was no time for the government to take any action that would limit economic recovery. Deficits were indeed a concern, but dealing with them, in terms of limiting spending, increasing taxes, severely cutting back on social services, or raising interest rates must take a back seat to increasing economic growth. Unfortunately, the Euro countries are embarking on exactly that path, and being the global economy that now exists, the effects of Euro policies could well inhibit recovery.

U.S. Treasury Secretary Timothy Geithner has spent the last week at the G-20 Summit, and has been trying to coordinate European and American efforts to deal with both the world’s recovery and the European debt crisis. It does not seem at this point in time that he had any success. A default by Greece on its debt is now likely, as is its withdrawal from the Euro currency. Spain will be experiencing a perhaps devastating general strike next week, as pressures mount against government cutbacks on social welfare programs. Social unrest is bound to spread to Portugal and Italy, while David Cameron’s remarks on Monday in the UK will no doubt spark opposition in Britain. All this is playing out in the face of what all economists recognize as a very fragile economic recovery.

No one wants to see a double-dip recession, but in the face of all these pressures on economic recovery, such an outcome should not be surprising, despite Bernancke’s statement this morning to the contrary.