Economic news lately has been dominated by the euro crisis. Europe is in recession. Many see Greece as an economic basket case. Italy and Spain may be facing bankruptcy.
Greece may yet be forced to abandon the Euro Zone, renege on its national debts totaling hundreds of billions of euros, and revert to the old drachma as its currency. This may trigger banks in Greece and elsewhere in Europe to collapse, or at least seek massive bailouts from the European Central Bank and the International Monetary Fund.
And as Europe slips deeper into recession, European governments are at odds as to how best to address these problems. Germany, the richest member of the European Union, has a Conservative government that is adamant that the fiscal problems faced by Greece, Italy and Spain were caused by excessive government spending and borrowing.
To the Germans, supported by the Conservative British government, the solution is austerity. Countries with major debt problems must cut back their spending, reduce the size of their public sectors, and curb social entitlements like public pension plans and health, education and welfare policies.
Such austerity has already been the price of Greece receiving fiscal support amounting to hundreds of billions of euros. But such austerity in Greece has also crippled the economy, placing the country and its people into an economic depression the likes of which have not been seen since the 1930s. The Greek economy has declined by over 10 per cent since 2009.
If austerity is supposed to spur economic market fundamentals so that a country can grow out of its financial troubles, that theory has been failing in Greece.
And this has led leaders such as France’s new Socialist President Francois Hollande to stress that economic growth, not austerity, is the key to economic renewal and that with the private sector unable and unwilling to take the lead in investing in the European economy, such investments must come from governments.
Hence governments in France, Italy and Spain are calling for major programs of public spending, not unlike the Marshall Plan of the late 1940s.
As these debates have been playing out in Europe, there are some in North America who argue that the euro, the common currency in most of Western Europe, is doomed. Read More