If you Read Ed’s article on the need for stimulus packages in Europe you may have come across a debate Ed and I had over the nature and merits of a stimulus. Regardless of which side you fell on, there were further issues at stake than just economics. Economists like to see their subject as a science: numerical and evidence based, rational and objective. No doubt, many of their research tools are scientific but economics is also the backbone of the modern world and often not an end in itself, more a vehicle for achieving other ends.
As James Surowiecki argues in the Financial Page of the New Yorker, economics is by no means a science and as the recession draws on, we’re able to examine the cultural memories that can and do direct economic courses of action. From recessions and inflations, each country will have its own preferences and fears that alter the importance attached to different parts of the economy.
In the US, the focus has fallen on the stimulus package and Paul Krugman has made the case that europe should follow suite. He makes a convincing case for a European stimulus package, but is it correct to lampoon European economic policy and decision making as woefully inadequate or to equate US economic policy so readily with Europe? Well in some sense yes, it’ s perfectly fair, the rationale for the stimulus is not so difficult, it could even lead to greater gains if correctly invested in infrastructure which could grow economies in the future, from transport to broadband aswell as tiding Europe over during a recession. In fact, many economists, (despite what many think) advocate deficit spending. They argue that if done correctly it will more than pay itself back through the higher tax-receipts of the economic growth it will yield.
But Krugman’s argument fails to take into account complexities within Europe, not just over the method of recovery but the acceptable limits . Surowiecki’s argument makes clear the perils of inflation in cultural memory and ought to be taken seriously:
If the episode that haunts the U.S. is the Great Depression, in Europe, where the Germans have been dominant in shaping economic policy, the defining historical moment is the hyperinflation of Weimar Germany, when prices rose more than seventy-five billion per cent in just one year, 1923, and, in the words of Walter Benjamin, “trust, calm, and health” vanished
The US has never sufferred the acute inflationary issues several European countries and notably developing countries have suffered, but it has suffered unemployment. Europe on the other hand has had its fair share of both, such as Weimar Germany. Inflation is not simply a historical boogeyman, Hungary and Yugoslavia , Argentina and Chile in the 70s and 80s and Zimbabwe to this present day have allsuffered the terrible impact of inflation, collapsing economies as easily if not more so than high unemployment.
Within Europe, unemployment is also less of a concern than the US. Europe an countries have lower unemployment rates and greater safety nets, which act as stabilisers against recession. European states can and will try to sweat out the recession by letting the welfare states take the strain. Furthermore, Europe knows that the US and China have to get themselves going, China has been candid before about its need to maintain high growth rates to appease ever-growing expectations among its population and the US similarly has high expectation, if these key markets take the strain Europe could ride on their coat tails. They will probably recover more slowly, miss an oppurtunity to re-vamp their economies for new challenges, but European countries have in the past demonstrated their willingness to take the backseat, if it means avoiding the riskier decisions.
US capitalists would look in horror at the idea that European states would happily accept higher levels of unemployment and the subsequent welfare costs, and forego economic growth in return for stability. But a turbulent history of left-right battles recurrent thrroughout the 20th century, continuing after Post-War into the radical conflicts of the 60s have made the European centre right more concilillatory, in order to maintain stability. In Germany for example, the importance of left-right pacts that the CDU has fostered since the days of West Germany, to keep the left and the right firmly in check and the bargaining parties as the power-brokers, not the fringe parties.
Krugman’s views shouldn’t be taken out of context, as an American he can’t be immune from the feeling they are taking more than their fair share of the burden. Surowiecki’s argument is that the US is paying for the luxury of a rapid recovery through stimulus, with the bonus of being able to re-shape significant parts of the economy such as green energy investment to prepare the economy for a low-carbon future, rather than endure a longer recession and a slow recovery. Surowiecki’s argument underestimates the importance of a stimulus to the US, lengths of recessions are not “luxuries” but he’s right in some sense that there is a cultural value being attached to the economy as whole, particularly when Americans lack the European safety nets.
By comparison , Europeans have less to lose from economic growth, much of this is the welfare state, unemployment is not the devastating force it can be to many in the US. A more relaxed attitude to growth may also be a way of compensating for Europe’s inability to compete with the US economically, or a disregard for trickle down economics but I suspect it’s also rooted in the history of post-war Europe, as the battle ground of the Cold War. With the spectre of communism on the one side and the rising power of US capitalism on the other, Europeans were caught internally and externally between competing views of progress and settled, broadly, for variations on social democracy, a comfortable less exciting middle ground, less growth, more stability.
Nevertheless, using culture and history doens’t mask other problems facing Europe. Germany undoubtedly has its reasons for not backing a stimulus as do other European countries. Some, might find it politically unpalatable, many Europeans blame the “Anglo-Saxon” economic system, and are not in quite the dire straits the US and the UK, no wonder Brown is the loudest for a stimulus when the UK is already mired in debt and less able to help itself. But Krugman is right, when before he’s recognised that European institutions have been slow and incapable of decisive action, even if they’d want to do so . Europe finds itself in the position of having an integrated market without integrated institutions to support it which this recession has exposed cruelly.
