A Greek flag flies as an advertising sticker on a mini van that delivers coffee products displays the euro symbol in central Athens, Monday, Nov. 7, 2011. (AP Photo/Thanassis Stavrakis)
When the Troika holds your country up as definitive proof that austerity works, you know you’re in big trouble. First it was tiny Latvia, singled out by International Monetary Fund chief Christine Lagarde at its annual meeting in September as a shining light for the eurozone. This was after a 25 percent drop in Latvia’s GDP—more than in America during the Great Depression—which forced nearly one in four employees out of work and one in twenty to flee the country.
Now it’s Ireland’s turn. “There is some good news,” insisted French technocrat Philippe Mills, chair of an EU subcommittee on government bonds, at a gathering of terrified bond investors in Brussels days before the October European summit, billed as make or break for the euro. “Ireland is now overachieving the targets we set,” Mills said, noting admiringly how the eurozone’s most swingeing wage and spending cuts had restored the Celtic Tiger’s competitive position and propelled its trade balance into positive territory. This was exactly the sort of “internal devaluation” that the Troika—the improvised council of European Commission, European Central Bank (ECB) and IMF now managing the euro crisis—was prescribing for the wasteful Mediterranean rim.
After two years of draconian austerity, Greece, in the grips of economic collapse and social unrest that would soon claim the government of socialist George Papandreou, was heading for default. Portugal, with massive competitiveness problems, also seemed close to insolvency. In Spain, recession and unemployment at 24 percent had cost socialist Prime Minister José Luis Rodríguez Zapatero his job, as the right-wing People’s Party prepared for a clean sweep in the November 20 elections. Finally, Italy, the third-largest European economy, with massive public debt, was now the subject of big sell-offs by bond investors. Interest rates on Italy’s sovereign debt had soared to more than 7 percent, five points higher than Germany’s, pushing up the cost of debt servicing beyond the limits of sustainability.
Not even the economy of Gucci, Prada and Fiat seemed able to compete with the eurozone core and export its way out of the crisis. Unit labor costs in Italy had barely fallen, compared with a 10 percent reduction in Ireland since the crisis began. For Mills and the other eurocrats at the Association for Financial Markets in Europe’s annual government debt conference in Brussels, all this was proof that the “Club Med” economies had not gone far enough along the Irish route of wage and spending cuts. With no liras, escudos, drachmas or pesetas left to take the easy way to competitiveness (i.e., sovereign currency devaluation), only more internal devaluation, it was argued, would set the wayward Mediterranean back on track.
It would be natural for the dark-suited bond vigilantes, bankers and ratings analysts at the conference to be persuaded by that argument, but they weren’t. Now, after months of fear and chaos in the bond markets, few investors believe simultaneous austerity programs are a route to growth and debt reduction. “Ireland has met every condition they imposed. It has even eked out some export-driven growth. But the global economy is tanking, and the engine will soon start to sputter,” said Willem Buiter, chief economist at Citigroup, at the conference. He continued ominously, “Once the wolf is at Italy’s door and we find ourselves on the brink of another depression, maybe then they will reconsider.” It was chilling to hear a Citigroup adviser sound as gloomily progressive as Paul Krugman in his critique of eurozone economic orthodoxy. But that’s just one measure of how rotten things are in the European capital.